Having a bad credit history can be a nightmare that only decays with time. Along with your standard of living dropping drastically, the mountain of debt continues to rise due to late payments. Like the icing on the cake, an unexpected expense pops up. Your first thought before a total meltdown is to reach out to your bank for a loan. Hopeful, you book an appointment with your bank representative, and he tells you, “You cannot qualify for the loan because of your bad credit history.” Pause. Everything halts for a second as life comes crashing down on you. Opportunity doesn’t knock twice, but bad-luck knocks twice thrice times infinity. You start questioning everything; where, how, and why it all went wrong?
Before you depress yourself into believing that your only step forward is coming onto the streets. Let me tell you that there’s still hope. It’s not impossible to qualify for loans with bad credit history. Although limited in number, there still exist mechanisms that you can pursue to meet the requirements for a loan even with a bad credit history. According to the findings of the credit bureau Experian, the shocking reality of almost one-third of Americans is that their credit score ranges between “Fair,” “Poor,” or “Very Poor.” You need to understand that bad credit is not permanent. It is a temporary crisis that you can always overcome.
Before we dwell on the mechanisms, we should first grasp the idea of what having bad credit is all about?
Understanding “Bad Credit”
The Fair Isaac Corporation, aka FICO, works through a scoring system, commonly known as the FICO score. This three-digit number categorizes your credit performance on a scale depending upon how poor or exceptional your credit history is. The range is estimated as provided in the table.
Bad credit is when your FICO score is at a scale of 579 or lower, immediately marking it as weak.
Once we establish what bad credit is, we can now move onto the ways you can qualify for a loan with one.
1. Identifying your Credit Situation
You must understand where you stand in terms of your Credit performance. Therefore, this calls for an inspection of your credit report and your credit score. As mentioned earlier, your credit score is your FICO score, which you should have access to, pronto. According to Bruce McClary, a representative of the National Foundation for Credit Counseling, finding your credit report and credit score are crucial because they help put things into perspective by identifying the kind of interest rates that the lenders are charging.
It is not a shocker that a loan with a bad credit score can cost you a higher interest rate than the one with a better credit history. Lenders do prefer individuals with an average or good credit history over the ones with bad. They still charge higher interest rates regardless of a “fair” or a “bad score. More importantly, rejection is a common occurrence. But this should not be a discouraging factor. Besides, doing your homework is what matters. Researching on multiple lenders and then shortlisting the ones with comparatively fewer interest rates, eventually leaves you with several options.
2. Improve your credit
Getting back on track is a process that takes time and determination, but the sooner it is, the better. Especially the ambitious entrepreneurs looking for bad credit business loans to set up their startups, your best chance at qualifying for a loan is by improving your credit score. Once you are back on the roll and making timely payments, scoring a loan at a lower interest rate is a possibility. The goal is to work on factors that can help build your credit score.
Factors to consider are:
- History of your Payment
- Credit limit vs. current balance
- Duration of your credit history
- Credit Mix
- New Credit
3. Personal Loans
Personal Loans, aka unsecured loans or signature loans, are loans that can help you pay for an expense sans your credit card. The approval is based on your credit performance and requires no collateral. Accordingly, there is no possibility of you having to risk your property or a valuable asset. The setback is that the approval depends on your creditworthiness. Therefore, it can be challenging to qualify for a loan with a bad credit history. On the bright side, there is always a possibility of you qualifying for one. With limited options and high cost, it is still a better deal than a no deal at all.
4. Compare your Lenders
As a borrower and part of your research, it is a must to compare lenders. For that, you can take the help of various online comparison tools. Feed-in your purpose, amount, and Fico score, among other details. After taking care of the basics, identifying the real options at hand is a much easier process.
5. Consider a secured loan or a home equity loan
Mortgage, home loans, secured credit cards, and personal loans are some of the examples of a secured loan. All of them have one thing in common, which is signing collateral. The collateral can be anything of value; house, car, jewelry, etc. Because you as a borrower are already in red with your bad credit history, therefore it is something that you cannot avoid. Although your willingness to put your assets as collateral can help you secure an approval quickly, this is your way of telling the lender that he can trust you.
One cautionary advice for a secured loan is that in case you fail to pay back the loan, you can lose your collateral. Therefore, it is essential to apply for a secured loan only if you are sure that you can pay the amount back.
With the home equity loan, your bad credit history doesn’t matter as long as you have a house with significant equity. It means that you are no longer a risk by default. According to Holly Johnson from the Business Insider, a home equity loan comes on a fixed rate of interest and a repayment period.