Yes, if you have a low credit score it is entirely possible to get a loan but it may be more difficult and expensive. A low credit score can be a red flag to lenders that you could be a risky borrower, and they may be hesitant to offer you a loan.
According to Experian’s 2015 Vantage Score 3.0 data, nearly a third of Americans have a credit score lower than 601, which is considered ‘bad credit’. While a low credit score can make it more challenging to get approved for a loan, there are still options available, which this article aims to outline.
What Is A Credit Score?
A credit score is a numerical rating that determines your creditworthiness and indicates how reliable you are in your financial dealings. It is based on your credit history and is regularly used by lenders to determine the likelihood of you repaying back a loan on time. The scoring typically range from 300 to 850, with a higher score representing a more trustworthy borrower.
What Can Cause A Credit Score To Drop?
Common factors that can cause a credit score to drop include
- Missed or late payments
- High credit card balances
- Collections or charge-offs
- Applying for multiple credit accounts in a short period of time
- Bankruptcy or foreclosure.
Can You Get A Loan If Your Credit Score Drops?
Yes, you can get a loan even if your credit score has dropped but it may be more difficult. This is because the drop in your credit score signals to lenders that you may have some trouble paying off your loan in the near future. As a result, you may be offered higher interest rates or may be required to put up collateral to secure the loan.
How Long Does It Take For A Credit Score To Recover After A Drop?
In general, it can take several months to a year or more to see a significant improvement in your credit score. However, the time it takes for a credit score to recover after a drop depends on a number of factors including the severity of the drop, the reason for the drop and how quickly you take steps to improve your credit.
Can I Improve My Chances Of Getting A Loan With A Low Credit Score?
Yes, there are some ways to improve your chances of getting a loan with a low credit score. The main ways to improve your chances of getting a loan with a low credit score are by finding a co-signer or putting up collateral to secure the loan.
A co-signer is someone who agrees to take responsibility for the loan if you become unable to repay it. Because the co-signer is essentially guaranteeing the loan, lenders may be more willing to offer a loan to someone with a low credit score.
However, you may want to consider improving your credit score before you resort to these options. You can do this by paying off outstanding debts, making payments on time and avoiding opening new credit accounts.
What Are Some Types Of Loans That Are Available To People With Low Credit Scores?
Applicants with low credit scores may be able to get other types of financial products such as secured loans. A secured loan is a type of loan that requires you to put up collateral, such as a car or a house, in exchange for the loan. Lenders will feel more secure offering loans to people with bad credit if they have some sort of assurance in the form of collateral, meaning this could be a viable option if you have a low credit score. However, if you default on the loan, the lender has the right to seize the collateral, meaning you could lose your house or car.
Other types of loans that are available to people with poor credit include personal loans or payday loans. However, it is important to note that these loans may come with higher interest rates and fees.
What Are The Risks Associated With Getting A Loan With A Low Credit Score?
If you have a low credit score, the risks include higher interest rates and fees, which can make it difficult to repay the loan. Keep in mind that taking on more debt when you already have a low credit score can make it even harder to improve your credit in the future.
Conversely, if you take out a loan and repay it back on time, it is indeed possible that this may improve your credit rating. However, this should not be your primary reason for borrowing money.
What Should I Consider Before Taking Out A Loan With A Low Credit Score?
Before taking out a loan with a low credit score, you should consider the following:
- The interest rates and fees associated with the loan
- Your ability to repay the loan on time
- The terms and conditions of the loan, including any penalties for late payments or default.
Can A Lender Deny Me A Loan Based Solely On My Credit Score?
Yes, lenders use your credit score as one factor in determining your creditworthiness, and if your score is too low, it can be a red flag that you may be a risky borrower. In cases like this, you can try to negotiate with creditors to set up a payment plan or ask for a temporary forbearance or deferment.
How Do I Quickly Improve My Credit Score?
Improving your credit score usually takes time and consistent effort but there are some steps you can take to improve your credit score relatively quickly. These include:
- Paying off outstanding debts
- Joining the electoral register
- Disputing any errors on your credit report
- Keeping your credit card balances low.
Justine is a full-time writer with lots of expertise and a wealth of experience in the financial world. In particular, she specializes in household income and consumer finance across the United States. Follow her articles for useful advice and top tips, guides on how to save money and lots more.