In the United States, the credit scoring system is unique in the way it leverages credit bureaus to score a borrower’s creditworthiness. As a result, the system has empowered many American citizens seeking financial flexibility.
But it has also proven prohibitive for many who struggle to build a positive credit history. In addition, the system leaves many wondering how to do simple things, like getting a loan with bad credit.
During the beginnings of the credit reporting system, led by 1800s merchant Lewis Tappan, measuring creditworthiness was biased in race, class, and gender. As a result, credit reports reinforced existing social hierarchies, redlining access to reliable credit. It became difficult to learn about the system enough to change your behavior and improve your standing.
Over the years, there have been many changes to the system. Laws, such as the Fair Credit Reporting Act of 1970, are now in place to protect consumers from discriminatory lending decisions. The modern credit scoring method is an algorithm created by Fair, Issac and Company – hence the name FICO.
Despite eliminating discriminatory practices and advancing the credit scoring system, many individuals still find barriers to getting a loan because of bad credit.
According to credit bureau Experian, nearly one-third of U.S. consumers have a “subprime” credit score. And yet, over 50% of possible credit scores are considered in the “subprime” range. This same subprime consumer group often has twice as many personal loan accounts and higher balances on HELOCs than those with prime credit.
It becomes an endless cycle of needing more credit, but having less access.
We want to change that narrative. Creditworthiness is not a measure of your worthiness in achieving financial health and wealth. Instead, when you’re in a financial pinch, you deserve access to financial resources that can help.
So let’s get into how to get a loan with bad credit.
What Kind of Loan Do You Need?
Finding the right loan can be stressful, especially when you have bad credit. Fortunately, you have options, even with credit problems. The first step to finding the right lender for your financial emergency is to figure out what kind of loan you need.
Your choice can depend on various details, but a few key considerations can get you started.
Three Questions to Answer About Your Financial Needs
Financial emergencies come in many shapes and sizes. Perhaps your partner got laid off, and you need to make ends meet until they find another job. Or maybe you’ve fallen behind on your bills and need an influx of cash to make your debts more manageable.
Your answers to the following questions can significantly impact which type of loan you’ll need:
- How much money do you need?
- What expenses are you trying to cover?
- How quickly do you need the loan?
If you have bad credit, the amount of money you can borrow may be limited, and your interest rate may be higher. You’ll want to understand your options before applying for a loan. If you apply for a loan that you can’t qualify for, your credit score may worsen due to the hard inquiry on your credit report.
You don’t want to make the wrong choice and have an even harder time getting approved the next time you apply.
Types of Loans to Consider
In 2019, the Federal Reserve reported that two-fifths of unbanked adults used a financial alternative to access additional cash in 2018. Those methods included a money order, check cashing service, pawnshop loan, auto title loan, payday loan, paycheck advance, or tax refund advance. An additional 16% of under-banked adults have a bank account AND use an alternative financial service product.
While subprime credit limits the availability of loans you’d qualify for, some are made specifically for borrowers like you. To name a few:
- Bad credit loan
- Debt consolidation loan
- Emergency loan
- Payday loan
When choosing between a loan, it’s crucial to understand how the interest rates may vary. Unfortunately, the lower your credit score, the higher your interest rate is likely to be. The following chart outlines how much average interest a consumer may pay in a specific credit score range, according to Bankrate.
Average Personal Loan Interest Rates
Most bad credit loans are short-term financial solutions with lower balances. These are used for covering utility bills, making ends meet after a layoff, or fixing your car. However, they aren’t suitable for more significant expenses like medical emergencies or consolidating debt.
In addition, they often offer higher interest rates. Technically, bad credit loans are personal loans from lenders who can look beyond your subprime credit score. Credit unions, community banks, and online lenders are most likely to offer bad credit loans.
If you need a loan to help manage your debt, you could consider a debt consolidation loan. In 2018, the average debt consolidation loan was $12,670. While debt consolidation loans typically call for higher balances, they also have restrictions on what expenses you can use the money to pay off.
This kind of loan can help you cover and consolidate costs like credit card debt, student loans, utility payments, medical bills, and more. However, suppose you need money to cover things like lawsuit settlements, back taxes, or other types of secured loans. In that case, you can’t cover them with a debt consolidation loan.
Learn more about how to get a debt consolidation loan.
Emergency loans and payday loans are similar in that they often borrow money from your next paycheck. However, borrowing money based on your pay does limit the amount of money you can borrow.
For example, most payday loans have a limit of $500. Other emergency loans will allow you to borrow your entire next paycheck.
In addition, many payday loans or emergency loans can have extremely high interest rates, which can often put you in an even worse financial situation. So while they’re a fast way to get a loan with bad credit, it’s rarely the best move. If you want to go with this option, research the lenders heavily to make sure their terms are not predatory.
Learn more about BrightUp’s Emergency Loan with lower interest rates.
