Having bad credit — also know as sub-prime credit — is indeed a substantial, and unfortunately common, barrier to obtaining a personal loan. But it’s not necessarily an insurmountable hurdle.
1. Make Sure Your Credit Reports are Accurate & Up-to-Date.
It’s human nature to want to avoid unenjoyable activities, and going over your credit report line-by-line when you have bad credit is about as fun as stepping on a scale after Thanksgiving dinner.
That said, it’s a very import step to take because your credit score may very well be even worse than it should be if you’re one of the 26% of people whose credit report contains inaccurate information on it. Yes, that’s right. A study by the Federal Trade Commision found that one in four people have “at least one potentially material error on at least one of their three credit reports.” (The three reports being Equifax, Experian and TransUnion.)
So even if you know your credit is bad, you need to make sure that your score isn’t being harmed by information that shouldn’t be there. Perhaps a long-settled debt is still lingering on your report as unpaid or is past its statute of limitation. Or, even worse, perhaps some derogatory items that aren’t yours are appearing on your report due to some clerical error.
So bite the bullet, and go over your report with a fine-tooth comb to make sure everything is accurate and up-to-date. If you find something that isn’t — immediately request a correction. (Visit the FTC’s website here to find out how to file for a credit report correction.)
Getting a loan with bad credit is hard enough as it is, so it worth your time to ensure that report inaccuracies aren’t making your score worse than it should be.
2. Go after the Low-Hanging Fruit
If you can afford to pay off one or two derogatory items, do so. Your past payment record determines 35 percent of your credit score, so improvements in your payment record can make a big dent.
If your credit took a hit because of a temporary job loss, serious illness or some other mitigating factor, draft a 100-word statement to add to your credit report. Although the statement won’t improve your credit score, some lenders — particularly LoanNow and other socially-responsible lenders — do look at the ‘overall picture’ and take borrowers’ surrounding circumstances into account as part of their underwriting process. At the very least, borrowers will see that you take your credit profile seriously, which can only work in your favor.
3. Consider Socially-Responsible Online Lenders
One of the best improvements to the sub-prime credit market has been the recent emergence of online lenders driven by a mission of socially-responsible lending. Many of these companies are using the groundbreaking work of Muhammad Yunus and other forward-thinking economist and financiers to bring fairness and opportunity to people who have been historically ignored or exploited by traditional lending practices. Lenders such as LoanNow look at more than just your credit score, and consider your entire financial situation when considering you for a loan.
4. Try Credit Unions
Credit unions perform the same primarily functions as banks but unlike banks, they are nonprofit organizations with a legally-mandated mission to serve a specified community . Their special nonprofit status and mission typically allows them to be more flexible and understanding when it comes to lending to people with less-than-optimal credit.
You have to qualify to join credit unions, but the chances are good that you qualify for membership in at least one, based on your residence, occupation or family affiliation.
5. Offer Collateral
You can improve your odds of being approved for a personal loan by applying for a loan secured by collateral such as your car. However, proceed with this option with the utmost caution. If you should fall behind in your payments, you risk losing your collateral. This means you must be absolutely certain that you will be able to repay the loan in full before taking on a secured loan.
6. Obtain a Creditworthy Co-Signer
Obtaining a creditworthy co-signer is one of the best means to obtain a loan when your own credit is bad. Family and close friends are the most likely prospects for co-signing your loan. Be forewarned that if you default on the loan, your co-signer is on the hook with the lender. Leaving a friend or family member in the lurch for your bad debt can strain or even destroy your relationship with that person forever, so don’t take the matter lightly.
7. Try Peer-to-Peer Lending
If your credit profile is less-than-perfect but still not absolutely horrible, peer-to-peer lending may be a viable option. With peer-to-peer lending, you create an online profile that includes your financial circumstances along with background information and your reasons for requesting a loan.
If you have an appealing request, you can attract “backers” to fund your loan. Some may find it a bit uncomfortable to offer up their financial needs and circumstances to a peer-to-peer community made up of strangers; however, many people actually find it less stressful than borrowing from friends and family.
8. Tap Into Home Equity
Home equity loans have waned in popularity since the Great Recession (and for good reason), but they still represent a financing option if your credit score does not qualify you to borrow elsewhere. Home equity loans typically do not depend on credit scores, and you keep your home while you pay back the loan. But if you default, you could wind up losing your home to foreclosure, so be extremely careful. Be sure your are borrowing for something that’s absolutely necessary and at terms you can afford.
9. Shop Around
Sometimes obtaining approval for a loan is simply a matter of approaching the right lender. It definitely pays to shop around.
10. Borrow from Friends and Family
Sometimes your only option for obtaining a personal loan is truly personal – such as borrowing from a family member or friend. When going this route, don’t use your familiarity with each other as a reason to forgo the ‘formalities’ of a written agreement. Drawing up a basic agreement which lays out the fundamental framework of the loan is still highly advisable. You don’t need to go overboard and hire a lawyer to write out a contract filled with legalese. But you definitely want to write out the basics terms — such as the amount borrowed, the repayment schedule and interest, if any.
You may feel awkward drawing up a contract with your mom and dad, but treating the loan as an official transaction will help ensure that all the involved parties have the same understanding and expectations. This will go a long way to minimizing the chances of a misunderstanding causing unwanted stress and conflict between you and your loved ones.