Finance

How to Cope with a Personal Loan When You Have Bad Credit

Tackling the personal loan real estate with a shaky credit score feels like wading through mud. It doesn’t have to be a lost cause though. With some careful planning, digging into details, and a good dose of honesty about where you stand financially, you can get your hands on the cash you need—even if your credit history isn’t a polished masterpiece

Step 1: Get the Lay of the Land on Bad Credit

So, what exactly is “bad credit”? Typically, it’s signaled by a FICO score under 580— or a VantageScore below 630, more or less. While your score isn’t the only thing the suits consider, it definitely holds some weight while determining your eligibility and the loan terms offered, score will slap on the table. Different lenders have their own definitions—a mixed bag, really. So, take some time to figure out what each lender needs to see to think about giving you a shot.

Step 2: Crunch Those Numbers on Your Debt-to-Income Ratio (DTI)

Before you jump in, take a beat to see about your financial standing by calculating your debt-to-income (DTI) ratio. This little nugget tells you what slice of your monthly cash goes to paying off debts. Generally, lenders like to see a DTI of less than 50%, which isn’t a hard rule—some might giddily take on a higher figure if the rest of your application has some bite. Understanding your DTI can also steer you when it comes to deciding if it’s smart to take on another loan right now.

Step 3: Scout for Lenders Who Just Get Bad Credit

Some lenders, bless their hearts, know better than to get bent out of shape over just your credit score. They’ll nose around your income and employment history, too. Names like Avant, with a minimum score requirement of 550; Upstart, who doesn’t have much in the way of minimum credits but cares about your job and schooling; and LendingPoint, who nabs customers starting at 640. These folks often deal in smaller loans—thing like $1,000. And you want to weigh up the annual percentage rates (APRs), fees, and nifty perks like reduced rates with autopay against various options.

Shifting online loans could get your funding into your pocket quicker with more lenient approvals—to a point. Credit unions are there, too—often with friendlier terms and rates. However, a pre-existing relationship with a credit union can enhance your chances of approval since they consider your banking history.

Step 4: Pre-Qualify and Keep Score Checks Soft

Getting pre-qualified is a nifty little tool. It’ll show you what terms might work for you without hitting your credit score. Basically, it’s a “soft pull,” the nice sort that won’t stain your credit history. Aim to get pre-qualified through at least three lenders to hunt down the best option with the most favorable terms you can actually live with.

Step 5: Spot and Fix Credit Report Errors Before You Apply

It’s a good idea to check your credit report for any slip-ups—like wrong accounts or weird hard inquiries. If you see ‘em, challenge those puppies quick. Getting these things sorted before you send in your application can give your credit profile a smooth little bump up. Also, lenders might want to see proof of income, things like W-2s, pay stubs, and your latest bank bits, so gather that stuff before you dive in.

One way to give your application a fighting chance is by asking a solid co-signer to step in alongside you. Or, if you’re slightly daring, think about a secured personal loan with something in collateral. Co-signers can bolster your chances and may get you better deals. Secured loans aren’t for the faint-hearted since defaulting could cost you a prized possession, but they might be easier for someone with not-so-great credit.

Step 6: Brace for Higher Costs and Short Debts

If you’re looking at loans with bad credit, prepare—APR’s will be clingy and high! Think around 19.92% to 21.64% on average, which granted is much steeper than the typical 12.74% for folks with excellent credit. Occasionally, unhappy APRs soar all the way to 36%. Meanwhile, also note that many bad credit loans have a shorter life, usually crammed into one to five years, which means higher monthly payments. Yeah, use a loan calculator here. Don’t get pulled into the financial abyss.

Step 7: Dodge the Predators

Watch out for lenders hawking payday loans or provocatively casting the no credit check bait. They can lure you in with promises but soon trap you in scary payday cycles, steep interest, like a staggering 300% APR. The good loans’ APRs should stay beneath 36%, and quite honestly, decent ones won’t ask for cash up front before handing over the dough.