There are instances when applying for a loan is a necessity regardless of your credit standing. While having good credit will be an advantage in acquiring the best rates, you may have no other option but to get a loan despite having bad credit.
If you find yourself in this situation, what can you do to make the best out of the circumstances? Consider the following steps before applying for a bad credit loan:
Fix your bad credit.
There is a chance that you can instantly fix your spotty credit. How? You can dramatically
increase your score by correcting possible errors or incorrect charges in your report. In most cases, a very low score is a result of erroneous reporting.
- Get a copy of your report from each the three major credit reporting agencies prior to submitting your loan application.
- If you do find errors, send a dispute letter to the agency that issued your report so that the items can be fixed or removed from your report.
- If your request is valid, the credit reporting agency will send you an updated credit report showing the items have been removed.
Negotiate with your creditors.
After disputing the incorrect items on your credit report you need to deal with the valid negative items. You can attempt to do this on your own or hire an agency. But if you choose the DIY route, you need to start with negotiating w/ your creditors. Many people offer their creditors 1/2 of what they are asking. Why? The longer a debt is in a collection or charged off status. The less likely the creditor will collect. Which means they are willing to take “something” over nothing. When I worked for the collection agency, we would drop as low as 75% of the orginal amount! But at that level, the debt was really old and only a few years from falling off their credit report.
If you are good at negotiating, you may want to start off at 75% and ask the creditor to either remove the negative item (they ususally want more money for this) or to show it as Paid as agreed.
Steps to successful debt negotiations
- Explain your present situation and request if your repayment terms can be modified so you can have a chance to keep up with your obligations and avoid inflicting more damage to your credit history.
- If they agree get EVERYTHING in writing before sending any money. Some collection agents goal is to get you to make a payment, Once they get that payment, the date of the payment becomes the new “start” date for collections. So if you have an old debt that they “said” they would take reduced amount and report it cleared. If you dont’ have it in writing, they may not honor the amount they quoted you. You have also effectively “restarted the clock” on this debt. If you don’t make another payment, they put it back on your credit report as a brand new collection. AND it has a larger effect on your credit score then it did before!
- Once you have it writing (make sure its on their business letterhead) send the payment. Within 30 – 60 days the new status should appear on your credit report and your score should have gone up!
Choose the right bad credit loan lender.
If you have done all you can, and your score is still considered to be well below average ( current average credit score in the US is a 687) . Then you need to apply only to lenders who are open to approving clients with bad credit. Bad credit lenders tend to be more expensive to deal with then the ones that work with good credit borrowers. But at least they will legitamately lend to a high risk borrower.
Beware of scams. And use good common sense when talking to a lender. Any bad credit lender that offers interest rates that are the same or even lower then what they will give someone with GOOD credit, is scamming you. We see this all the time. They get you to send them money to cover fees and insurance. And you NEVER get the loan. If you are looking for legitamate lenders who will finance bad credit borrowers, click here for our list of bad credit personal loan lenders.
Protect yourself from scammers.
Having bad credit leaves you vulnerable to many scams and tricks. Watch out for bad credit repair services that promise to give your report an instant fix. Credit repair takes time and a lot of organization skills. You should never attempt to create a new social security number, buy trade lines or use your own childrens social to obtain credit.
Furthermore, beware of predatory lending companies that offer incredibly low rate loans and instant approval. The low interest rate could be a trap! The moment you sign up for the loan, you may suddenly find yourself stuck with a loan packed with hidden fees, unreasonable penalties and continuously increasing rates.
Plan your repayment.
How do you plan to keep up with your monthly loan payments? Have you created back-up strategies to make sure that you will not miss or delay with a single payment? Create your personal repayment plan before submitting your application. If you must get a bad credit loan, you might as well use it to rebuild your imperfect credit.
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