Get a Loan Even With Bad Credit
It is possible to get a loan when you have bad credit. The key is to make smart choices as a borrower and to start on the path to rebuilding your credit. It may feel overwhelming, but with some planning you can get the money you need and get control of your finances.
- Learn the difference between a secured and an unsecured loan. A secured loan is one that's backed up with collateral (a home, car or property, for example.) On the other hand, an unsecured loan does not have any collateral behind it, so they're riskier for lenders to make and therefore come with higher interest rates. Also known as personal loans, unsecured loans are primarily small amount loans used to cover home improvements, small purchases (computers, riding lawn mowers, security systems) or to cover unexpected expenses.
- Be clear on the terms. In some cases, a loan has a fixed interest rate and a specified payment term. In other cases, the loan may work like a revolving line of credit and come with a variable interest rate.
- Calculate tax-time savings. You can deduct the interest on secured loans such as mortgages or student loans. The interest on an unsecured loan is not tax deductible.
- Be wary of payday loans and cash advances. Payday loans are short-term, small-amount loans that are meant to tide you over when you are low on cash. You write a check for the amount you borrow along with a fee for the loan and leave it with the lender, who will then cash the check when you have the funds to pay. If you don't pay on time, you can roll the loan over, but that means additional fees that can really add up.
- Banks, chains and private storefront operations all offer payday loans that come with interest rates as high as 500% or more. According to the Center for Responsible Lending, the average interest charges for these loans are 225% to 300%.
- Think twice before borrowing on your credit card. Credit card cash advances are expensive—interest rates fall between 30% to 40% once you factor in fees.
- Figure out what you can afford. Just because a lender will loan you money doesn’t mean that you can afford it. While banks take into consideration your ability to repay,secondary lenders who do high-risk loans don’t take this step.It is up to you to determine whether or not you can afford the loan.
- Expect a higher interest rate and fees. The price you pay for less-than-stellar credit comes in the form of higher closing costs, origination fees, and interest rates. A borrower with excellent credit may have closing costs that are .5% of the loan amount. A buyer with a low score may be charged between 1-4% of the loan amount simply because it's a riskier loan, and lenders do not make as much money on them.
Understanding the Importance of Credit Scores
- Learn how your FICO credit score is calculated. There are five areas FICO considers when calculating your credit score, and each is weighted differently. The importance of each areas is approximately:
- Payment History — 35%. The most important factor in your credit score is whether or not you have a good track record of paying your debts on time.
- Amounts Owed — 30%. This examines how much you currently owe. Owing money isn't automatically a bad thing; FICO will examine how much credit you have available and how much of it you are currently using.
- Length of Credit History — 15%. A young person with no credit will likely have a low score here, but this can be balanced out by having high scores in other areas. Generally, a longer credit history will give you a higher score in this area.
- New Credit — 10%. If you have opened several new accounts over a short period of time, especially if you have a short credit history, this can lower your score.
- Type of Credit Used — 10%. This area examines your retail, installment loans (such as auto payments), mortgages, and credit cards. Your score will be higher if you show you have a good, balanced mix of credit.
- Know how your credit score can impact loans. Your credit has a direct impact on whether or not you are eligible for a loan, as well the amount of interest charged on the loan. Lenders will examine your credit score to determine if you are a good risk and likely to actually repay the loan. To get a loan and good terms, you'll want a good credit score. If you have a bad credit score, see what you can do to improve your credit before taking out a loan.
- Order your credit report and check for errors. There are three credit bureaus lenders may use to check your credit score — TransUnion, Equifax and Experian — and they will provide you with a free copy of your credit report once a year. Your credit report is used to calculate your credit score, so it is essential that you check your report for any errors. Note that credit bureaus may use different versions of the FICO score, so you should check all three reports yearly.
- Order your credit report from annualcreditreport.com. Keep in mind you will be provided with a free copy of your credit reports, not credit scores. You will almost always have to pay a small fee to find out your actual score.
- Dispute any errors on your credit report. If you do find a mistake on your credit report — perhaps you paid off a loan but it is showing up on your report as unpaid — you will need to make sure these errors are corrected. Start by reaching out to the vendor who reported the incorrect information and ask them to correct the error. Contact the credit bureau as well, providing copies of any evidence proving they have incorrect information. The bureaus are required to investigate your claim within 30 days.
