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4 Tips for Taking Out a Loan With Bad Credit

Young smiling couple signing a loan
Borrowers with bad credit frequently find that securing approval for a loan with reasonable terms is a difficult process. Lenders view these prospective borrowers as risky and are reluctant to lend them money. Fortunately, there are loan options available for borrowers with poor credit. If your credit needs work, then check out a few tips that can help you find and secure approval for an affordable loan.

1. Rethink the Terms of the Loan

Most likely, you can find a lender willing to approve your loan. You need to be flexible when it comes to the terms of your loan. Be prepared to pay a slightly higher interest rate than you originally planned. Some lenders may also require borrowers with poor credit to agree to fees, like an origination fee or prepayment fee.

A higher interest rate may increase your overall monthly payment and interest expenses. If your monthly payment is not affordable with a higher interest rate, see if the lender can extend the term of the loan to decrease your payment.

Once you establish a positive payment history, this will improve your credit. You can then pursue options for refinancing the loan if you remain unhappy with the term, fees, or interest rate.

2. Make Sure You Are Strong in Other Areas

Many lenders consider more than just your credit history when deciding whether to approve a loan. They often look at your employment information to see if you maintain steady employment. If you do, this increases your chances of getting a loan.

Your income is another factor that lenders look at. Some lenders even have a minimum income requirement, which you must meet before they will approve your loan. Be prepared to provide recent paycheck stubs and copies of your recent tax returns to verify your income.

3. Apply With a Cosigner 

You have the option to apply for a loan with a credit-worthy cosigner. A friend or family member can serve as a cosigner. Applying with a cosigner increases your chances of securing a loan, and it often yields better terms, such as fewer fees or a lower interest rate.

However, your cosigner is legally responsible for repaying your loan if you are unable to make the payments. If you make the loan payments after the due date, then the lender will report this information to the cosigner's credit report (as well as your own).

Many people are reluctant to use a cosigner or act as a cosigner because they do not want money to harm their relationships. Try to apply for the loan on your own. If the lender says no or the interest rate is too high for your liking, then ask the lender if you can reapply with a cosigner. 

4. Pursue a Secured Loan

Secured loans are financial products backed by some type of collateral. If you can't pay your payments, then the lender can seize the collateral to pay off the loan and minimize its losses. This permits the lender to approve loans that they would otherwise deny or offer a lower interest rate. Mortgages, home equity loans, and auto loans are a few common examples of secured loans, but there are other options available.

See if your lender offers loans secured by your property, such as your car, savings account, or recreational vehicle. When using your car as collateral, you will need either to have ample equity in the vehicle or own it outright. When using a savings account to secure your loan, know that you will likely have to avoid withdrawing your money until you repay the loan.

Do you need a loan? Find one of our OneMain Financial branches in your area to begin your loan application.

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