When your credit score falls below 580, it means you have poor credit. Numbers below this range show you have a history of missing payments or not paying your bills on time. Fortunately, borrowing money with bad credit is possible, but it can be challenging.
Lenders can charge you higher interest rates because they see you as riskier than other borrowers. Some may not extend you the loan at all. So if you urgently need money and have a poor credit score, taking out a bad credit loan might only be your chance.
Below, we’ve highlighted some tips to help you enhance your chances to secure a bad credit loan.
Show Proof of Income
Most lenders look at your credit score before approving a loan, but they may also weigh other factors. Lenders may still approve your loan even with bad credit if you can prove that you’d be able to make payments on time.
You can do that by showing your latest proof of income. There are high chances of them approving your loan if they see an increase in your earnings. Lenders would always want to ensure that you can afford to repay the loan.
It’s also the reason why they would want to consider your debt-to-income ratio. It’s the percentage of your monthly income that you put toward debt repayment. Lenders prefer a DTI of less than 40%. If you reduce your monthly debts and your gross monthly income increases, you’re more likely to get approved.
Put Up Collateral
Another way to increase your chances of securing a loan is to put up collateral. If you have a home or other valuable asset, you can use it to obtain a loan. Note that lenders are more likely to offer a loan to a low-risk borrower.
They would be more confident to approve you with collateral even if you have a poor credit score. It’s because if you default on the loan, lenders can sell/auction the collateral to recover the amount you borrowed.
Providing collateral can be an excellent option, especially if you need a considerable amount of money. You may even be able to get a better rate and term. However, make sure that you can keep up with repayments if you don’t want to lose your home or asset.
Apply With A Co-Signer
Applying with a co-signer would also be a great idea if you have less-than-stellar credit. Not all lenders allow co-signing a loan application, so make sure to check out multiple lenders.
A co-signer can be a family member or friend with good or excellent credit and reliable income. They will co-sign your application, agreeing to pay off the loan if you default. Through this, lenders can ensure that they won’t lose the money if you can’t repay it.
If you go with this option, make sure to pay your obligations on time so you won’t damage your relationship with your co-signer because the lender will hold them accountable for the debt if you fail to do your part.
Work With The Right Lender
Borrowing money with bad credit can be tricky, and lenders have different methods of evaluating loan applications. Credit scores are not a deal-breaker for some lenders.
If you want to boost your chances of securing a bad credit loan, make sure to work with the right lender. Below are some of the choices you can consider.
- Online Lenders. Most online lenders offer unsecured loans, meaning you don’t need collateral. They conduct business online and are more lenient with their credit requirements.
- Peer-To-Peer Lenders. These lenders extend a loan through a peer-to-peer lending platform. They are a group of investors who offer a loan based on various factors. Although they consider credit scores, they are still willing to approve borrowers with bad credit.
- Pawn Brokers. These lenders don’t run any credit checks. As long as you bring in valuable items like jewelry or electronics, they will lend you the money. Note that the amount of loan they can offer is based on the value of your items.
Improve Your Credit Score
If you’re not in an emergency, the best thing you can do is improve your credit score. Perhaps, you’re planning to take out a loan to cover a significant purchase. If it can wait, you can do the following to boost your credit and increase your chance of getting approval.
- Pay more than the minimum monthly payment of your credit balances
- Make your past-due accounts current by catching up on your missed payments.
- Don’t open or apply for a new credit account within six or twelve months.
- Have different types of credit accounts.
- Opt for lenders that offer no credit check loans. Depending on the type, a credit check can hurt your credit score.
- Don’t miss payments on your current bills.
- Get your credit report and look for any errors.
The Bottom Line
It’s possible to get access to the money you need, even with bad credit. The key is to know and explore your options. Remember that your credit score doesn’t only influence whether lenders approve or deny your loan. It can also affect your financial life in general. So make it a habit to check your credit report regularly and improve your credit health in any way possible.