10 Questions to Ask Yourself Before Applying for a Bad Credit Loan
Applying for a loan can be intimidating, particularly for people with bad credit. But don't worry, there are plenty of options for people with bad credit to consider when seeking a loan.
Applying for a loan can be intimidating, especially if you've never done it before.
But this can be even more of a challenge if you're applying for a personal loan with bad credit.
Don't worry. I know it sounds impossible, but there are definitely ways you can still secure adequate funds with a bad credit loan.
But before you run into the bank or start applying for loans online, you need to make sure that everything is in order with your finances.
All too often, I see people get denied for a bad credit loan because they rushed into it.
I don't want to see this happen to you.
That is my main goal for creating this guide.
I've narrowed down the top 10 questions that you need to ask yourself before you apply for a bad credit loan.
Once you're able to answer these questions properly, it will improve your chances of getting approved and receiving the money that you need.
1. How Much Money Do You Need?
This may seem like an obvious question, but you'd be surprised at how many people don't have the right answer to it.
There are several factors that come into play here.
For starters, it's going to depend on what you plan on using the money for.
Just because you might be in debt and have bad credit, it doesn't mean that you should just pick a number out of thin air and hope that it's going to be the answer to your prayers.
Applying for an amount that's too high can reduce your chances of getting approved.
But if you apply for a loan that's too small, it may not be enough to cover what you need, which ends up being a waste of your time and resources.
Here's my suggestion: Take your time to really sit down and factor in all of the costs and expenses associated with what you need the loan for.
For example, let's say you need some new home appliances, like a refrigerator, stove, oven, and dishwasher.
Applying for just the advertised price of each won't be enough.
You need to factor in elements like sales tax, delivery charges, installation fees, extended warranty options, and things of that nature.
These extra costs can add up quickly and you want to be prepared to pay them.
2. Will You Qualify for a Bad Credit Loan?
Once you determine how much money you need, now it's time to ask yourself if you're going to qualify and be approved for that amount.
You need to always be making an effort to improve your credit score, even if you have bad credit.
Applying for a loan and getting declined is going to hurt your chances of getting approved in the future.
That's because the next lender you visit will see your history and think that you're a high risk.
So it's important to look at the specific terms of a loan before you apply.
That way you'll be able to realistically ask yourself if you're going to get approved.
Often times, there will be qualification terms tied to these loans that you can see before you apply.
For example, you may be required to prove a certain income or minimum credit score.
If you don't meet those requirements, don't apply.
Look for another loan that you can qualify for and it will increase your chances of getting approved.
3. Can I Repay the Loan?
Just because you qualify for a loan, it doesn't mean that you should automatically apply for it.
You'll need to be realistic and ask yourself if you can pay back the loan, plus the interest on what you owe.
That's right, you can't forget about interest.
This is something that will add up quickly, especially if you have bad credit.
Make sure that you fully understand the terms of your loan.
Figure out how much money that you'll need to come up with each month and how long you'll have to do this for.
Then, look at your income stream.
If you don't have a steady job right now, then it may not be the best time to apply for a loan.
Failure to repay your debts will just hurt your credit score even more, and trap you in a cycle that you don't want to be in.
Even if you have a steady job, you need to take the time to write out how much money you make each month, and then subtract all of your expenses.
I'm referring to things like:
- Housing (rent or mortgage)
- Utilities (cable, Internet, gas, electric, water)
- Cell phone
- Medical costs
- Miscellaneous expenses
Write down everything.
See how much money you have left over after you subtract these costs from your income.
If that amount isn't more than your monthly loan payment, then you can't repay the loan. Plain and simple.
I encounter too many people that have the "I'll figure it out later" mentality and just apply.
But all of this needs to be sorted about beforehand.
You may realize that you need to cut some expenses.
Start by canceling unnecessary subscriptions, like Netflix, Amazon Prime, or Sirius XM Radio.
Walk, bike, or take the bus to work to save money on gas.
4. How Much Equity do You Have in Your Assets?
Often times, you'll need to put up some collateral to apply for a bad credit loan.
This is known as a secured personal loan and the concept is pretty simple.
You borrow against what you own, like your car, home, or boat.
The more valuable your assets are, the more likely you are to get approved for a higher amount.
But with that said, it also depends on how much equity you own in these assets.
For example, let's say you bought a new car a couple of years ago for $20,000.
That doesn't mean that you can borrow up to that amount.
First, you need to determine what the vehicle is worth today based on the year, mileage, and condition.
Recognize that the lender may even value it below that amount, so factor this into consideration as well.
Let's say that a low estimate of the fair market value of your vehicle is $14,000.
But you've only paid off $6,000 to the dealer between your down payment and monthly financing options.
That's the equity that you can borrow against.
So your best bet is the borrow against assets that you own the most equity in.
But refer to our last question about being able to repay the loan.
Failure to do so will result in the loss of the property you put up as collateral.
5. What is Your Credit Score?
I know that some of you may be thinking that this question doesn't matter.
