Your credit score plays a crucial role in your overall financial health. Many things rely on a decent credit score, including securing a personal loan. In fact, a common concern among consumers with low credit scores is that they may not be able to secure any type of loan, including a personal loan.
Generally speaking, lenders consider anything under 620 a low credit score and anything below 580 is considered a poor score. In these cases, getting approved for any type of loan can be a challenge. That’s because a low score reflects your financial history, including your loan repayment behavior. If you’ve got a low credit score, odds are you’ve missed a payment or two in the past.
Lenders will be hesitant to loan out money to borrowers who have a history of late or missed payments. The risk is often too high for lenders, who may be inclined to turn down loan applications from those with less-than-perfect credit.
But while it may certainly be more of an uphill climb to get a personal loan with bad credit, it’s not out of the question. There are ways to get approved for a personal loan while keeping your financial situation intact.
How to Get a Personal Loan With Bad Credit
Although the average traditional bank might be more likely to reject your personal loan application, there are other avenues you may be able to take.
Apply to a credit union. Similar to banks in terms of services offered, credit unions are typically smaller and cater to local communities.
Credit unions tend to be more forgiving when it comes to credit scores and other criteria required for loan approval. They also usually offer lower rates and fees compared to banks, making their loan products more affordable overall.
Consider an online lender. Over the recent past, the online lending landscape has grown and expanded a great deal. Several online lenders have popped up frequently over the past few years with the goal of filling the void of helping the underbanked.
Online lending has made it easy and more convenient for borrowers to take out loans. Lending requirements are typically less stringent than traditional financial institutions. Many online lenders are specifically geared towards helping borrowers with low or poor credit scores.
However, there are some potential drawbacks to online lending that borrowers should be aware of; namely, higher interest rates. Alternative lenders typically charge a higher rate on borrowed funds. That means the personal loan you take out would likely be slightly more expensive than a loan from a traditional bank.
While online lenders seek to serve those who find it hard to get financial services from the usual financial institutions, they also have to protect themselves. Taking on high-risk borrowers with low credit scores means online lenders must be compensated in some way, usually in the form of a higher interest rate.
Get a co-signer. If you have a family member or friend who’s got good credit, perhaps they may be willing to co-sign a personal loan with you. Of course, this has to be someone who knows you well and understands your current situation. They’ll also want to have some level of trust in your ability to pay back the loan you take out.
By having someone with good credit co-sign a personal loan with you, your lender may be more open to extending credit to you. If you default on your loan payments for whatever reason, the lender still has some recourse by going after your co-signer.
That last statement holds a lot of weight and is something that both you and your co-signer need to seriously consider. If you fail to repay your loan, your co-signer will be on the hook for payment. Your co-signer’s credit score will also be affected if you fall short of your end of the bargain.
What All Low-Credit Borrowers Should Be Wary of
Before you go out in search of a personal loan with poor credit, there are a number of things you need to be aware of first.
Understand the terms of your personal loan. Before you sign on for a personal loan, be sure to familiarize yourself with all the loan terms. That includes things such as the interest rate, penalties for late or missed payments, length of the loan, and your credit limit. Failure to understand these terms can put you in a position that you won’t be financially prepared for.
Don’t take out any more money than you can pay back. Even if a lender approves you for a certain loan limit doesn’t necessarily mean you should take out the full amount. Requesting more money than you really need can just send you into financial turmoil much faster. The more money you owe, the more interest you’ll have to pay. This will simply continue to compound until you wind up in some sort of debt settlement situation.
Avoid payday loans. While personal loans can help alleviate some of your financial issues, payday loans can just make them worse. These types of loans typically come with exorbitant interest rates that can make your loan so expensive that it’s nearly impossible to pay it off if you don’t have strong finances.
If you’ve got a bad credit score and need a personal loan, you’ve got options. While having a low credit score isn’t ideal, there are still ways to obtain a personal loan without fearing rejection. Be sure to keep the above tips in mind, and steer clear of any loan products that charge you sky-high interest rates and bind you to unfavorable loan terms.
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