You might be currently planning to take out a personal loan. However, due to past financial obligations that you haven’t handled correctly, you are now burdened in managing a bad credit status. This is already troublesome as having bad credit already marks you as a high-risk borrower from any of your potential lenders.
However, don’t lose hope, since there are still possibilities that you can be pre-qualified for a loan and might be granted an approval.
But there are a few things that you should remember and take note of. Applying for a personal loan with a bad credit score entails you to a more thorough and stringent application process. Also, there are other hurdles that you need to get through to have your application approved.
In this article, you will know what those hurdles are. We also added some tips on how you can improve your credit score.
Credit Score Categorization
It is essential to know what group your credit score belongs to and how these lenders can determine that you have a bad credit status. Below is the categorization of what FICO uses as a credit score reference.
- Excellent 800–850
- Very good 740–799
- Good 670–739
- Fair 580–669
- Poor 300–579
Now, let us answer the question, is it possible?
Yes, applying for a loan with bad credit is possible. However, as stated above, there are hurdles that a borrower will face upfront when they decide to apply for a personal loan. These hurdles do not only negatively affect a single loan application but also other future financial transactions.
Higher interest rate
It is undeniable that having a poor credit score will make it hard for you to borrow money from any lenders. Also, the chances of getting an application approval are low.
Even if you are invited or are qualified to apply for a personal loan, you’ll get to handle a high-interest rate compared to borrowers that have a fair to excellent credit score. However, there are still many lending companies that offer loans for bad credit, even if it is already pre-determined to be at a significant level of risk.
These types of companies give chances to the borrower to make up for their bad credit score by qualifying them for short-term personal or installment loans. But it is expected that they will perform the stringent implementation of company rules when it comes to loan repayments.
Unfriendly loan terms
Granted that you are qualified or luckily got approved for your quick loans, you need to accept and understand that the odds are not in your favor. There will be unfavorable terms that your lender will ask you, such as having your loan in a short payment period with a high-interest rate. This kind of loan term is demanding as you need to compromise and show firmness that you can have your loan paid precisely on time.
Tip: You can win this kind of unfriendly loan term by only borrowing a small amount. With the small principal amount plus the interest rate on top, you can manage to handle the monthly loan repayments without hurting your budget.
Ways you can do to improve your bad credit score.
Your bad credit score does not only affect taking out a personal loan or any other type of loans (credit card, car loan, and mortgage), yet it does have an impact on any financial-related transactions. However, there are some ways that you can ultimately help your score increase and get yourself out of a poor situation.
- Pay on time. It is irrefutable that paying your loan repayments on time increases your credit score faster. Your credit paying history will matter most and has a high percentage in your credit score computation.
- Paying twice in a month. Paying on time and redoubling your payment in a month will help your score improve. This action can convince the lender that you are serious about getting your loan paid off.
- Get a quick loan. Bad credit score entitles you to apply for a quick loan, which is a good step to improve your credit score. This type of loan offers a small amount, but all repayments are reported to credit agencies, which is good for your credit history and report.
- Mixed loans. Apply for a credit card, take out a personal loan, get your dream car through a car loan; whatever it is, diversifying your loans will also increase your credit score. Just make sure that every time you take out a loan, ensure that you can make your payments on-time.
Having a bad credit score is not the end of your financial capabilities, and taking out a loan is still possible. Even though there are hurdles and struggles you have to endure to continue with the application, it’s a precaution for lenders to protect themselves, too. But don’t fret as there are many ways you can do to improve it. You just need to become a diligent and responsible borrower.