How do you get approved for a personal loan when your credit score is lacking? You don't. At least, that's what it may feel like if you're constantly denied by large banking institutions.
The reality is you can find the loans you need with no credit or bad credit, so long as you know how. Let's take a look at the landscape for those with subprime credit, as well as some strategies to secure a loan.
What is Bad Credit?
Your credit score is an ever-evolving financial report card. Banks and other lenders use this number to gauge your trustworthiness. If you have bad credit, these lenders may refuse to do business with you.
Credit scores exist on a spectrum between 300 to 850. With such a large spectrum, you may expect bad credit to fall at the lower end of the scale.
However, bad credit is anything less than 650. Even credit scores under 700 could exclude you from certain types of loans.
Having no credit means you lack credit history and this is often the case for young adults graduating from high school or college. The three major credit bureaus can't assign a credit score seeing as you've never been entrusted with a line of credit before.
Those with no credit will struggle to find lenders willing to offer a personal loan. In their eyes, you haven't shown you can be trusted to repay your due. That's why people with bad or no credit are in a similar situation.
Visit FCU’s Financial Success Center to learn more about credit scores.
Borrowing Money With Bad Credit
In a perfect world, you would first work to improve your credit score before taking out a loan of any kind. But the world isn't perfect. Sometimes emergencies happen and you need money right away.
That's okay! Resources are available to keep you on your feet. These strategies increase the odds of landing a personal loan and also snagging one with better conditions.
Talk to a Loan Officer
Trying to get a loan online or over the phone is a quick way to have your request denied. When you have bad credit or no credit, you’ll need to make a case for yourself with additional information.
Request an interview with the loan officer associated with the financial institution. The officer is the one who negotiates loans and decides who gets them -- and who doesn't.
During the interview, you’ll want to provide concrete evidence that you are a trustworthy borrower. This documentation includes paperwork such as tax returns, pay stubs, assets, and current bank statements. If you can show proof of a healthy payback history or valuable possessions, you could convince the loan officer to move forward with a loan.
Another two areas the loan officer will look at are residence status and work history. Being at the same job for longer than a year and living in the same place for more than two years will go a long way in proving that you're a trustworthy borrower.
Get a Cosigner
This is your best bet in a pinch. A cosigner is someone who agrees to the loan terms alongside you. That means the cosigner will be equally responsible for missed payments.
How does this help? If the cosigner has a great credit score or high-quality assets, it gives the lender confidence that someone will repay the loan one way or another.
In fact, taking out a loan with a cosigner is an amazing way to build credit when you're in a bad spot, something we’ll touch on more later.
For now, you should consider that using a cosigner puts your relationship at risk. Most people use their friends or family members as co-signers, but if you have a financial hiccup and leave them to pay for it, there’s no doubt going to become an issue.
Be vigilant about making timely payments should you choose this option.
Secure Your Loan
Personal loans come in two distinct sizes: unsecured and secured. When we use the word secure, think of it in relation to a security deposit. Just like a security deposit protects a landlord, so too does a secured loan protect a lender.
A borrower offers some type of collateral in a secured loan. Sometimes it's a liquid monetary payment like a security deposit. But usually, the collateral is an asset such as a home or car.
Almost everyone takes out a collateral loan at some point.
For example, 43% of American adults have auto loans. Few people could own cars or homes without the help of these lenders. But if you're late on a car payment or default on the loan, the bank has the legal right to sell the vehicle as collateral and recoup its losses.
Naturally, an unsecured loan doesn't have collateral on the table. It's a paper agreement.
If you have bad credit or no credit, adding collateral is a fantastic way to put the odds in your favor. Remember, lending institutions want to make their money back. Collateral makes it more likely they can.
For that reason, always offer collateral whenever possible. Secured loans often come with better rates too, so there's no reason not to.
To learn more about loans and other types of payments, click here.
Use a Credit Union
Credit unions have a reputation for being more flexible than large banks. Where a loan officer at a large institution may turn you away, a credit union could give you another chance. They’re based in your community and look to help whenever possible.
Best of all, you could stand to save by going through a credit union. Credit unions will often offer lower interest rates than banks.
This is a real sticking point for people with bad credit. After all, when someone is willing to offer a loan, it usually comes with sizable conditions. Since credit union rates are typically lower, it is likely that your bad credit score will have less of an impact.
Avoid Predatory Loans
Desperation can lead to impaired judgment. Some lenders see this as an opportunity.
Let's say you need an emergency loan right away, but your credit appears to prevent you from getting one. Payday and title loans may seem like the perfect solution. After all, they're available regardless of your credit.