- If possible, communicate with everyone via mail, keeping copies of any correspondence as proof.
Rebuilding Your Credit
- Get a secured credit card. Secured credit cards help you rebuild your credit by allowing you to establish a consistent repayment history. They work like this: You load a certain amount of money onto the card (a security deposit) and that represents your spending limit. As you repay the amount you "charge" to the card, it becomes available for you again.
- Shop around for the lowest fees and rates. There are two expenses associated with secured credit cards: an annual fee and an interest rate. Do your research to find the card that's most affordable for you.
- Explore "hybrid" cards. Some cards are hybrids of a secured card and a regular credit card. They allow the borrower a credit limit that's higher than their security deposit. These cards typically come with high interest rates.
- Make payments on time. Your payment history makes up 35% of your credit score, so on-time payments will help you build higher credit. Once you've established a positive credit history and improved your credit score, you're able to qualify and apply for one of the issuer's many unsecured cards.
- See a credit counselor. It can be very helpful for you both financially and emotionally to have someone on your side as you try to rebuild your credit. That's what credit counselors do. They offer services that include helping you to create a budget, negotiating with your creditors, creating a repayment plan, setting up a savings strategy to name a few; it all depends on your needs. Their goal is to help you eliminate debt and be financially secure.
- Choose a reputable counselor. A professional credit counselor will be experienced and licensed in finance or a related field. Make sure they are part of a non-profit agency.
- Investigate debt consolidation services thoroughly. While seeking a debt consolidating loan may be a good strategy for you, approach this option with caution. If an agency asks for an up-front fee to help you with this process or suggests you stop paying your loans and pay them instead to handle the consolidation, this should raise a red flag for you.
Getting an FHA Loan
- Know the terms. FHA loans are available to some first time home buyers who are purchasing single family homes or homes in small multifamily units. A buyer with a credit score above 580 will typically be eligible for a loan with only 3.5% of the purchase price as a down payment on the mortgage. Borrowers with scores between 579-500 are eligible for 90% financing (or a 10% down payment), and borrowers with credit scores below 500 are ineligible.
- Check your credit score. Just as you would if you were buying a car, you should start by checking your credit. That way, you maximize your information and minimize the surprises. Therefore, check your credit score and get a copy of your credit report before you even start to visit with lenders. You can get a copy of your credit report at https://www.annualcreditreport.com/index.action. You can get your credit score directly from the credit bureaus, or from sites like creditkarma.com or credit.com.
- As with applying for any loan, the more you can Increase Your FICO Score to adjust it higher, the better. Try and establish a year's worth of on-time payments, reducing your credit utilization to 30% or less than your credit limit, and minimizing your applications for large lines of credit, like car loans.
- Know the disqualifiers. Now that you have your credit report, check the items in your credit report against the standard disqualifiers. The standard disqualifiers are: bankruptcy within 2 years, a mortgage foreclosure within 3 years, late mortgage payments or a credit to debt ratio that is too high. While FHA lenders will review any of these items for extenuating circumstances, these usually disqualify a buyer from loan eligibility. If you have any of these items on your credit report, you should consider postponing your application for an FHA loan
- Make adjustments. If you are turned down for an FHA loan, then you can make adjustments to your financial situation that will increase your chances of approval down the road. For instance, if you have cash reserves equal to at least three months of mortgage payments, a reduced debt-to-credit utilization ratio, or apply for a loan for a home that has a payment that is no more than $100 greater than your current payment, the lender may approve you for the loan where you were denied before. As always, lenders look more favorably upon borrowers who have larger down payments than borrowers with small down payments, as it is indicative of financial stability.
Getting an Auto Loan
- Check your credit. You want to have as much information going into any transaction as you can. That way, you will be able to better evaluate any information that you counterpart in the transaction tells you. Therefore, check your credit score and get a copy of your credit report before you even start to visit with lenders. You can get a copy of your credit report at https://www.annualcreditreport.com/index.action. You can get your credit score directly from the credit bureaus, or from sites like creditkarma.com or credit.com.
- Plan in advance. Try to make plans for your new car purchase several months in advance. That way, once you have read the information in your credit report and seen your credit score, you can take steps, such as making on-time payments and using less of your existing credit limits (try and keep it under 30%), to Increase Your FICO Score.
