When life throws us an unexpected curveball, sometimes we all need a little help. Our first instinct tell us to get a payday loan, but we all know that this is a huge mistake. Payday loan companies tend to have an annual interest rate averaging 400%. These companies will prey on people that don’t have access to traditional credit.
About six years ago, I was in a similar situation. I fell behind on my credit card payments and a few went into collections. I eventually made payment arrangements with my creditors and negotiated a settlement for those that were in collections, but the damage was already done.
My credit score dropped significantly. I was in the low 700s and my credit score was in the 550 range. It was the first time I’ve seen score go down this much, and I thought my life was ruined.
A year later, there was a water leak in my condo. Homeowners insurance obviously covered the damage, but I was responsible for paying for the damage upfront since the insurance check would come weeks after.
Here’s how I Got a Personal Loan with Less Than Perfect Credit
The first step I took was to get a free copy of my credit report at Annual Credit Report. You’re allowed one copy from each bureau once a year. I first looked to see if there were inaccuracies on my report. Long and behold, there was a collection account that I paid off that was never reported as “settled for less than full amount.”
I called the collection agency and brought this to their attention. I thought it would be a nightmare to get this fixed, but they were surprisingly prompt in rectifying this situation.
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The First Stop, Try Getting a Loan through Your Bank
Before you apply to various places for a loan, always check with your bank first. The bank should be where you do your everyday checking. Your bank has all your information regarding your direct deposits, average daily balance, and number of times you had any overdrafts.
All this information will be considered when applying for a loan. If this isn’t successful, then follow the steps below.
Do Your Homework Before Applying for Loans
Here’s a pro tip when looking for a personal loan. The web is flooded with lead generating companies. For example, when you do a quick search for “loans for bad credit”, you’ll see a mixture of direct lenders and lead generators. A lead generator basically collects your information and matches you with a lender. The problem with this is that you’ll have a handful of emails and phone calls coming in for the next week.
If you look at the bottom of each website, there should be a disclaimer. If you see something a disclaimer that says something along the lines of…
“The operator of this website is neither a lender nor a broker. This Website merely takes information from consumers and forwards it to lenders who offer the types of loans…”
…then you’re giving your information to a marketing company. Always make sure you’re going directly to a lender to avoid all the solicitation emails and calls.
Make Sure the Lender Pulls a Soft Inquiry
When you’re applying for a loan, make sure the lender is pulling a soft inquiry. Credit Karma does a great job differentiating the differences between a soft and hard pull. In a nutshell, soft inquires do not affect your credit score and can only be seen by you.
This is important because a hard inquiry will actually hurt your credit score. If a lender sees a hard inquiry on your report without a corresponding trade line associated with that company, it’s presumed that you weren’t offered a loan. Companies like LendingClub and Avant both pull soft credit reports.
In addition, it’s also important to make sure that the lender is reporting back positive payment history to all three major credit bureaus. This is crucial and an important stepping block in rebuilding your credit.
Does the Lender Charge an Origination Fee?
This is exactly similar to when you purchase a home or refinance your mortgage. The lender will charge you an origination fee for lending you the money- usually about half a percent to one percent.
The term “origination fee” can be twisted. Some lenders may call this a service fee. No matter what it’s called, make sure you look at your rates and terms in great detail. Lending Club, for example, charges a fee between 1.11% to 5.00%. This amount is deducted from your loan proceeds, so the loan proceeds you receive will be less than the full amount of the issued loans.
Preparing For the Final Moment- Submitting Your Loan Application
Before you submit your loan application, make sure you’ve done everything you can do improve your credit score. Lenders use sophisticated models to determine if you’re approved or not, so even a few points can make a world of a difference. Try to be added as an authorized user from a friend or family member. Try to pay down your debts to under 30% debt to income ratio. And finally, make sure there are no inaccuracies on your report.
When submitting your application, it’s important not to falsify information. Lenders will tend to verify your income, and once you’re denied, most lenders won’t allow you to apply for a certain number of days.
Responsible Borrowing Is Good Borrowing
Here’s the honest truth. If you’re looking for a personal loan and have bad credit, chances are that you’re not going to get favorable terms. The interest rate will most likely be on the high end, so you’ll need to plan in advance for this. Before you begin to take out that personal loan, make sure you have all your safeguards in place. Once you do do this, you can check out some of the best personal loan options for bad credit.
What are you doing to minimize some of your expenses? Create a game plan to save more money each month. Consider this as a first step in rebuilding your credit. Prove yourself that you’re a creditworthy customer that learned from your past and get access to better terms in the future. So let’s recap the steps on how to get a loan with less than perfect credit.
- Check your credit report for inaccuracies
- Apply directly with your bank (where you do your everyday checking)
- Do your homework- are they a direct lender? Do they conduct a soft credit pull? Do they report to all major credit bureaus? Do they charge an origination fee?
- Exhaust all options to improve credit score- Become an authorized user or pay day debt
- Create your budget to ensure timely repayments with lender
*article updated on 1/14/2016 with ReadyForZero’s loan partner recommendation*
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