You may have seen it on a sign somewhere or possibly on your TV or computer screen: “No credit, no problem!” Don’t believe it. The truth is, when you need to get a loan and you have no credit or bad credit, there definitely is a problem. It’s not an insurmountable one, but it is a problem nonetheless.
Having poor credit makes you a high-risk customer to major banks, credit unions and other major lending institutions. Those lenders have strict standards, and they rely on credit scores when picking their borrowers and calculating loan terms. Unless lenders are assured that their loans will be repaid, they simply won’t make the loan. In addition, heightened regulations and tighter internal controls by lenders in the wake of the Great Recession make today’s lending climate a tough one for borrowers.
So when your credit is bad, you may feel like you’re at the mercy of payday lenders and other sources of financial help, sources that will only loan you money if you agree to repay it at high, or “subprime,” interest rates. These loans are fool’s gold. They often you leave more in debt than you should be. In fact, payday loans are illegal in 13 states because of their predatory terms.
Warning Signs for Bad Credit
To understand how your credit affects you loan options, the best place to start is to understand your credit score. Free credit scores are now available at several online sites. Unfortunately, most people aren’t interested enough to even bother asking.
The National Foundation for Credit Counseling says that 60% of Americans haven’t checked their score in more than a year.
Some common signs of a bad credit score include:
- You are paying higher interest rates than you see advertised
- You have stopped trying to pay down debt and are satisfied making minimum payments
- You have a history of late payments for housing, utilities or other monthly bills
- Your checking account is overdrawn on a regular basis
- You have problems getting a lease for housing
- Cell phone companies won’t give you a contract
- Your insurance rates for home, auto or life take a big jump
All of these have a negative effect on your credit score, making it more difficult to get a loan. Don’t get sucked into a situation that sounds too good to be true. If you have bad credit and need a loan there are options available but it will take a little time and research to find the one best suited to you.
Visit a Credit Union
Credit unions are similar to commercial banks in terms of their services, but they are owned by their members rather than by profit-seeking shareholders. Credit unions are nonprofit institutions, meaning they pass their earnings along to their members in the form of lower fees and borrowing costs and better customer service.
A credit union – especially one affiliated with your employer or one that is community-based – may be willing to look beyond a poor credit history and make a judgment about whether it will loan you money based on your character and your promise to repay, regardless of if you have bad credit or not. Think of them in the way you would a small community bank from years ago.
Although the recent recession forced a number of smaller credit unions around the country to be merged with larger ones, almost all credit unions are actively looking for borrowers. If you can afford terms that match your credit history, you are likely to find a credit union somewhere willing to work with you.
If you are thinking of asking a credit union for a loan, look for one with which you have something in common. For example, if you are a veteran of the armed forces, you might want to approach the Navy Federal Credit Union. If you are a teacher, there are credit unions created by and for members of that profession.
Borrow from Family or Friends
In Shakespeare’s “Hamlet,” the character Polonius admonishes his son Laertes to be “neither a borrower, nor a lender.” While this advice is prudent when dealing with strangers, it might be even more judicious if you’re thinking about borrowing from family members or friends. Not repaying a loan to a relative or close associate can poison relationships in ways that go far beyond a bad credit report.
Nevertheless, sometimes those closest to you are your best sources of funds and a family loan can benefit everyone involved. You should always treat any loan from someone you know just as if it were an important business transaction between you and a stranger. That means it should be formalized with clear documentation and legally recorded. To avoid future problems, create a written contract that includes the loan terms and interest rate, and what will happen if you cannot repay the debt.
Get a Co-Signer
If borrowing from a friend or relative is not possible, you can still approach someone with good credit who trusts your capacity to repay the loan and you can ask him or her to be a co-signer on a loan from a traditional lender. With a qualified co-signer, the lender will set the loan terms based on the credit score of the person with good credit, who will then be equally responsible for repayment. All payment information will be recorded on both yours and your co-signer’s credit reports, so if you default on the loan, or you’re late with payments, you will severely damage your co-signer’s credit score. However, if you make timely payments, your own score will improve, making it easier to obtain future loans without a co-signer.
Tap Your Home Equity
If you have equity in your home, you can apply for a home equity loan or home equity line of credit (HELOC). Home equity is the difference between the amount your home can be sold for and your mortgage. Your home is used as collateral, and home equity loans can be obtained regardless of your credit score. The interest rate is usually low, because the loan is secured by the home. Also, the interest you pay on a home equity loan is usually tax-deductible.
