The recent financial crisis has saddled many Americans with bad credit records. Even responsible borrowers have been caught up in the crisis because of the precipitous drop in home values. This has made it particularly difficult for some individuals to obtain much needed loans for automobiles, home repairs, education and other necessities. Personal loans may be a good alternative in these situations.
Even if your credit has been damaged, in most cases you should still be able to secure a personal loan. The trade-off is that you may need to pay a higher interest rate. Fortunately, even a high interest rate loan may improve your credit rating if you make the payments on time. So the next time you apply for a loan, you could qualify for a lower interest rate.
Below are some tips for securing a personal loan with bad credit:
- Obtain free copies of your credit reports from the credit bureaus. The interest rate that you pay on a loan will be determined largely by the credit scores on these reports. Once you get the reports, you should review them carefully for accuracy. The credit bureaus and the organizations that provide information to them can make mistakes. Correcting any errors can improve your score.
- Make sure that you don’t do further harm to your credit rating. First of all, be sure to pay all of your bills on time. Secondly, don’t open or close credit card accounts unnecessarily, including unused credit card accounts. Thirdly, if possible, reduce the balance on each credit card account to less than 35% of your maximum credit limit. It may even be beneficial to shift high balances from one account to another in order to achieve this percentage on each account.
- Before taking out a loan, take a step back and review the real reason for the loan.
Most financial advisors recommend that you do not take out a loan simply to pay for ongoing expenses such as food and clothing. Similarly, it is not advisable to take out a personal loan to purchase luxuries that you can live without.
- Don’t borrow more than you can afford. Make sure that the terms of the loan result in payments that you know you can make on time. One goal is to use your loan to help improve your credit rating.
- Shop around to find the loan that is most suitable for you. Take into account not only the interest rate, but also the length of the loan term and the payment schedule. You can even shop and apply for personal loans online, but be sure to watch out for fraudulent lenders. For more information, refer to our recent post on choosing personal loan lenders.
- If you plan to purchase a used automobile with your personal loan, make sure that the length of the loan term is shorter than the remaining life of the car. If you have bad credit, the last thing you need is to be saddled with debt for a car that you no longer own.
- It is not advisable to ask a friend or relative to co-sign a loan for you, even if they are more than willing to do so. In most cases this is a recipe for disaster. Many co-signers do not realize that co-signing your loan can affect their ability to get credit even if you make your payments on time. This can easily damage your relationship with that individual and may not be worth it in the long-run.
- Review all of the terms of the loan agreement or contract BEFORE you sign for the loan. In particular, make sure that you understand the interest rate, fees, monthly payment and term of the loan. Read the fine print! If you don’t understand the terms, be sure to ask the lender to explain them to you.
If you follow these simple guidelines, a personal loan can meet your immediate needs AND get you back on the road to financial health.
Briana Fabbri is a recognized “Emerging Leader” from the Chicago Association of Direct Marketing and currently blogs for NetCredit, an online personal loan provider. She frequently blogs about credit, loans, and other personal finance matters.
Note: Ms. Fabbri and NetCredit do not provide financial advice. Please consult with a qualified financial advisor regarding your individual circumstances.
- How to Get a Loan With Bad Credit (helpwithdebtnow.com)
- Personal Loans for people with bad credit (helpwithdebtnow.com)
- Unsecured Personal Loans Suitable for Bad Credit Borrowers – New One Hour Approval Service (prweb.com)