Let’s think about loans in terms of attending an entertainment event for a moment. A good-to-excellent credit score can serve as an all-access pass, granting its holders entrance backstage — or the biggest variety of loans with the most enviable terms. A bad credit score, on the other hand, feels more like standing in the back of the general admission area trying to see the stage — or, worse, standing outside the venue just hoping somebody will be nice enough to sell you their ticket so you can experience the show.
Thankfully, having a poor credit rating does not necessarily exclude you from taking out loans. Lenders look at other factors besides just your three-digit score ranging from 300 to 850. You can increase your chances of qualifying for loans with bad credit if you show strength in these other areas.
Your credit score communicates to lenders at a glance how likely you are to repay loans based on your financial health and payment history. But, as NerdWallet notes, many lenders will look beyond just the number — evaluating your credit report more in-depth when they’re making a decision.
Lenders will almost certainly keep an eye out for negative credit events, such as:
- Payments over 30 days late
- Accounts in collections that remain unpaid
- Bankruptcy within the last seven to 10 years
- How often you’ve applied recently for credit
The fewer negative marks you have on your credit report, the less risky you will appear to lenders. Request a copy of your credit report from the major reporting bureaus and look over it line by line before you apply for any new loans with bad credit. Are there any areas in which you can make improvements, like by paying off a late account?
This also illustrates the importance of building a strong credit history moving forward. Do whatever you can to make every payment on time. Avoid applying for new credit frequently and sporadically, as this will trigger a hard inquiry each time — something that can bring down your score and signal to lenders you’re desperate for cash.
Income vs. Expenses
Lenders will also consider how much income you’re bringing in to make sure it’s enough to repay a loan. But a high income alone does not tell lenders the whole story; they still need to compare your income to your fixed expenses to determine how much of your income is available for loan repayment.
Cameron who makes $6,000 dollars per month might appear to be a stronger candidate than Taylor who makes $3,000 per month, but it’s impossible to know until you compare their incomes against their debts and fixed expenses. It may turn out Cameron has an expensive mortgage and a huge new car payment, while Taylor pays modest rent and keeps expenses low.
Lenders will calculate your debt-to-income ratio, or your total monthly debt payments divided by your gross monthly income before taxes. Experts generally recommend trying to keep this number below 30 percent, but lower looks even better.
Speaking of income, lenders may also look at your employment history from the past few years. Unexplained bouts of unemployment, or constantly hopping between jobs, may make you appear riskier to lenders.
Lenders may look for assets they can hold as collateral against the loan. If you default, the lender will be able to seize this asset — so think carefully before agreeing to secure a loan with collateral.
To qualify for loans with bad credit, and to earn reasonable interest rates on them, you’ll need to demonstrate a strong enough showing in these other areas to offset your low rating.