The advantage of borrowing money with a personal loan is that you can use your loan proceeds for anything, whether it’s fixing your car, replacing your laptop, or paying off your credit cards. But since personal loans are unsecured, it can be difficult to get one when your credit score is not so good.
Some types of loans are secured by a specific asset or collateral. A mortgage, for example, is secured by the house it is used to finance. If you’re behind on your mortgage payments, your lender may force the sale of your home to get paid off.
A personal loan is unsecured, so it is not tied to a specific guarantee. Thus, lenders take on more risk with a personal loan. If you are behind on your payments, your lender may not be reimbursed at all.
Credit scores play a huge role in qualifying for a personal loan. If your credit score is high, it means you pose less risk to lenders. But a lower credit score means you’re a riskier borrower.
Now, to be clear, it East possible to get a personal loan with a less than stellar credit score. But it can be more difficult to qualify. And if you do qualify, you could end up with a higher interest rate on your loan. With that in mind, here are three tips for getting a personal loan when your credit score could be better.
1. Get a co-signer for your loan
When you enlist the help of a friend or family member to co-sign a personal loan, that person’s credit information is added to your application. Lenders consider this information to determine whether to approve your application and what interest rate to give you. If your credit score is in the 600s but you get a co-signer with a credit score of 800, you have a much better chance of being approved and getting a more favorable interest rate on your loan because your co-applicant will then become responsible for the repayment of this debt in the same way as you.
Of course, if you ask someone to co-sign your loan, you will have to really do your best to borrow in moderation and keep up with your payments. Otherwise, in exchange for this favor, your friend or family member could end up responsible for payments that are supposed to be your responsibility.
2. Shop around with different lenders
If your credit score isn’t great, you may have to settle for a higher interest rate on a personal loan. But it is always beneficial to seek offers from different lenders. You may find that one lender is able to offer a more attractive loan rate than the rest of the pack.
3. Borrow as little as possible
While a personal loan can be an affordable way to borrow, if your credit score isn’t that good, it can become less affordable if you’re slapped with a higher interest rate. If you are considering taking out a personal loan, try to borrow as little as possible. As tempting as it may be to borrow more for those “just in case” moments, the more principal your loan has, the higher your monthly payments will be.
Having bad credit should not prevent you from taking out a personal loan. But these tips can make it easier to navigate the process and keep your borrowing costs to a minimum.
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