Having a bad credit score causes major issues when you’re applying for loans. Many lenders won’t consider you. However, it’s not impossible to get a loan with bad credit as long as you follow the right advice.
Lenders use all sorts of criteria when deciding whether to approve your loan application. Many of these are specific to the lender, which means they vary depending on who you apply with.
However, almost all will carry out an assessment of your credit history before making a decision.
This places you in a bad position if you have a poor credit score. Previous financial issues make it much more difficult to apply for a loan. In some cases, lenders will immediately reject your application if your credit score falls below a certain level.
Bad credit brings risk with it. Many lenders see this and instantly decide to avoid taking on the risk. After all, they want borrowers who’ll make repayments on time and in full.
Thankfully, it’s not impossible to get a loan with bad credit. You just need to know how.
Before getting to that, let’s take a look at some of the issues that can damage your credit score.
There are plenty of issues that can affect your credit score. Unfortunately, some aren’t as simple as you might think. In fact, it’s possible to end up with bad credit even though you haven’t done much wrong.
The following are the issues to look out for.
Bankruptcy. This is perhaps the most obvious issue that can affect your credit score. If you declare bankruptcy, you’ll have to wait three years for the bankrupt status to clear. Even then, the bankruptcy can stay on your credit record for up to five years.
Defaults. You default on a loan whenever you fail to make repayments in a timely manner. Typically, lender will give you 60 days after the intended repayment date to make the payment. If you don’t, the lender may report the debt and place you in default status for the loan. The more defaults you have, the worse your credit score becomes.
Late Repayments. Even if you don’t default, late repayments can still have an effect on your credit score. Each one essentially counts as a black mark against you.
Debt Agreements. You’re not out of the woods if you create a debt agreement with a lender. This agreement also goes onto your credit history and has a negative effect on your credit score.
Credit Applications. This is the one that catches many people out. Every credit or loan application that you make gets lodged in your credit history. Making a lot of applications in a short period of time can have a bad effect on your credit score.
All of these issues can make it more difficult to secure a loan. Thankfully, there are a few things that you can do to turn the tide in your favour.
Tip #1 – Know Your Credit Score
As mentioned, repeated applications can damage your credit score further. To avoid having to make several applications, it’s best to know your credit score in advance.
There are several services that offer information about your credit history. These include:
Dun & Bradstreet
You’ll often have to pay a fee to access your credit history. However, some providers offer a limited amount of free enquiries per year.
Knowing your credit score allows you to pick the right time for sending a loan application. Plus, it tells you the scale of the issues that you face. This feeds into the next tip…
Tip #2 – Take Control of Your Debt
People often end up with bad credit because they’ve allowed their debts to spiral out of control.
Once you have access to your credit history, you can create a plan to deal with your existing debts.
Start by paying off any smaller debts. This clears them from your credit report, which gives your score a little boost.
For larger debts, you may consider consolidating them into a single loan. This makes it easier for you to keep up with repayments and reduces the possibility of defaults.
Organise your debt so that you have complete control over it.
Tip #3 – Provide Evidence of Your Financial Strength
Experiencing financial problems in the past doesn’t exclude you from getting a loan in the present. However, many lenders want to see that you have full control over your financial situation.
Taking control of your debt is just the start of this. It’s also worth keeping any documentation related to your finances. Tax returns, income reports, an evidence of paying bills can all go a long way towards convincing a lender.
It’s also a good idea to maintain a savings account that you pay into regularly. All of this paints a picture of somebody who can manage their repayments, even if they have a poor credit score.
Tip #4 – Consider Using a Co-Signer
A co-signer is a third party who agrees to take on the same responsibility for the loan that you assume. Typically, this is a relative or friend who trusts you to keep on top of your debt.
A co-signer adds security to the loan, which increases lender confidence. A co-signer with a strong credit score can also cancel out any concerns about your credit score.
There is a caveat to this technique though. If you default on the loan, the co-signer assumes equal responsibility for dealing with the issue. This could lead to the breakdown of a relationship if you’re unable to keep up with your payments.
Ensure your co-signer knows the risks and have a plan in place in case something goes wrong.
Tip #5 – Speak to a Credit Repair Agency
There are some firms that specialise in helping people to improve their credit scores.
These credit repair agencies take a closer look at your credit history to find issues that you can clear up. For example, they may discover that you have unfair black marks on your report that have lowered your score.
They’ll then work with you to get the erroneous information removed from your credit history. If successful, this can improve your credit score and give you access to more loan types.
Tip #6 – Offer an Asset as Security on the Loan
Some lenders will allow you to use an asset that you possess as security on your loan. For example, you may be able to use a property as part of a caveat loan.
Much like with a co-signer, this asset offers extra security to the lender. It provides the lender with additional recourse should you default on the loan. As a result, they feel more confident in letting you borrow the money. After all, you have the added incentive of making repayments to ensure you maintain possession of the asset used as security.
Tip #7 – Use a Specialist Lender
You may find that many major banks and lenders won’t consider your application. Even if you take the other steps outlined in this article, many just aren’t willing to take the risk.
Thankfully, there are specialist lenders that offer loans specifically for people with bad credit. These loans often come with slightly higher interest rates than the loans you’d get with good credit. However, you can use the loan to make consistent repayments, which improves your credit score. After that, you can refinance the loan at a lower interest rate.
It’s important to shop around when searching for a specialist lender. Each has its own rates and criteria. Try to find a loan that suits your circumstances and doesn’t come with an overly-high interest rate.
Max Funding offers an array of specialist loan types. For example, one client operates a start-up, which means they’d yet to build their credit rating. They needed $120,000 to purchase the business but couldn’t find a loan using a traditional lender. Max Funding helped them to secure a loan of $120,000 and provided a long repayment window that included an interest-only repayment period.
The Final Word
You’re not out of options if you have a bad credit score. There are several steps that you can take to improve your score and increase your chances of getting a loan. Plus, you can use a co-signer or asset as security on a loan.
There are also some specialist lenders who understand your circumstances and are willing to help.
At Max Funding, we believe in second chances. We offer bad credit loans that are:
Ideal for start-up companies.
Flexible enough to help you to meet your business needs without causing you financial hardship.
Come with tax-deductible interest.
Apply online today to get a decision in just 5 minutes.