How to Obtain a Loan with Bad Credit

/ BY / Personal Finance

It’s not impossible to get a loan when you have bad credit - but you may have to work a little harder than you would if you had a good or excellent credit rating. Just as there are options when you want a credit card for bad credit, you have a few choices when it comes to finding a loan for a car, for college or even for a new home.

  1. Consider getting a secured loan, like a home equity loan. Do you have collateral you can offer as assurance that you’ll pay back your loan? If you’ve built equity in your home or if you have a fully-paid off vehicle, a lender might be more willing to work with you.
  2. Go to the best sources. A local credit union is usually a better choice than the branch of a big national bank or a car dealership. Want money for college? Stafford loans for education are approved on the basis of need, not on credit worthiness.
  3. Try asking for a loan in person. Suppose you got behind in your bills because you have an illness or because you had a job loss. You’re doing better now, but that mark is still on your credit record. You may be able to convince a loan officer that you are responsible and that it was a temporary blip if you have the opportunity to present your arguments face-to-face.
  4. Borrow the absolute minimum that you need. Need a new car? Choose the model without all the bells and whistles so that you won’t have to borrow as much money. A lender might approve you for a $5,000 loan but balk at a $10,000 loan.
  5. Get a co-signer. It’s great if you have family members or friends who are willing to take on the liability for your loan if you don’t pay up. But remember that if you do default you’re likely ruining the relationship forever, so don’t take this step unless you’re confident that you can pay.
  6. Try peer-to-peer lending. Prosper and Lending Club are two of the websites where private individuals agree to finance loans for other private individuals. Although these organizations do have standards and will check your credit score, some individuals may be willing to take a risk on someone with less than stellar credit.
  7. Be prepared to keep applying.  Standards vary by lender, and if one bank turns you down that doesn’t mean you won’t get approved by the next. When you do get declined, ask the lender if there is anything you could do to improve your chances next time.

Some other tips:

  • Don’t apply for a payday loan. They have exorbitant rates of interest and it’s easy to fall behind in payments so that you never get caught up.
  • Get copies of your credit reports, look for errors and get them corrected. A creditor may report an account as delinquent when you’re actually up to date; a bad report may remain on your account even after the time it should be removed (a debt that’s older than seven years, for example).

    If you can get caught up on delinquent accounts and are making payments on time, lenders are more likely to look on you favorably, whether you’re applying for a credit card or applying for some kind of loan.

Read the fine print carefully if you’re forced to obtain a subprime loan. You may find that the lender has reserved the right to change the terms of your agreement by raising the rate of interest you pay at any time.

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.