If you have bad credit, you may be asking, “How can I improve it?” Surprisingly, one of the best things you can do is get another loan. But wait, there are a few things you need to know about getting a personal loan with bad credit.
Let’s start with a review of what makes your credit bad in the first place.
Typically, missing payments or slow payments will be reported to a credit agency by your creditors. Enough of these black marks will lower your credit score. So will allowing your outstanding credit to build so much that the payments represent more than 40% of your income.
The best thing to do, of course, is avoid this situation in the first place. But, recent economic realities have pushed many people into bad credit through job loss, lowered income and other factors that have affected their ability to pay. A bad credit score is simply a measurement of your payment history.
So, how can getting a new loan help, and who would give you one?
You may be surprised to learn that getting a new loan with bad credit isn’t as hard as you’ve been led to believe, especially if you plan ahead to overcome the three major objections that may lead to a rejection. Each time you pay off a loan, your credit score goes up a small amount.
With more disposable income, you might pay off other old loans more rapidly by making payments above the minimum. Or you might avoid having to take short-term, high interest loans to make it from paycheck to paycheck. Shop carefully for your new loan to be sure it will allow you to accomplish at least one of these goals.
Now, prepare for the application with care. Make sure you can overcome these two reasons that lenders give for rejection loan applications:
No Credit History?
This may seem counterintuitive, but someone who has never had a loan before will actually have a harder time getting approved for a loan than someone who has demonstrated poor repayment history. Lenders can lower their risk in lending to the latter person by raising the interest rate, but the former is simply an unknown. Have available someone with good credit who is willing to co-sign for you to overcome this objection.
No source of income/insufficient income?
Believe it or not, your credit score isn’t given as much weight as your current ability to pay regardless of credit history. If the loan is within lender guidelines, typically no more than 40% of your net income, you may well be able to convince a lender that a bad credit history was the result of a temporary or one-time misfortune, and that you are a good credit risk in spite of your score.
Remember to always do business with a lender who is committed to help you improve your credit score by designing a loan that will allow you to pay off the loan on time, whilst being affordable.