Getting Approved for a Loan with Bad Credit
Figuring out what kind of loan you’ll need is a simple task compared to getting approved, especially when you have bad credit. Understanding different ways to position yourself as a reliable borrower can make applying for a loan with bad credit much less stressful. If you have the time to implement these techniques, it can make a big difference in your creditworthiness.
Try to Improve Your Credit Score
Suppose your financial needs are not an immediate emergency. In that case, you could set a long-term goal to improve your credit score before applying. But unfortunately, a surprising number of consumers – almost 60% – don’t fully understand the credit scoring system in a way that enables them to improve their credit score.
While not all of these tips will be an option for you, each small change can make a big difference in your score over time. Just be patient and know that it could take up to a year to improve your score.
8 Ways to Improve Your Credit Score:
- Pay your bills on time
- Keep balances on your credit cards or lines of credit low
- Don’t apply for multiple loans at once
- Don’t open multiple credit cards at once
- Don’t cancel unused credit cards
- Pay off debt in collection
- Combat false adverse claims on your credit report
- Look into alternative reporting agencies like ExperianBoost or UltraFICO
One of the more attractive opportunities to improve your chance of getting a loan with bad credit is looking into alternative reporting options. For example, the Experian Boost and UltraFICO programs improve consumer credit scores by including bank account information and bill-paying records in the scoring.
The classic scoring method typically focuses on payments to debt. Still, reporting agencies recognize that young adults don’t always have a debt payment history of building up their credit score. With these additional criteria, a large population sector can improve their credit history with other expenses, like utilities.
While improving your credit score seems like a long and tedious task, this is ultimately the best way to set yourself for success and financial flexibility moving forward.
Find a Co-signer or Co-Borrower
When you can’t count on your credit score to get approved for a loan, you might want to consider finding a co-signer. A co-signer is someone who agrees to repay your debt if you default on a loan or miss a payment. This scenario requires a lot of trust between you and the co-signer, because it can damage their credit if you fail to pay.
A co-signer will often be a family member or friend with good credit, a low debt-to-income ratio, and consistent income. Pairing with a co-signer will improve your creditworthiness, giving you access to a loan with better rates.
Historically, co-signers are most common when buying a car or a house. However, it is harder to find a lender that will opt for a co-signer to support your creditworthiness. More often, you’ll need to find a co-borrower.
While a co-signer is only responsible for the debt if you default on your loan, a co-borrower is equally responsible for paying the loan at any given time. So, instead of backup, they’re side-by-side with you borrowing the money. On the plus side, in this scenario, you’re likely to get approved for a higher loan amount.
Try a Secured Loan
When you have bad credit, you are more likely to get approved for a loan if you offer collateral. This type of loan is called a secured loan.
How is it different from an unsecured loan? Unsecured loans depend on proof of your ability to pay back the loan with your credit history. In contrast, a secured loan leverages property that the lender can take if you do not pay back the loan.
Types of collateral can include:
- Your savings account
- A certificate of deposit
- Your car, boat, or RV
- Your home
- Expensive property like fine art or jewelry
If you have a piece of property that you can leverage as collateral and cannot get approved for an unsecured loan, this could be your best bet. But before you dive in, consider the pros and cons of putting your property at stake.
Pros of Secured Loans:
- Borrow more money
- Lower interest rates
- Easier to qualify with poor credit
Cons of Secured Loans:
- Requires property to offer as collateral
- Shorter repayment terms
- Higher payments
- Risk of losing your property
If you feel confident in your ability to pay the required amount on your loan monthly, a secured loan can be a great solution to your problem. However, if you have even an ounce of concern, stay diligent and keep exploring your options.
Find a Bad Credit Lender
At this point, you might feel like you’d be more successful in finding a unicorn than a suitable lender. Still, there are trustworthy bad credit lenders out there.
As mentioned before, many credit unions and community banks have programs that connect families with subprime credit with manageable lending options. In addition, community service organizations like the United Way often work with banks to provide access to low or no-cost banking options and financial resources.
BrightUp is the kind of financial organization that looks beyond your creditworthiness and recognizes your worthiness as an employee, family member, and citizen who deserves financial stability.
Our compassionate capital provides access to cash to get you through a pinch, without the fees and fine print that you see with predatory lenders. Thanks to our alternative underwriting algorithm, we offer employees who were previously denied a loan the chance to find stability and get back on track.
Where most lenders strictly rely on FICO scores to estimate your likelihood of defaulting on your loan, we’re able to look beyond those numbers to get a better idea of your ability to repay. Our emergency loan and debt consolidation loan could be exactly what your company needs to help employees reduce financial stress.
Keep Your Eyes on the Prize
It’s easy to get discouraged about your finances when you run into emergencies that overextend your finances, or your debt becomes overwhelming. Terms like “subprime” and “creditworthiness” can be damaging to your self-confidence.
Just remember: when it comes to finances, nothing is permanent. The stock market rises and falls. Your credit score will too.
However, when you equip yourself with the right resources, advisors, and financial management tools, you can start to worry less and less about the ebbs and flows. With the help of BrightUp, financial wellness is possible. Get in touch with a BrightUp representative to get started today!
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