You know that your credit is bad, and that's all that counts.
But that's the wrong mentality to have and here's why:
Earlier I explained how you need to have a minimum credit score to qualify for certain loans.
If your current score is below that amount, and you don't need the loan right this second, try to buy some time before you apply.
This will give you an opportunity to start rebuilding your score with bad credit.
Pay off any debts that you can afford.
If you can't pay them off in full, at least try to pay them down.
Get a credit report and check for any errors.
For example, you may find something you didn't even know about, like an old unpaid utility bill from a previous address for the month that you moved out.
Settle that with the company.
Get documentation from them to prove that it was paid and that you are in good standing with their business.
Then you can file a dispute to get the mark removed from your report.
Otherwise, something like this will stay on your report for up to seven years.
Taking these steps can have a huge impact on your credit score.
Getting unfavorable marks removed can help you qualify for more and better loans than you initially thought since you'll have improved your score.
But you won't be able to do any of this if you don't know your score and get a credit report done in the first place.
6. Will You be Penalized for Prepayment?
Some loans have a prepayment penalty if you pay them off early.
You might be asking yourself why you would even consider paying back your loan early.
Does this question really matter? Absolutely.
Paying off your loan early is a great way to avoid hefty interest charges.
So I recommend it, as long as you won't be penalized.
If you can't find a loan without a prepayment penalty, your next best bet is to try and negotiate the terms.
Ask the lender to agree that you'll only be charged a penalty if you pay off the loan in full within a short period of time, like six months or one year.
After that time passes, you'll be free to pay it back without being penalized.
Paying off a loan early will also help you improve your credit score and put you in good standing with that lender.
They'll be more likely to loan you money in the future as well.
7. Where Are You Applying for the Loan?
You need to decide where exactly you plan to get the loan from.
If you're going to a bank, figure out which bank to choose from.
Don't just pick one randomly.
You can start with your local branch, but that doesn't mean that you shouldn't shop around.
Credit unions and online lenders have made a huge jump in just those two years.
Those numbers are continuing to rise as we reach the midway point of 2018.
Seeking alternative options to a local bank will help you find the best possible loan for your situation.
Credit unions are viable choices if you're affiliated with a specific group.
For example, veterans and active duty armed forces members can get great loan rates from Navy Federal Credit Union.
This offer extends to their families as well.
If you wish to consider these online options that are growing in popularity, just make sure that they are reputable.
I know that I'm a bit biased, but starting your search for a bad credit loan with us is a great place to begin.
CreditLoan has been around since 1998 and we've helped more than 2 million customers and I know we can help you too.
8. What Documents Do You Need to Apply?
Get all of your paperwork in order.
Find out the requirements for the loan.
Be prepared to show your tax returns, W-2s, 1099, and pay stubs.
If the loan is related to your business, you'll want to bring in all of your past years' financial statements and projections for the next year or two.
Even if certain documentation isn't required, it's better to have them ready anyways.
This will show the lender that you're prepared and serious about this loan application.
The more information that you can provide, the more willing they will be to work with you, even if you have bad credit.
9. Do You Need Someone to Co-sign Your Loan?
Depending on how bad your credit is, you might struggle to find a suitable loan on your own.
Based on your history, you're realizing that you don't qualify for lots of these options.
You have some assets, but you don't own a ton of equity in them, and you may not be comfortable borrowing against them.
That's OK. All hope is not lost.
You can find someone to co-sign your bad credit loan.
In this case, the lender would use the credit score of the co-signer to come up with the loan terms.
So if you have a co-signer with excellent credit, you'll qualify for more loans.
But the co-signer is equally responsible for paying back the money.
So make sure that they fully understand these conditions before they sign anything.
10. How Will The Loan be Repaid Under Extreme Circumstances?
Most people don't think about things like this, but it's important to know the answer.
Let's say that you break your leg and can't work.
Or you're hospitalized for a medical condition.
What if you lose your job?
How will the lender handle these types of circumstances if you don't have the income to pay back your debt?
I don't mean to sound morbid, but you also need to find out what happens if you die.
You wouldn't want your bereaved family to get stuck with payments.
If you have assets in your name, the bank may seize them to fulfill the loan debt.
Hopefully, you won't encounter any of these extreme circumstances.
But it's still important to make sure that you are properly insured and protected ahead of time, before you sign on the bottom line.
BONUS: Were You Able to Answer These Questions?
Now that you've gone through the list of the top 10 questions to ask yourself before applying for a bad credit loan, it's time to ask yourself just one more.
How well did you answer?
If you went through this list and answered each one confidently, and you know you meet the requirements for everything we've discussed, then you're ready to move forward with your application.
If this isn't true for you, don't panic.
Take your time to get things in order before you apply.
Use this guide as your handy reference and I'm positive it will help you get approved for a bad credit loan in the near future.
Have you experienced getting approved for a loan despite your bad credit?
What tips would you recommend for people looking to get a bad credit loan?
Feel free to share your thoughts in the comments below.