Applying for a loan in banking institutions and lending companies is hard enough if you are a first-timer or if you do not necessarily have huge savings and a good income source. But it becomes even more difficult if you already have a bad credit. Some people actually do not even bother trying to get a loan if they are aware that they have a bad or negative credit record, thinking there is no way they will get approved. But you do not need to be disheartened, because there are a few ways that will enable you to get a loan even if you have a bad credit history.
Having bad credit
Before we explore the ways how you can get a loan even with a bad credit rating, you must first be aware if you have negative or bad credit rating in the first place. Some people with positive cash flow as of the moment can sometimes be surprised and baffled as to the reason why their loan applications are constantly being declined by financing institutions. This is because even if you currently have good financial standing, your credit rating might still be bad or in the negative if you neglected to take care of past loan accounts. We listed some of the issues that usually cause a bad credit rating:
- Closed credit card accounts with outstanding balances – if, for some reason, you forgot that you had a credit card and you have an outstanding balance, it can be closed without you knowing. The unsettled credit card account will then be reflected in your credit rating report.
- Bouncing checks – if you issued a check and it bounced due to lack of funds, it will still be recorded in your credit report even if you pay the required amount in cash.
- Unpaid loan accounts – While this might seem obvious, some people sometimes forget that they have active loan accounts, especially if they let their secretaries or other people handle the payments.
- Foreclosed property – If you have a property that was foreclosed, it will be reflected in your credit report.
There might be other reasons for a negative or bad credit rating, like an active civil or administrative (or even criminal) case, but the ones listed above are what banks and traditional lending organizations consider. Reviewing your financial status and financial accounts will go a long way in determining the best way you can acquire additional loans even with a bad credit. If you have, indeed, figured out that you have bad credit, then here are the ways you can still obtain a loan.
Family and friends
Family and friends, unlike banks and lending institutions, are far more likely to be understanding of your situation as they have a personal relationship with you. Most would not require the numerous documents that are usually required by lending companies, and they would also be more tolerant of bad credit history (provided your previous delinquent loan was not with them as well). In fact, your grim financial situation might even motivate a relative or a friend to lend you money, which is the exact opposite when it comes to established financial institutions. Also, some might not even charge you interest and almost all will probably have much longer terms than financing companies.
There are a few downsides to trying to get a loan from family and friends though. Firstly, unless you have very rich relatives or friends, they most probably would not be able to loan you a bigger amount than the loans you can get at proper financing institutions. Also, while you would experience less legal pressure (depending if you signed a contract or issued checks) than banks or lending companies, your personal relationship is at stake when you start missing payments or cannot pay the loan. For some, that reason alone is enough for them to not consider asking family and friends for loans.
Online lending companies
The rise of the internet has given rise to a number of new industries and companies that offer products and services that were non-existent just a few years ago. One of these are online lending companies that can give you access to loans faster and with less documentation required. While banks and traditional financial institutions rely mostly on credit rating, online lending companies also consider a client’s current financial capability, including current income level. This allows clients with negative or bad credit rating to still get considered for a loan, if they can show that they have a steady income source.
But online lending companies also have their share of disadvantages, the most important of which is the higher rates and fees. They can charge as much as 50% more than banks, and they also have much shorter terms, which are usually anywhere from 6 to 18 months. If you are not stable financially, or a significant event leaves you without an income source for any extended period of time, the higher rates and shorter terms would probably be an even bigger financial burden than your previous loans acquired through banks. So, it is best to carefully research and plan accordingly if you are thinking of availing the services of online lending companies. However, since this is a form of unsecured loan, they would not have the legal authority to sequester your properties should you default on your payments.
Even if you have a bad credit report, you can still approach banks and financing companies for a new loan, provided that you have a property that you can offer as collateral. By offering a property – e.g. car, house – that you fully own, banks and lending companies have more incentive to approve your loan because in the unfortunate event that you default on your loan, they have a tangible asset that they can legally acquire to cover the balance of your loan account. The loan amount that you can get will also depend on the value of your property, which the bank or lending company will assess first.
