(Updated 9/22/2014) With the economy being what it is, a lot of people who once had good to excellent credit are facing the fact that they are now considered high risk. Some people feel the best way to deal with a low credit score is to pay off as much of their debt as possible and go to their local bank and ask them for a loan, hoping they will disregard the low credit score and look at their current circumstances.
While paying down all existing debt is a good idea, unfortunately a lot of the big banks (like bofa or citibank) have a strict credit criteria and won’t be able to help you until your credit score improves. If you belong to a community bank or credit union. You should make an appointment to meet with the credit manager and see if they might be able to help you. I’ve found that smaller banks that serve just their small community are a bit more lenient. Its import to show them that you are now capable of paying off your debt on time.
At this point your probably thinking ok, well I don’t belong to a community bank or credit union. So what do I do? That’s where a second chance lender (sub prime lender) will step in.
Second Chance Loans for Bad Credit
Sub prime lenders are lending institutions that specialize in providing consumers with bad credit loans. Their rates do tend to be higher then your local bank, but that is because the risk they take is considered higher. Depending on what type of financing you are applying for, you may be able to negotiate with the lender and see if you can get a lower rate.
Who Should Ask For A Lower Rate
Its not a guarantee that you will get a lower rate, but if you fit the following criteria, you have a better chance of getting a lower rate.
- Your current credit report shows that you have been making ALL your payments on time for a year or more
- No liens or bankruptcy on your credit report
- Bankruptcies should be discharged at least 3 years
- Started to rebuild GOOD credit after a bankruptcies
- You have additional collateral that you are willing to use to secure the loan
If you don’t meet the above criteria, its unlikely that your request for a lower interest rate will be successful. But don’t let that stop you from applying. Just understand the interest rate will be higher than normal. So you should consider taking the loan out for a shorter amount of time. When I’m working with a start up business or a bad credit borrower, I always explain to them it will be in their best interest to take the loan for a shorter time period. Instead of 48 months, if they can afford it they should do 36. If they can’t afford it, they should see if there is a pre-payment penalty. If there isn’t a prepayment penalty they should make bigger payments then required to pay the debt off faster. Meanwhile they continue to work on their credit so that the next time they need a loan or line of credit, they won’t need to look for a subprime lender.
Prove Your Credit Worthiness
As a credit analyst of over 20 years, I can’t tell you how many times people say to me if you give me a chance, THIS TIME, I won’t mess up. Actions speak louder than words. A credit report that shows me consistent payments. A credit report that shows me they are paying down debt. Pay stubs showing consistent employment and an ability to pay. Those are the things that make me feel a loan may not be as high risk as the credit score leads me to believe.
Tip: Be in the job at least 6 months before applying for your loan. The longer the better.
Aside from paying off your debt to your creditors, another important step to getting approved for a bad credit loan is finding the right lender.
[Related Article: Information You Should know About Bad Credit and Business Loans]
How To Find The Right Lender
Doing a search online is a quick and easy process. Look for subprime lender, subprime loans, and bad credit loans. Then read the fine print! There are lots of companies saying they will give personal loans to people with bad credit, but the criteria differs greatly depending on the lender. Some lenders like Avant Credit offer unsecured personal loans for bad credit borrowers. At the same time you will find lenders like CashAdvance.com who offer personal loans but they are essentially payday loans, since they are tied to your paycheck.
Keeping all this in mind, borrowers should remember that second chance loans are best only for short term financial needs. They should keep working on improving their credit so that the next time they need financing they can make lenders fight over the opportunity to work with you and offer you the best rates possible!