Unlike a home equity loan, which is a lump sum of cash, a HELOC acts like any other credit account. You can access money when you need to, up to the loan’s credit limit, and you must pay it back according to a predetermined schedule. In both cases, it is important to remember that tapping your home equity puts your property in jeopardy if you don’t repay the debt. But if you are disciplined and have a reliable source of income, it is an inexpensive way to borrow from a reputable lender if you have bad credit.
Consider Peer-to-Peer Lending
Peer-to-peer lending, also known as person-to-person lending, is a relatively new loan form, having only been around since 2005. It’s an online platform that allows you to borrow directly from another individual rather than from an institution. Potential borrowers can post a loan listing on various peer-to-peer websites, indicating the amount wanted and what it’s for. Investors review the loan listings and choose the ones they wish to fund.
Your credit score is still a factor, but since an individual investor has much greater leeway in how it is to be weighed these loans are often more readily available for people with bad credit. Lending standards are significantly more lenient and interest rates are usually lower than those offered by traditional lenders. In addition, peer-to-peer websites help evaluate risk for the lender, while verifying the lender’s credentials for the borrower.
Personal Loan Lenders
Technology and a wide gap in the marketplace have opened the door for Personal Loan Lenders, a new industry that has created an option for people with low credit scores.
Personal Loan Lenders primarily work online and offer competitive loans for things like credit card debt consolidation and home repairs. Their primary appeal is they work fast. They can make decisions in minutes and deposit funds in an account in a few hours or days. Many have no application fee or pre-payment penalty.
Personal loan lender applications are simple and easy to fill out. Credit scores are only a part of the decision-making process so this could be an appealing option if you have bad credit or no credit. In fact, some personal loan lenders have their own credit-score model. Other factors that are considered include whether you have a college degree, the school your degree came from and your employment history.
If your credit score does not impress banks or credit unions, the best chance to get money you need is through a secured loan, one in which you borrow against an asset you own, such as a home, car, boat, savings or even stocks.
The lender will hold the asset as collateral against you defaulting on the loan. Secured loans usually offer lower interest rates, better terms and access to larger amounts of money than unsecured loans. They also can improve your credit score, if paid off in timely fashion.
The amount you can borrow is determined by the amount of equity you have in the asset you plan to use as collateral. That is why your home is generally regarded as the best piece of collateral to be approved for a secured loan, though obviously there is the risk of losing it, if you default on the loan.
To calculate equity on any asset, take the market value and subtract the amount owed. For example, if the market value on your car is $10,000 and you owe $2,000 on it, your equity is $8,000.
Some banks will make secured loans based on the amount you have in a savings account or the value of any stocks you own. The value of getting a secured loan against savings or stocks is that you will not need to liquidate the asset so when you have paid off the loan, you still own the savings or stocks. However, if you plan to use savings or stocks as collateral, most financial advisors suggest you liquidate them and use the money to pay whatever debt you are trying to settle rather than take out a loan.
Loan Process for Bad Credit
If your application for a loan has been turned down repeatedly due to poor credit or no credit, it might help to ask a lender for an in-person interview to try and convince them you are creditworthy.
If you get that interview, be sure you are prepared with documents that prove you’re a good risk. Lending institutions love stability. If you can show them that you’ve lived in the same house (or city) and worked the same job (preferably for the same employer) for a number of years, it definitely will help your case.
Common things to bring to a meeting to provide your credit worthiness include:
- Tax returns, W-2s and 1099 forms from at least the last two years
- Details of your job history, including salary and pay stubs
- List of assets such as home, car, property and where you stand on paying
- List of unsecured debts such as credit cards and medical bills
- Whether you pay or receive alimony or child support
- Bank statements for checking, savings and CDs
- Statements for 401(k), IRA and any other stock investments
Not all of these documents are required, but if you have a poor credit history, anything you can produce that demonstrates you have become responsible with your money will be considered a plus. You should also expect the lender to ask questions about your credit history that may reflect negatively on you. Things like:
- Have you been involved in any lawsuits?
- Do you have any judgments against your or items in collection?
- Have you declared bankruptcy or had a foreclosure judgment against you?
- If you have been divorced, what are the details of your divorce settlement?
- What is your ethnic background?
The last question would seem to violate anti-discrimination laws, but it is required by the government so that it can keep date on lending to minorities and make sure they aren’t routinely turned down or charged excessive fees. The purpose of an in-person interview is to convince the lender that you can comfortably take on the payments, if you receive a loan. Any evidence you have that can support that fact – especially proof that you paid off loans on assets like a car, motorcycle or boat in the past – are going to work in your favor.