At some point in our life, we all come across a situation where we need extra cash. However, some of us may not be able to acquire a loan as easily as others could. One of the underlying causes of this is having a bad credit score.
Lenders want assurance that you, as a borrower, can pay the loan despite your bad credit score. There are multiple ways you can prove it to your lender. If you plan to take a loan with a low credit score, you might want to consider these things below.
Provide a Collateral
The first thing you might want to consider to get your loan approved is providing collateral.
Your collateral will assure the lender that the money they are lending you will get paid off.
If you fail to repay the loan, the lender has the right to forfeit the collateral.
So before agreeing to provide collateral, you should talk to your lender and understand the terms to know if it's a good option for you.
Apply with a Co-signer
Another option you can consider to ensure your loan approval is to apply with a co-signer. A co-signer pledges to repay the loan if you, the principal borrower, fail to do so. Co-signers can be family members, a friend, or even your parents.
Most lenders may ask for a co-signer from a first-time borrower. The reason could be that the borrower's income and credit score are not enough, making the lender feel insecure in lending out the money.
Your co-signer must have a good credit score. Also, any person has the right to refuse to be a co-signer. A co-signer will be at risk of hurting their credit score if you fail to pay the loan. Plus, repaying someone else's debt can be a tough thing to decide.
Avoid Getting a Loan from Banks
When it comes to credit scores, banks are very stringent. No matter what you do or provide, there will still be no assurance that your loan will be approved.
So, if you have a bad credit score, avoid banks and try getting a loan from credit unions or online lenders.
Credit unions are financial institutions that function similarly to a bank. The only difference is that they are owned by the members, not by a private entity or government.
Online lenders are also an excellent option for you. They can provide you with many loan options according to your situation. It would be best to be vigilant when picking an online lender to apply for a bad credit loan.
Take time in comparing options and check the loan terms, interest rate, requirements, and the likes. Choose which lender best fits your needs based on the mentioned factors.
Improve Your Debt-to-Income Ratio
Aside from a credit score, your DTI or debt-to-income ratio is another vital factor that affects your eligibility for a loan. So if your credit score is low, you should work on improving your debt-to-income ratio. It will give your lender a peek at how much your income goes toward debts.
Calculate your DTI by getting the total of your monthly debt payments and then dividing the sum by your gross monthly income. The result would be your debt-to-income ratio. Keep in mind that lenders prefer a DTI lower than 36%. Therefore, you should aim for a DTI below 36% to increase your chance of getting approved.
Settle Outstanding Debts
Before you even attempt to acquire loans for bad credit, you must settle all your outstanding debts and focus on one repayment only. Settling all your debts will also reflect on your credit history, which the lender can notice.
Paying all your existing debts is also an indication that you are trying your best to fix your finances. It's also a clear sign that you are becoming responsible with your finances. With good faith, your lender will be more comfortable approving your loan and confident that you will pay it back.
Work on Improving Your Credit Score
Having a low credit score will make it hard to acquire financial services quickly. Now that you have experienced how hard it is to get a loan with a bad credit record, you should start building your credit score up and never worry about getting a loan anytime.