While this is a good approach to acquire a loan even with a bad credit, this is also a risky option. If, for example, offer your house as collateral, then the moment you miss payments or default on your loan, the banks or financing companies can force you out of your home, as they will use the property as payment for your outstanding loan balance. If you do decide to go this route, you better make sure that you have a backup financial plan to pay off your loan, or that you are indeed okay with losing your property should you encounter an unfortunate financial issue during the term.
Banks who know you
The financial system is not as black as white as it may seem, and some considerations can be granted by banks or lending companies to select clients that have been their loyal customers, or those who have had a good credit history save for a rough patch that has caused your credit rating to plummet. If you are such customer of a local bank, then you can discuss to them what happened and appeal for their understanding to give you a new loan despite your current bad credit report. As this is a normal loan application, there is little risk for you, but do keep in mind that this has far lower chance of success as the other loan options listed above. You will have to rely on how close and familiar you are to the bank manager or lending company officer and how they see you as a client, and this is a very subjective issue. If you are in a hurry and on a deadline, this might not be the best option as you have no way to quantify your chances of getting approved.
Get a co-borrower to vouch for you
The reason banks and lending companies prefer to approve the loan applications of those with good credit rating is because the credit report gives them a way to quantify and rate your ability to pay. So, if you have a bad credit, then you can ask a friend or family member with a good credit report to be a co-borrower and sign your loan application. This has a two-fold benefit. The banks or lending institution lower their risk by spreading it into two people for a single account. As for you, your loan application will have a vastly greater chance of getting approved than if you applied for a loan with only yourself as the signatory.
But as with the other options here, there are also disadvantages to this setup. For one, you are getting your co-borrower involved in the account, which technically means he or she would also now have a loan account to monitor and make sure to pay. While you, in all likelihood, assured your co-borrower that it will be your full responsibility, the moment you miss payments or default on your account, your co-signer will be on the hook as well and their credit scores might also be affected negatively. This puts a huge risk on your personal and professional relationship with your co-borrower.
Do your research
As you can see above, you do not have to despair if you have a bad or negative credit report, as you can still secure additional loans. But each option has its pros and cons, and you must do thorough research to find out which option gives you the best benefit with the least risk for you and for family or friends that you may get help from. Careful examination of your financial status, income sources, and cash flow is in order so that your next loan will be a step in improving your credit rating, not the other way around. You must thoroughly examine and compute the payments and amount you can spare, as much as possible, to avoid payment delays. Remember, you already have a bad credit, and the goal should be improving it through the new loan that you will get.
Prepare as much supporting documents as you can
Each option requires varying number of documents. In the case of family or friends, you just might need a written contract and not much else, while in the case of online lending companies, you might need to provide your income statement and other financial documents. As you are operating at a disadvantage considering you have a bad credit, any document that can help enforce the idea that you are a willing and able payer would be a huge boon. Some of the documents you might need to prepare are:
- Tax returns
- A record of your job history (with pay slips)
- List of assets and their corresponding documentation (land titles, car sales receipt)
- Bank statements
- Proof of billing (current)
At the end of the day, the question might not be whether you can get a loan with a bad credit or not, as it is clearly possible as detailed in the many options above. Instead, the question should be how you can use this chance to get a new loan to improve your credit rating that is the cause of your slim chances in the first place. If you are a borrower that has a chronic tendency to default on your payments, then getting a new loan would not help you if you refuse to change your financial decisions.
The best way to get a loan is to not have a negative or bad credit in the first place. So, before you get a new loan, plan and develop a system about how you can steadily improve your credit score. It does not need to be drastic and immediate, rather, it needs to prioritize consistency above everything else. Being consistent with payments about your outstanding loans and avoiding big and unnecessary expenses will go a long way towards improving your credit rating and finances in general. Keep these things in mind and you’ll be on your way to getting approved for that personal loan.
Robert is our in-house expert on personal loans and finance. He got an MBA, specializing in Finance, before joining the workforce. After working for multiple Fortune 500 companies in the past decade, he brings a wealth of knowledge and experience to the table.