Thanks to the Great Recession, securing a loan is much more difficult today than it has been in the recent past. Having bad credit adds to this difficulty but bad credit by itself will not impossible to secure a loan. Other factors besides your credit rating are taken into account when applying for a loan.
Before you apply for any type of credit you should be knowledgeable about what the criteria are that will determine the outcome of your application. By ensuring you don’t get snagged by the non-credit score criteria, you will be in better shape to get the loan you are applying for.
Does Bad Credit Really Affect My Application?
Bad credit does affect the application. But there are other factors. Lenders ultimately are trying to determine what the risk is that you will default on the loan. They will look at your current and future earnings. They will also look at what the loan payments will look like as a percentage of your earnings.
There are ways around having bad credit. There are lenders who specialize in lending money to people with bad credit. Finding these lenders is a great first step in getting your loan. Traditional lenders are not lending as they once used to. They are not lending to people with fantastic credit scores. But there are many lenders who are lending who are not necessarily your neighborhood bank.
What If I Don’t Have a Credit Score?
For people who have just gotten out of school, lack of credit is a fact of life. As already mentioned, credit scores are used to assess the risk of default. Traditional lenders are much less likely to loan money to someone without a credit score. Other lenders will look past the lack of a credit score and will use other criteria to determine if you will repay the loan.
You can get a loan approved with a cosigner. A cosigner is a person who will stand behind you on the loan and will be responsible for making payments on the loan if you don’t. Lack of a credit score is a major cause of loan application rejection but it is not a problem that cannot be overcome.
What about Collateral?
Collateral is used to secure a loan. Auto loans and mortgages are typical secured loans. Unsecured credit is typically a credit card. The purpose of collateral in the loan application process is to show that you have something of value that is equal to the amount of money you are applying for. A $1000 item that you own can secure a $1000 loan.
Remember that your collateral may be going down in value during the life of the loan. A car worth $5000 today will only be worth $3500 in the future. Don’t let this discourage you from seeking a loan. Your lender will work with you on what collateral will be needed and what else you need to do to secure more collateral.
Can I Have Too Much Debt to Get a Loan?
If you are running your credit cards up to their limits, you may have a harder time securing a loan. Lenders want to see some breathing room in your existing credit. Again, this should not discourage you from looking for a lender who will work with you. You may have to spend down some of your outstanding debt, but your lender will tell you how much you need to spend down.
You Can Get a Loan If You Look For the Right Lender
Even though traditional lenders are closing the doors on loan applicants, they have never been the sole source of loans. There are many lenders who specialize in loans for people with less than perfect credit.