How can I get a personal loan if I have a bad credit score?

How can I get a personal loan if I have a bad credit score?
How can I get a personal loan if I have a bad credit score?

How can I get a personal loan if I have a bad credit score?: Bad credit loans are a relief option for consumers whose low credit scores limit their borrowing options.

Put another way: A bad credit loan, which is really just another name for a personal loan,can bail you out of a financial emergency, even if your credit score (something under 650) is a lot lower than you or most banks would like.

So if you suddenly need money to buy or repair a car; make payments on a medical bill or consolidate credit card debt,but don’t have a high enough credit score to get a loan from one of the big banks, don’t give up. There is help available.

Bad credit loans are treated the same as personal loans. They are money you borrow and pay back in fixed monthly installments. The loan could come from a bank, but if you’re looking for an affordable interest rate and flexible qualifying requirements, the better choices probably would be:

  • Credit unions. A great option. Maximum allowable interest rate is 18%.
  • Family or friends. Easier to qualify and hopefully lower interest rates.
  • Find a co-signer. Use someone else’s high credit score to get a lower interest rate.
  • Tap home equity. Credit score not a factor. If you have equity, you can get a loan.
  • Online or P2P. Huge market of lenders who can be very flexible with terms.

You could add more options like payroll advances, loans from retirement accounts or borrowing against life insurance to the list, but those are last-ditch choices best left untouched unless everything else fails. There are better alternatives to consolidate debt with bad credit.

Also read: What are the best books to start learning about finance?

Can I get a personal loan with no credit?

Most lenders may not sanction personal loans to those with no credit score. There are exceptions, like Fullerton India which may provide loans to applicants who have a CIBIL score of “NH” or “-1” simply because they do not have any history of credit. However, loan approval for such applicants will depend on other parameters such as monthly income, nature & stability of employment, work experience, and so on.

For those who do have a credit history, lenders usually require a minimum credit score of 750 or above to accept personal loan applications. Lenders give due consideration to an applicant’s credit score because a personal loan is an unsecured loan that involves a lot of risk for them.

If the applicant does not handle credit responsibly and defaults on the borrowed loan, getting their money back becomes too difficult for the lender. Therefore, they only consider applicants with a high credit score indicating a solid credit history.

Those with a low CIBIL score may apply for a salary loan if they need urgent funds – but they should note that these loans charge extremely high rates of interest, and should ideally be repaid within a few months to avoid a debt trap. Alternatively, a better option would be to build one’s credit score before applying.

Can I get a personal loan with no credit to build my credit?

Sure—but it’s not the best way to develop a good credit score.

Start with a secured credit card from your bank or credit union. You shouldn’t have to pay any fees for this.

Your credit limit will typically be the amount of your deposit securing the card. I recommend making as large a deposit as you can manage. The reason will be evident momentarily.

When you get the card, use it for everyday purchases. Pay the balance in full when you get the statement or when your balance gets close to 30% of the limit, whichever occurs first. You may have to make several payments a month if your limit is low.

Here’s why you should pay attention to your balance relative to the credit limit. 30% of your FICO score comes from your credit utilization. That indicates how much of your credit limit is outstanding. When the balance reported exceeds about 30% of the limit, you lose many points. If the reported balance is close to the credit limit, you’ll lose 50–75 points.

This will happen even if you pay the balance in full when you get the statement. Credit card issuers report balances to the credit bureaus when they send out statements. If you have a $250 balance on a card with a $300 limit, you’ll lose many points because of the 82% utilization. The same balance on a card with a $5,000 limit won’t cost any points.

If you have a card with a low limit, you can optimize your scores by paying about a week before the statement arrives. The card issuer will report the lower balance to the bureaus, so your utilization will be low and your scores higher.

Regardless of your credit limit, use the card as often as possible. Don’t carry a balance month-to-month. It won’t help you “build credit.”

After six months, ask the card issuer to convert the card to an unsecured account. This step is critical, so you should mark your calendar, so you don’t omit it. If they turn you down, keep using the card and ask again in 30 days. Keep asking until they agree.

When the account is unsecured, request a credit limit increase. Your regular use and flawless payment history should give you an excellent chance of getting the increase.

Higher limits lead to higher credit scores because they tend to generate lower credit utilization figures.

When you’ve been using your secured card for six months, apply for two additional cards. Store cards and gas cards tend to be easier to get. Use the new cards in the same way as the first.

Don’t buy something you don’t need just to “build credit.” That’s a waste of money. Don’t carry a balance month-to-month. It won’t help your scores, and the interest rates are brutal. Pay all your cards off in full each month.

You can develop a credit score of 750 or higher in a year or so if you start from scratch (no credit history). If you have some dings (“derogs”) on your credit report, it’ll take longer—but negative items have less impact as they get older. A single 30-day late payment will cost 25 points or more if it happened last month. After two years, it’ll still appear on your credit report—but its impact will be negligible.

Contrary to what some self-described finance “gurus” claim, a FICO score is not an “I-love-debt score.” You do not have to owe money or pay interest to have a high score. Credit cards are the best way to demonstrate your good intentions—and you can do that without ever paying a penny of interest.

I hope this is helpful.

How does a personal loan impact my credit score?

If you wish to build your credit card with a personal loan, here are the best tips to do so:

  • It is imperative to pay your EMIs on time and in full. Making repayments on time improves your credit score.
  • Multiple loan applications display a credit hungry behaviour and could significantly reduce your credit score.
  • Consolidate all existing credit card debt / personal loans with a personal loan for debt consolidation and repay it in easy monthly EMIs. Don’t apply for more loans until the current loan is repaid.
  • While applying for a loan, it would be wise to choose a loan amount that you can afford to repay within the stipulated EMIs. Failing to make repayments could hurt your credit rating.
  • Always make sure that you repay your personal loan EMIs in FULL. Part payment or paying just the minimum amount due causes interest to accrue on the unpaid amount. Over a period of time, this could build up into a mountain of debt you cannot deal with.
  • You can use an EMI calculator to determine a suitable EMI based on your needs.
  • Make sure that existing EMIs are not more than 30% of your net monthly income.
  • There is more to a personal loan than just the loan amount and the interest rate. There are fees associated with a loan. They can be minor, but you do not want to be blindsided by these fees. So, make sure that you know what you are getting into before signing off on it.

Borrow from family or friends

Sometimes the best way to get fast cash isn’t through a lender at all. If you have a good relationship with a family member or friend, it may be worth asking them for help.

Keep in mind, though, that borrowing from loved ones can be devastating if things go wrong. As such, it’s typically a good idea to draw up an official agreement between you and them, and consider paying them back with interest.

Your loved one may be more understanding than a lender if you’re struggling to repay the loan, but avoid taking advantage of that fact. Make it a priority to pay them back as quickly as possible.

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