There can be a lot of unexpected and unwanted emergencies that can cost you a lot of money, so if you have not saved up enough for a rainy day, you would need to take a loan. But a triggering fact that could diminish the hope of getting a loan is a bad credit score. You may have a bad credit score if you are not on track with repaying your credit if you’re overspending, not paying bills on time, or have already taken a few loans and failing to keep a financial track record. If you have a credit score that is below 600, it is nearly impossible to search for a bank or a lender who could loan you the needed money.
But the good news is, there are still some chances of you getting the loan despite your bad credit score. There is a specific category of loans that are designed for borrowers with bad credit. However, there are a few aspects that you need to consider before getting a loan categorized under this section. We’ll be taking a look at some of those.
Reflect on your credit score and cross check
Before you start to look for lenders and banks that can give you a loan, you should first check and review your credit score and report. Do not worry about doing this and whether it will affect your total or not because this action is known as a soft pull, which wouldn’t harm. Credit scores are divided into a range that is categorized from good to bad. According to the most widely used model, a score of 300-579 is considered poor, 580-669 is fair, 670-739 is a good score, 740-799 is a very good score, and 800-850 is excellent and the best credit score you can obtain.
Once you have checked and verified your score, you need to search for a lender that will provide you with a loan. If you drop down from fair to poor, you will find fewer banks or lenders that could help you out, but there is still hope. One issue that you can face with a bad credit loan is that you will be provided with a very small amount of money to borrow and the interest rates will skyrocket, which is how the lenders will make a profit. Still, you can at least use the money for emergency purposes.
If you know your credit score, but you are not 100 percent convinced, you will have to look for errors and report should you find any. Upon correcting any mistakes, there might be a chance—and more hope—for your credit score to improve, which will make it easier for you to borrow the money.
Consider your debt-to-income ratio to be a major factor
Your debt-to-income ratio is a calculation carried out by money lenders to assess whether you are eligible for the amount of loan you’ve applied for or not. This calculation determines whether or not you are fit to pay the debt with the monthly income you currently have. The formula to reach your debt-to-income ratio is dividing your existing or potential monthly debt installments by your monthly salary. If it turns out to be more than 35 percent of your salary, you would have very low chances of receiving a loan. To increase your chances, calculate the monthly debt installments that are possible for you to repay, given your monthly salary, and figure out an amount to borrow that would be easy to get and pay off without difficulty.
Provide your collateral or asset as proof
Well, you cannot blame the lenders when they ask for some collateral or any valuable asset from you in order to provide you with the loan, given your poor record of loan repayment. This form of loan is known as a secured loan, and your asset would act as proof of reliability for you to pay back within a specified amount of time. The assets may include anything that is of high value, such as your house, car, watch or jewelry, depending on the amount of money you want to borrow. A number of poor credit loans that are found online ask for collaterals, so you shouldn’t take this option lightly. A secured credit card will also be considered valuable if you do not have or want to put your assets as collateral. If you fail to repay this secured loan, of course, you end up losing your assets.
Try to improve your credit score
If it is possible for you to wait for a while before taking a huge loan, you can improve your chances of getting one by trying to improve your credit score in the meantime. It is obviously not as easy as it sounds, but it can benefit you in the long run. Try to minimize the hard credit inquiries, repay your previous loans—even if in smaller amounts if feasible—and try to be as debt-free as possible. It will improve your credit score, and you can then apply for a bigger loan with lower interest rates. Plus, your credit score will be higher for good. It’s a win-win situation.
Receive help from a cosigner
A cosigner is a person who signs as a proof or witness acting as an assurance to the lender for you to pay the money back, along with interest, on time. The cosigner acts as a guarantee for you, who usually has a good credit score. Asking friends and relatives with an amazing credit history can increase your chances of getting the loan. But if you fail to repay the debt and the interest on time, your bank or lender will seize the cosigner, who will, in turn, have to pay on your behalf. It is therefore wise to take the help of a cosigner only if you are sure you can pay every penny or if you are in desperate need.
You need to do some thorough research before reaching out to a lender to understand all their clauses and considerations to lend money. Some might have higher interest rates, and some might ask for compulsory collateral, making it extremely important to know and ask before seeking out a bank or a lender.