- Shop around. If you're buying a car, your bad credit may not be a terrible hindrance to getting a good loan because the term of the loan is short and the car itself is essentially collateral (it can be repossessed if you fail to make payments). Therefore, it is imperative that you shop around. The average borrower with bad credit pays higher rates for an auto loan. If you’re paying much more than that, there’s an excellent chance that you can get a better deal elsewhere.
- Read the fine print. Some dealers write up contingent or conditional contracts that allow them to increase the down payment or monthly payment of your loan. This type of term is extremely unfavorable to the borrower, and will almost certainly be used against a borrower as a pretext for repossessing the car. If a lender inserts this type of clause into the contract, run the other way.
- Look at conventional lenders first. While a conventional lender, like a credit union or bank, might give a person with bad credit a higher interest rate than a person with good credit, they will often lend to borrowers with bad credit. Scrutinize dealers that cater to people with bad credit carefully. Those are often the lenders with the least favorable terms to the borrower.
- Focus on finding the lowest APR (annual percentage rate) over the shortest term. Extending the length of your loan may be tempting because it reduces the amount of your monthly payments, but you end up paying more in interest in the long run. This goes double if you are buying a used car. If the term of the loan is too long, you can end up making monthly payments on a car that long ago ceased to be drivable.
- Watch out for non-essentials in your contract. Some lending contracts require the borrower to purchase extended warranties, aftermarket services and even insurance. If these have been added onto your contract, walk away.
Getting a Business Loan
- Identify various credit sources. There are a variety of credit sources available to small businesses, but many business owners aren't aware of them. Banks, micro-credit organizations, crowdfunding, merchant cash advances, and business credit cards are all ways to generate cash flow for business development. In addition, SBA runs many loan programs that disburse funds through private lenders.
- Consider using a bank. This is where most business owners are going to turn first, and with good reason. Banks typically offer the largest lines of credit with the best repayment terms, but are among the most risk averse lenders.
Therefore, if you are applying for a business loan with bad credit, take steps to maximize your chance of success:
- Be prepared to offer collateral. Particularly if you have a low credit score, banks may want some sort of collateral, like real estate of heavy equipment, available to secure the loan. If you do not have that type of collateral, then make sure that your accounts receivable look as strong as possible. You may be eligible for accounts receivable (AR) financing. This means you can use the money owed (but not yet paid) to your business by customers as collateral for a loan.
- Factoring is another option similar to AR financing. Factoring entails the actual sale of AR for a discounted face value, instead of pledging it as collateral.
- You may also be able to get inventory financing from the bank, which is a loan given to purchase products to sell. The products, or inventory, themselves serve as collateral — if you cannot repay the loan, you will have to turn over the product to the bank, and the bank will sell it to try and recoup their loan.
- Show past profitability, and to describe a well thought-out plan for future profits. Even if you aren't profitable now, showing a plan for making a profit can go a long way.
- Start small. Start by making small loan requests as it will increase the odds of success. A track record of successful small loans sets you up for getting a larger one down the road.
- Try crowdfunding. If you think you have a great business idea but have a poor credit history, this can be an excellent way to get it off the ground. There are four basic types of crowdfunding :
- Rewards crowdfunding offers some type of tangible reward, like a t-shirt, a book, or coffee mug, in exchange for funding. This is the most common type.
- Equity crowdfunding offers a piece of the business in exchange for funding. This has been especially popular in Europe, but is on the rise in the US.
- Donation crowdfunding—which amounts to nothing more than soliciting donations with nothing in return—offers the least amount of risk to the recipient of funds, but is usually the domain of charitable and artistic enterprises. This can be a very hard sell for a profit-based business.
- Lending crowdfunding is basically peer-to-peer lending on a different kind of platform. Whereas peer-to-peer lending focuses on the loan, lending crowdfunding focuses on the purpose for the loan. This can be a great option if you think you can provide a quick return on investment, as the terms of these loans are typically shorter than conventional loans.
- Try microfunding. This is can be especially attractive for startup companies. Microcredit organizations loan small amounts less than $50,000 (more likely in the $1,000 to $3,000 range) to small business entities, and they open credit lines to markets that traditionally have very little access to it, like women and minorities. Since the duration of these loans is usually short, look for microloans from non-profit groups, like www.accioneast.org to avoid usurious interest rates.
