HOW TO QUALIFY FOR A LOAN WITH BAD CREDIT
You may have seen it on a sign
somewhere or possibly on your TV or computer screen: “No credit, no problem!” Don’t
believe it. The truth is, when you need to get a loan and you have no credit or
bad credit, there definitely is
a problem. It’s not an insurmountable one, but it is a problem nonetheless.
Having poor credit makes you a high-risk customer to major
banks, credit unions and other major lending institutions. Those lenders have
strict standards, and they rely on credit scores when picking their borrowers
and calculating loan terms. Unless lenders are assured that their loans will be
repaid, they simply won’t make the loan. In addition, heightened regulations
and tighter internal controls by lenders in the wake of the Great Recession
make today’s lending climate a tough one for borrowers.
So when your credit is bad, you may feel like you’re at the
mercy of payday lenders and other sources of financial help, sources that will only
loan you money if you agree to repay it at high, or “subprime,” interest rates.
These loans are fool’s gold. They often you leave more in debt than you should
be. In fact, payday loans are illegal in 13 states because of their predatory
terms.
Warning Signs for Bad Credit
To
understand how your credit affects you loan options, the best place to start is
to understand your credit score. Free credit scores are now available at
several online sites. Unfortunately, most people aren’t interested enough to
even bother asking.
The
National Foundation for Credit Counseling says that 60% of Americans haven’t checked their score in more than a year.
Some common signs of a bad credit score include:- You are paying higher interest rates than you see advertised
- You have stopped trying to pay down debt and are satisfied making minimum payments
- You have a history of late payments for housing, utilities or other monthly bills
- Your checking account is overdrawn on a regular basis
- You have problems getting a lease for housing
- Cell phone companies won’t give you a contract
- Your insurance rates for home, auto or life take a big jump
All
of these have a negative effect on your credit score, making it more difficult
to get a loan. Don’t get sucked into a situation that sounds too good to
be true. If you have bad credit and need a loan there are options
available but it will take a little time and research to find the one best
suited to you.
Visit a Credit Union
Credit unions are similar to commercial banks in terms of their services,
but they are owned by their members rather than by profit-seeking shareholders.
Credit unions are nonprofit institutions, meaning they pass their earnings
along to their members in the form of lower fees and borrowing costs and better
customer service.
A
credit union – especially one affiliated with your employer or one that is
community-based – may be willing to look beyond a poor credit history and make
a judgment about whether it will loan you money based on your character and
your promise to repay, regardless of if you have bad credit or not. Think of
them in the way you would a small community bank from years ago.
Almost
all credit unions are actively looking for borrowers. If you can afford terms
that match your credit history, you are likely to find a credit union somewhere
willing to work with you.
If
you are thinking of asking a credit union for a loan, look for one with which
you have something in common. For example, if you are a veteran of the armed forces, you might want to approach the Navy Federal Credit Union.
If you are a teacher, there are credit unions created by and for members of
that profession.
Borrow from Family or Friends
In
Shakespeare’s “Hamlet,” the character Polonius admonishes his son Laertes to be
“neither a borrower, nor a lender.” While this advice is prudent when dealing
with strangers, it might be even more judicious if you’re thinking about borrowing
from family members or friends.
Not repaying a loan to a relative or close associate can poison relationships
in ways that go far beyond a bad credit report.
Nevertheless,
sometimes those closest to you are your best sources of funds and a family loan
can benefit everyone involved. You should always treat any loan from someone you
know just as if it were an important business transaction between you and a
stranger. That means it should be formalized with clear documentation and
legally recorded. To avoid future problems, create a written contract that
includes the loan terms and interest rate, and what will happen if you cannot
repay the debt.
Get a Co-Signer
If borrowing from a friend or relative is not possible, you
can still approach someone with good credit who trusts your capacity to repay
the loan and you can ask him or her to be a co-signer on a loan from a
traditional lender. With a qualified co-signer, the lender will set the loan
terms based on the credit score of the person with good credit, who will then
be equally responsible for repayment. All payment information will be recorded
on both yours and your co-signer’s credit reports, so if you default on the
loan, or you’re late with payments, you will severely damage your co-signer’s
credit score. However, if you make timely payments, your own score will
improve, making it easier to obtain future loans without a co-signer.
Tap Your Home Equity
If
you have equity in your home, you can apply for a home
equity loan or home
equity line of credit (HELOC).
Home equity is the difference between the amount your home can be sold for and
your mortgage. Your home is used as collateral, and home equity loans can be
obtained regardless of your credit score. The interest rate is usually low,
because the loan is secured by the home. Also, the interest you pay on a home
equity loan is usually tax-deductible.
