5 Tips for Getting a Loan With Bad Credit
Credit unions are classified as nonprofit institutions and owned by members. Many credit unions pass along their earnings to existing members and offer lower borrowing costs and fees, even to people with bad credit. Individuals who are members of a credit union, especially an institution that is community-based or affiliated with an employer, may have a better chance at obtaining a loan because the loan approval process also considers character and a promise to repay.
Family and Friends
Bad credit definitely limits the ability to obtain a loan from lending institutions. It may be more cost-effective to take out a loan from family and friends when funds are needed. Individuals can tap into their personal network and compile an agreement to repay friends and family members with monthly payments or lump-sum amounts by a designated date.
Bad credit doesn't have to derail the loan process. Individuals can approach a friend or family member with good credit to serve as a co-signer on the loan. Many lending institutions base the interest and loan terms on the credit score and credit history of a qualified co-signer instead of the primary borrower who has bad credit. A co-signer, though, is equally responsible for the loan, so it is important to establish payment agreements to ensure the loan is paid in a timely manner to avoid damaging the credit of the co-signer.
Home Equity Loans
A person with bad credit who has equity in a home may qualify for a home equity line of credit. This type of loan uses the home as collateral and doesn't necessarily use credit scores as a basis for loan qualification. Interest rates are typically low with a home equity loan, which can save money for the borrower.
Peer-to-peer lending allows people with bad credit to borrow directly from an individual via an online platform. Investors establish the interest rate, and borrowers must agree to the loan terms. The online platform allows borrowers to post a listing that includes the amount needed and the reason for the loan. Investors survey the request, screen applicants, check credit status and determine if they are interested in offering a loan. Peer-to-peer lenders may be more sympathetic to borrowers with bad credit, more so than a traditional lending institution or bank.
It may seem that options are limited when people with bad credit attempt to get a loan. Borrowing can be more expensive, or lenders may reject loan applications based on credit scores. Poor credit often classifies individuals as high-risk to lending institutions, but options are still available to obtain a loan.
The most efficient way to get a loan ultimately is to improve credit over time to reduce the risk of rejection from banks and lending institutions. Individuals with bad credit should work to rebuild credit and improve credit scores by reducing their overall debt and making timely payments on their debts.