- Investigate merchant cash advances and credit cards. Merchant cash advances give a business owner a lump sum in exchange for a share of the business' credit card sales for a fixed period of time. Business credit cards, like all credit cards, can have very high interest rates, and low credit limits, but they can be used as a last resort.
- Look at the SBA's programs. The Small Business Administration (SBA) offers a variety of loan programs for small businesses, including real estate loans, disaster assistance loans, and general small business loans.https://www.sba.gov/loanprograms. Learn more on the SBA's website,
Getting a Student Loan
- Complete the FAFSA. The Free Application for Federal Student Aid (FAFSA) is a form detailing your financial information for the purposes of obtaining student aid. The bulk of government student aid is in the form of loans. Most of these loans are available without a credit check. Indeed, many students have no credit history at all and still receive loan awards.
- Consider a Stafford Loan. Stafford Loans are the most popular types of federally available loans. The interest is variable from year to year, and they come in two forms, subsidized Stafford Loans, and unsubsidized Stafford Loans. With a subsidized loan, interest is deferred while you are in school. With unsubsidized Stafford Loans, the interest accrues while you are in school. The amounts of Stafford Loans that are available to borrowers vary per year and by education level. Undergraduates may borrow between $5,500 and $12,500 per year. Graduate students may borrow $20,500 per year.
- Consider a Perkins Loan. The interest levels on Perkins Loans are fixed at 5%, unlike Stafford loans, which have variable interest rates. Undergraduates are eligible for $5,500 per year and graduate students are eligible for $8,000 per year. Eligibility is limited to those who demonstrate "exceptional financial need" as is determined by the FAFSA.
- Apply for a PLUS Loan. PLUS Loans are available to graduate students and parents of undergraduate students. The amount available is the cost of attendance minus any other aid the student might receive. The interest rate is fixed at 6.84%, and the loan origination fee is 4.272% after October 1, 2015. Unlike other federal student loans, PLUS loans come with a credit check, although the terms are fairly lenient.
- Investigate a private student loan. If you’re applying for a private student loan, a lender will assess your creditworthiness just like any other private lender. There are many different types of private student loan lenders, but you should start with conventional lenders, like Sallie Mae and SoFi. Check out some comparisons at www.graduateleverage.com and www.simpletuition.com.#*Private student loans should usually be something you look at last, but particularly for graduate students, the interest rates offered by private lenders can be less than interest rates offered by the government.
- Counter your poor credit with a co-signer. It may be easier for you to get a private student loan if you can find an adult (parent, guardian, trusted family friend) with good credit who will agree to co-sign the loan. A co-signer takes on the responsibility of paying your loan if you fail to make timely or regular payments.
Meeting with a Lender
- Present your case. If you plan on getting a loan, you're going to have to ask for it eventually, and that means meeting with a lender.You must present hard copies of financial documents to back up the information you presented in your loan application. Plan to bring with you: employment information and housing history for the last two years, two years worth of W-2 forms and income tax forms, complete information and several months worth of statements for all bank accounts and complete information for any outstanding loans and credit card debt.
- Prepare a loan application and/or loan application letter. A loan application captures basic information about you including your social security number, income, expenses and savings to name a few. Be sure your application is neat and complete. A lending officer shouldn't have to struggle to read your information. In some lending situations, you may choose to write a loan application letter. Use this letter to explain why you need the loan, how you plan to use it and your plan for repayment.
- Be prepared to ask more than once. Without a strong credit report behind you, you may have to work harder and have greater determination to get a loan. Facing rejection is never easy, but don't let it stop you from trying again and again if that's what's necessary to succeed in getting the money that you need.
- Make a plan. Create a list of at least a dozen lending institutions in your area and begin applying. If you receive a rejection from the first company, move on to the next institution on your list. Just knowing that there are more possibilities out there can help to keep your spirits up and your options open.
- Ask for feedback. If your loan application is rejected, be sure to find out why. Use what you've learned to try to strengthen your position for your next application.
- There are no real "quick fixes" for rebuilding your credit or paying off your debt. In some cases, the process can take years; however, the relief that comes with being debt-free is well worth the investment of your time and the change in your lifestyle and financial habits.
- File for Chapter 13 Bankruptcy
- Deal With Collection Agencies
- Cut Credit Card Debt
- Get a Credit Card when You Have a Low Income
Sources and Citations
- ↑ http://www.bankrate.com/finance/personal-finance/3-ways-to-get-a-small-business-loan-1.aspx