Unlike
a home equity loan, which is a lump sum of cash, a HELOC acts like any other
credit account. You can access money when you need to, up to the loan’s credit
limit, and you must pay it back according to a predetermined schedule. In both
cases, it is important to remember that tapping your home equity puts your
property in jeopardy if you don’t repay the debt. But if you are disciplined
and have a reliable source of income, it is an inexpensive way to borrow from a
reputable lender if you have bad credit.
Consider Peer-to-Peer Lending
Peer-to-peer
lending, also known as person-to-person
lending, is a relatively new loan form, having only been around since 2005.
It’s an online platform that allows you to borrow directly from another
individual rather than from an institution. Potential borrowers can post a loan
listing on various peer-to-peer websites, indicating the amount wanted and what
it’s for. Investors review the loan listings and choose the ones they wish to
fund.
Your
credit score is still a factor, but since an individual investor has much
greater leeway in how it is to be weighed these loans are often more readily
available for people with bad credit. Lending standards are significantly more
lenient and interest rates are usually lower than those offered by traditional
lenders. In addition, peer-to-peer websites help evaluate risk for the lender,
while verifying the lender’s credentials for the borrower.
Personal Loan Lenders
Technology
and a wide gap in the marketplace have opened the door for Personal Loan Lenders,
a new industry that has created an option for people with low credit scores.
Personal
Loan Lenders primarily work online and offer competitive loans for things like credit card debt
consolidation and home repairs. Their primary
appeal is they work fast. They can make decisions in minutes and deposit funds
in an account in a few hours or days. Many have no application fee or
pre-payment penalty.
Personal
loan lender applications are simple and easy to fill out. Credit scores are
only a part of the decision-making process so this could be an appealing option
if you have bad credit or no credit. In fact, some personal loan lenders have
their own credit-score model. Other factors that are considered include whether
you have a college degree, the school your degree came from and your employment
history.
Secured Loans
If
your credit score does not impress banks or credit unions, the best chance to
get money you need is through a secured loan, one in which you borrow against
an asset you own, such as a home, car, boat, savings or even stocks.
The
lender will hold the asset as collateral against you defaulting on the loan.
Secured loans usually offer lower interest rates, better terms and access to
larger amounts of money than unsecured loans. They also can improve
your credit score, if paid off in timely fashion.
The
amount you can borrow is determined by the amount of equity you have in the asset
you plan to use as collateral. That is why your home is generally regarded as
the best piece of collateral to be approved for a secured loan, though
obviously there is the risk of losing it, if you default on the loan.
To
calculate equity on any asset, take the market value and subtract the amount
owed. For example, if the market value on your car is $10,000 and you owe
$2,000 on it, your equity is $8,000.
Some
banks will make secured loans based on the amount you have in a savings
account or the value of any stocks you own.
The value of getting a secured loan against savings or stocks is that you will
not need to liquidate the asset so when you have paid off the loan, you still
own the savings or stocks. However, if you plan to use savings or stocks as
collateral, most financial advisors suggest you liquidate them and use the
money to pay whatever debt you are trying to settle rather than take out a
loan.
Loan Process for Bad Credit
If
your application for a loan has been turned down repeatedly due to poor credit
or no credit, it might help to ask a lender for an in-person interview to try
and convince them you are creditworthy.
If
you get that interview, be sure you are prepared with documents that prove
you’re a good risk. Lending institutions love stability. If you can show them
that you’ve lived in the same house (or city) and worked the same job
(preferably for the same employer) for a number of years, it definitely will
help your case.
Common things to bring to a meeting to provide your credit worthiness include:
- Tax returns, W-2s and 1099 forms from at least the last two years
- Details of your job history, including salary and pay stubs
- List of assets such as home,
car, property and where you stand on paying
them off - List of unsecured debts such as credit cards and medical bills
- Whether you pay or receive alimony or child support
- Bank statements for checking, savings and CDs
- Statements for 401(k), IRA and any other stock investments
Not
all of these documents are required, but if you have a poor credit
history, anything you can produce that demonstrates you have become
responsible with your money will be considered a plus. You should
also expect the lender to ask questions about your credit history that may
reflect negatively on you. Things like:
- Have you been involved in any lawsuits?
- Do you have any judgments against your or items in collection?
- Have you declared bankruptcy or had a foreclosure judgment against you?
- If you have been divorced, what are the details of your divorce settlement?
- What is your ethnic background?
The last question would seem to violate anti-discrimination
laws, but it is required by the government so that it can keep date on lending
to minorities and make sure they aren’t routinely turned down or charged
excessive fees. The purpose of an in-person interview is to convince the lender
that you can comfortably take on the payments, if you receive a loan. Any
evidence you have that can support that fact – especially proof that you paid
off loans on assets like a car, motorcycle or boat in the past – are going to
work in your favor.
Visit my website for additional information about Real Estate and our
Central Ohio Market! www.DeLena.com
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