If your credit is in bad shape or you’re just starting to build credit from scratch, you might feel shut out of opportunities to borrow money. While having bad credit can be a roadblock when applying for a loan from a traditional lender, the good news is that there are alternative options.
In this article I’ll cover 6 ways to get a loan when your credit is less than perfect.
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How to Check your Credit Report
If you live in the U.S. before applying for a loan, I recommend that you take some time to review each of your credit reports with the three nationwide credit bureaus: Equifax, Experian, and TransUnion.
Federal law requires each of the bureaus to give you a free credit report every 12 months if you request it. You can get your reports from the individual bureaus or access all of them at annualcreditreport.com.
Any inaccurate information—such as late payments, accounts you don’t recognize, or open balances that were previously paid off—could be dragging down your credit scores without you knowing it. Lower credit scores typically cause you to pay higher interest rates on credit cards and loans, so cleaning up your credit file can really pay off.
If you have old debt in collections, consider negotiating a settlement with your creditors. Arranging a payment agreement today won’t remove the bad debt from your report tomorrow, but it helps clean up your report.
Remember that credit accounts remain on your credit history for many years after you pay them off. Debts with positive payment history stay in your credit file for 10 years and those with negative information stick around for 7 years. So even after you settle or pay off a bad debt, it always remains on your credit history for 7 years after the date you originally became delinquent.
See also: The Statute of Limitations and 4 Options for Old Debt
6 Options to Get a Loan with Bad Credit
No matter if you’ve already been turned down for a loan or you just like the idea of using a non-traditional lender, here are 6 options to get a loan when you don’t have excellent credit:
Option #1: Apply for a loan at a credit union
Since the purpose of a credit union is to serve its members, they’re known for offering top-notch customer service and can be more flexible and forgiving of consumers who have less than perfect credit.
Credit unions are similar to banks; however, they aren’t legally allowed to serve the general public like banks do, so you have to be a member.
Different credit unions have different membership requirements, such as working for a certain employer, in a particular industry, or living in a certain city or county. However, in some cases joining can be as simple as making a one-time $10 donation to a charity that the credit union supports. Also, most credit unions extend eligibility to the immediate family of all their members.
Since the purpose of a credit union is to serve its members, they’re known for offering top-notch customer service and can be more flexible and forgiving of consumers who have less than perfect credit. Additionally, they generally offer competitive interest rates that can save you money.
You can search for local and national credit unions at:
Findacreditunion.com
Mycreditunion.gov
Findabetterbank.com
Depositaccounts.com
See also: Bank or Credit Union—Which is Better?
Option #2: Use alternative lenders
Traditional brick-and-mortar banks tend to have stringent underwriting guidelines for loans. However, there are many alternative companies that offer loans even if you have average or poor credit.
Check out these online lenders:
SoFi – uses a modern, radical approach to lending that evaluates applicants based on a holistic view of their financial well-being rather than on their credit score. They offer student loan refinancing, personal loans, and mortgages based on factors such as your career experience, income versus expenses, financial history, and education.
Avant – looks at a variety of factors when determining your eligibility for a personal loan. Checking your rate results in a soft credit inquiry, which doesn’t hurt your credit.
LendingTree - is an online lending exchange that connects borrowers with multiple lenders, banks, and credit partners who compete for your business, even if you have bad credit.
Some lenders allow you to get rate quotes with a soft inquiry to your credit report that doesn’t affect your credit—but many do a hard inquiry that will temporarily ding your scores.
The best way to shop for loans is to submit all your applications within a one- to two-week period. Credit bureau algorithms know that a few credit inquiries within a short timeframe mean that you’re shopping and will only be counted as a single inquiry.
See also: FICO vs. VantageScore Credit Score--What's the Big Difference?
Option #3: Try marketplace lenders
Marketplace or peer-to-peer lenders connect people who need money with investors who want to make loans, which creates a win-win transaction.
Marketplace or peer-to-peer lenders connect people who need money with investors who want to make loans, which creates a win-win transaction. This option is exploding in popularity because borrowers pay less interest than they would to a traditional bank and investors earn above average returns.
You create a profile and post a loan listing that investors can review and choose to fund. Many are willing to take a chance on borrowers with average or low credit scores.
Check out these popular marketplace lenders:
Lending Club
Prosper
PersonalLoans
Option #4: Appeal to a loan co-signer
If you’re having trouble qualifying for a loan on your own, consider finding someone with good credit to be your co-signer. Maybe you have a family member or friend who trusts you enough to share responsibility for a debt.
When you co-sign a loan, the payment history gets reported on both of your credit reports, even if only one co-signer makes the payments. That means if you make payments on time, it benefits both of your credit reports and helps increase both of your credit scores.
However, making late payments damages both of your credit files. And if you default, the lender will hold both of you equally responsible for repaying the full amount of outstanding debt.
Option #5: Use a home equity line of credit
If you’re a homeowner and have enough equity in your property, you may qualify for a low-interest home equity line of credit (HELOC). It’s a second mortgage that you can access as needed using a paper check or debit card.
With a HELOC, you’re limited by the total amount of the credit line offered and only pay interest on the amount you take out. Plus, up to $100,000 of the loan or credit line is tax deductible.
Your credit score typically doesn’t play a role in your loan’s approval or the interest rate you pay for a HELOC because your home is the collateral. That’s great if your credit isn’t good. However, the big drawback to a loan that’s secured by your home is that if you don’t make payments, you could lose your home.
So before tapping your home’s equity always be sure that you have secure and steady income. You can apply for a HELOC with the lender that handles your first mortgage or shop around with other banks or credit unions.
See also: Best Tips to Improve Your Credit Score
Option #6: Take a loan from family or friends
If you accept a loan from family or friends, view it as a business transaction and create a proper loan agreement to avoid future disagreements.
If you can’t get a loan using these 5 options, the 6th is to borrow from someone you know. Taking a loan from family or friends is a decision that shouldn’t be taken lightly since feuds over money can destroy relationships.
If you accept a loan from family or friends, view it as a business transaction and create a proper loan agreement to avoid future disagreements.
ZimpleMoney and LendingKarma are unique platforms that manage person-to-person loans. Both handle loan documents and payment arrangements to make your life easier. You can also draft your own promissory note with the agreed upon loan terms using sites like Rocket Lawyer or LegalZoom.
How to Raise Your Credit Score
If you exhaust these options and still can’t get a loan, the best way to qualify is to raise your credit score. One of the easiest ways to build credit fast is to use a secured credit card.
Also, check out a multimedia tutorial I created called the Credit Score Survival Kit. It’s a free download that includes a video, audio, and e-book that teaches you 3 smart and legitimate strategies to build excellent credit.
See also: How to Get Credit With No or Bad Credit.
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