Unfortunately, choosing this avenue could cost you. Payday loans come with egregious APRs (Annual Percentage Rates). Missing even one payment could kickstart a cycle of debt as you'll need to take out a new payday loan to pay for the current one.
Many states consider payday loans to be predatory. That may be just one reason they've been banned in 14 states, which now saves this collective over $3.5 billion every year in previous interest payments.
Title loans are just as dangerous. Although they have lower APRs in comparison, they're still higher than those found in normal loans. Even worse, you have to put your auto title up as collateral. Collateral is always a scary proposition, but it's much worse with these predatory loans, as paying them off can be a significant challenge.
Some credit unions have other options that can replace these expensive, short-term loans, such as FCU's Early Check Advance loan. This loan prioritizes the relationship you have with your credit union, as well as your income and residence stability.
Taking out a loan is a serious obligation. You wouldn't go to the first college that accepted you. So why would you go with the first financial institution?
Even if you have bad or no credit, you have more power than you think. There are several institutions that are willing to work with you. You don't have to settle with the first offer that comes your way.
Before choosing a loan, get a handful of quotes. These will inform you of the terms you can expect from the institution in question, but they may change once you fill out the paperwork.
You should primarily focus on the annual percentage rate, or APR. This is how much extra you'll pay on your loan. APR can swell when you have bad credit so it's important to choose the lowest rate around.
But APR isn't everything. Some lenders have fees or may require collateral. Weigh your options before making a final decision.
Personal Loan Alternatives
Still struggling to get a personal loan? You may not need one. Even in an emergency situation, other options can provide financial assistance that’ll sometimes come with better terms and conditions than those found through a lender. Here are the most common solutions.
Ask for an Advance
Depending on your employer, you may be able to ask for an advance. In this situation, your employer gives you your next paycheck before it's due.
Note that this is not a windfall. When the respective pay period approaches, you won’t receive payment since you already have.
This is a good option when a large bill occurs outside of your normal payment structure. You don't need more money, but you need money now to take care of it.
Borrow From Family
The Bank of Mom and Dad has some of the best interest rates around. The problem is, it’s not open for everyone. Some parents may not be financially able to lend money, while others may not want to.
If you borrow money, it's best to make a written contract, that way every party knows the terms and conditions. Of course, if you borrow money, make certain you pay it back.
Yes, it can harm your relationship if you fail. But also, you'll be legally liable to hold up your end of the contract whether it be written or verbal.
Change Your Budget
Don't need a large loan? Making budget adjustments could be enough to save up for whatever it is you're after. It's easy to save a few hundred every month if you know where to look.
Plus, budgets are a keystone of financial capability.
If you have a budget, see where you can trim unnecessary expenses. Most people can find extra cash in their bank accounts by avoiding fast food and unsubscribing from unused services.
For more serious savings, consider downgrading your car, car insurance, or living situation.
Building Your Credit Score
When the personal loan crisis is over, you should consider improving your credit score. Next time you need a loan, you'll have an easier time finding one -- and with better terms to boot.
How do you build a credit score? The major indicator is a great payment history. By taking out loans and paying them on time, you'll show lenders that you know how to manage money.
If you have bad credit or no credit, the easiest place to start is a secured credit card. With a small security deposit, you'll get a credit line to match. For example, Florida Credit Union's Fresh Start credit card is designed to help build or rebuild your credit.
Credit unions also offer credit builder loans. Basically, you take out a loan but it’s out of your reach in a bank account. After you finish making the monthly payments, the money is released from the account to you.
Think of it as a forced savings program.
As your credit score improves, you can give it another kick in two ways. The first is to hold two different types of loans to show you can handle them both.
You'll want an installment loan, such as a personal loan. The other is a revolving loan, such as a credit card.
Lastly, avoid maxing your credit lines. The old rule of thumb was to never have a credit utilization ratio of over 30%.
The reality is any debt you hold will lower your credit score. Those with the best scores have a credit ratio of 7%. Only use what you need.
Financial Success With Bad or No Credit
Many people think having bad credit or no credit is a death sentence. It's not ideal, but options are available if you're willing to put in the time and effort to find them. And while doing so, you'll have the opportunity to improve your credit for the better.
We understand that even the basics of personal financing can get complicated. That's why we created the FCU Financial Success Center. If you'd like to improve your financial literacy, get started here. Loan Officers are also available by phone 24/7. Just call your local FCU branch to ask questions or to get your loan application started. You may also learn more about our personal loan options by taking a peek at our Loan Products Brochure.
Florida Credit Union is a full-service financial institution. Founded in 1954 as the Alachua County Teacher’s Credit Union, FCU now services over 100,000 consumer and business members in 45 counties throughout North and Central Florida. For more information about the services we provide, visit FLCU.org or call us at 1-800-284-1144.