If you are among the millions of Americans who have a credit score of less than 580, you may have difficulty being approved for a loan. Even if you do get the loan, it might come with higher interest rates than what people with good credit receive.
The steps in this guide can improve your chances of qualifying for a favorable loan even with bad credit.
Review Your Credit Report
Checking your credit score is the first step you should take when considering applying for a loan. If you have bad credit, finding out your exact credit score will give you a clear understanding of your situation; the score might not be as bad as you think.
Make sure to check your credit score from all three credit bureaus: Equifax, TransUnion, and Experian. Each one has different information on file about you, so they may end up giving you a different score, which may range from just a few points to vastly different.
If your report has any mistakes, you can refute them for a potentially higher credit score. Since a bad score often means higher interest rates on loans, the difference could potentially cost you thousands of dollars.
Some of the common errors that can affect your credit report include:
- Clerical errors in reading or entering your name or address information in hand-written applications
- You applied for credit under different names, or the same name in a different order
- You put a different social security number or address when applying for credit
- Loan or credit card payments mistakenly applied to the wrong account
- Accounts being reported more than once due to errors, which shows lenders that you have higher debt or multiple open lines of credit
- if you closed a credit account, and your credit report shows that it was “closed by grantor,” it gives the impression that the creditor closed it—not you
- You are divorced, but your former spouse’s debts reflect on your report
- Your older bad debts still show on your credit report (they should be removed after seven years)
- Mysterious accounts and bad debts created by identity thieves who have your personal information.
If you find these types of errors, you can file a dispute with all credit bureaus so your report can be corrected. This simple step can improve your credit score, which can improve your chances of qualifying for loans with favorable interest rates.
While reviewing your credit report, try to take steps that might improve your credit score. Do that by paying down debts and avoiding hard credit inquiries, which negatively impact your credit score.
And regularly check and monitor your credit report from all the credit bureaus to catch any other errors or suspicious activities in your credit report.
Evaluate Your Existing Creditors
Your bad credit score may also be caused by your credit report not having sufficient information. If creditors didn’t report your credit information to credit bureaus, there could be aspects of your credit history that don’t match your report, which might also negatively affect your score.
Creditors normally report on-time payments, purchases, late payments, loan terms, balances owed, credit limits, and major events like account closures or charge-offs. However, creditors are not required by law to report to credit bureaus.
Some lenders may not report to all or some of the credit bureaus because of the fees involved in setting up reporting accounts with each one. The lenders must also follow relevant laws when reporting, which can be prohibitive for some lenders.
If you are denied credit based on an “insufficient credit file” or “no credit file,” that might indicate missing aspects of your credit history. To correct this problem, try asking your existing creditors to report your credit information to credit bureaus. You may also consider moving to a different creditor that regularly reports to credit bureaus. Doing this can improve your credit score and help you qualify for better loan terms.
Approach Direct Lenders
When getting a loan, you have the option of going through either an indirect or a direct lender.
Direct lenders issue loans directly to borrowers, while indirect lenders can either:
- Issue loans to consumers, which the direct lender purchases
- Forward loan applications from borrowers to the direct lender
Approaching direct lenders might be a good choice if you have poor or no credit, especially if the lender uses alternative data (personal information not featured in your credit report) to determine your credit risk.
By using alternative data, lenders can get a more holistic view of your financial profile, which potentially increases your chances of getting a loan.
Identify the Right Loan
Some loans have softer eligibility requirements. If you were rejected for a specific loan, assess the available loan options, and select another that best suits you.
Some of the available loan options for bad credit include:
- Personal loans with a co-signer – with this loan, you will benefit from the creditworthiness of your co-signer.
- Joint personal loans – similar to a co-signer personal loan, a joint loan lets you benefit from your co-borrower’s creditworthiness.
- Personal loans for bad credit – these are personal loans specially designed with friendly eligibility requirements that suit people with bad credit.
- Peer-to-peer loans – peer-to-peer loans tend to have less strict requirements than traditional loans.
- Payday alternative loans (PALs) – payday alternative loans provide credit access to people with bad credit, plus interest rates and fee caps to prevent exorbitant fees and rates.
- Payday alternative loan II (PAL II) – PAL II is a form of payday alternative loan that provides similar benefits, but higher loan amounts and faster loan funding.
- Car title loans – these loans utilize car titles as collateral, making lenders more willing to offer such loans to people with bad credit.
- Invoice financing – invoice financing provides a similar element of security as car title loans for business owners since lenders hold your invoice as collateral.
- Equipment financing – this type of loan is also useful to people who have businesses since it provides the financing to buy equipment without strict eligibility requirements.
- Purchase order financing – purchase order financing is similar to invoice financing, but it provides funding before you supply products to clients.
- Hard money loans – such loans can help real estate investors who need funding urgently to purchase property, especially when they cannot get a bank loan.
- Online line of credit – someone with bad credit may have a better chance of qualifying for an online line of credit, which is more accessible than brick and mortar stores.
- Short-term loans – short-term loans offer a funding option with longer terms than payday loans but not as long as personal loans.
- Loans from family members or friends – this is also an option, but do it carefully to avoid ruining your relationship.
- Payday loans – payday loans offer quick funding and relatively simple qualification requirements, but they can also have high interest rates and fees.
- Merchant cash advance (MCA) – like payday loans, a merchant cash offering incredibly convenient funding but high interest rates and fees.
If you have poor or no credit—and lenders repeatedly turn down your loan application—try asking the lender for an in-person interview to prove your creditworthiness. If you get the interview, come with as many documents as possible to show that you’re a good risk.
Since lending institutions look for stability in borrowers, two key characteristics can help your case:
- Living in the same house (or city) for several years
- Working on the same job (preferably for the same employer) for several years
The typical documents you can present to show your stability and creditworthiness include:
- Two or more years of tax returns, W-2s, and 1099 forms
- Salary information, pay stubs, and other details of your job history
- A list of assets (home, car, property, etc.) and details of how much you own
- A list of unsecured debts (credit cards, medical bills, etc.)
- Details of any alimony or child support payments or receipts
- Checking, savings, and CDs bank statements
Although lenders usually do not require this many documents, providing as much information as possible can prove your creditworthiness.
Also be ready to answer questions from the lender that could potentially reflect negatively on you, including:
- Have you been involved in lawsuits?
- Have you had any judgments against you or items in collection?
- Have you had a foreclosure judgment against you or declared bankruptcy?
- What is your ethnic background? (Lenders may ask this question, but they are obliged to comply with anti-discrimination laws.)
Once you’ve applied these strategies, you may succeed in getting a loan sooner than you think.
However, avoid taking any loan offer you receive simply because you assume that you cannot get any other offer based on your credit. Taking an unfavorable loan can put you in a debt trap, which is worse than simply having bad credit.