Ask any loan applicant and they will admit that, in their eyes, the biggest hurdle to securing a large loan is their credit history. And when nothing is provided as security, they see approval as practically impossible. But even a $20,000 unsecured loan with bad credit is within reach, if the criteria are satisfied first.
Bad credit is a negative influence on loan applications, but not influential enough to ruin the chance of approval. The chief concern for lenders is whether the loan repayments can be afforded by the applicant. Once confirmed that it is, approval with bad credit is extremely likely.
So, with approval on a large unsecured loan possible, bad credit applicants have a route towards vital funds to alleviate their financial situation.
But with credit scores largely ignored, what are the main issues that lenders look at when assessing if a loan is affordable?
1. Loan Size
The basic idea behind loan approval is that the borrower is able to make the monthly repayments without being stretched. Getting a $20,000 unsecured loan with bad credit may look to be straightforward when the income earned each monthly is high, but it is the size of the repayments compared to the excess income that matters.
What complicates the situation is the debt-to-income ratio that is applied to all applications. This ratio sets the repayment limit to 40% of available excess income, after the monthly living expenditure is taken into account. This means that if there were $1,000 excess income available, the maximum permitted repayment is just $400 - thus affecting the size of the loan.
Since getting approval with bad credit is not the key issue, keeping the size of the loan as low as possible is a greater help. Unsecured loans of between $1,000 and $10,000 are possibly within range, but $20,000 might require additional preparative efforts.
2. The Interest Rate
Credit scores have some influence on loan affordability since they dictate the interest rate charged. A lower score will prompt a higher interest rate to be charged, so it can be worth the effort improving the score, especially when seeking a $20,000 unsecured loan with bad credit.
A high interest rate means a higher monthly repayment sum, and depending on the term and size of the loan, an improvement of even 25 points can mean $50 is saved. While getting loan approval with bad credit may be complicated by the debt-to-income ratio, such savings are very helpful.
Improving the interest rate is dependent on raising the credit score, which is in turn dependent on reducing existing debt. Taking out some small payday loans ($500) that are quickly repaid in full, before applying for the larger unsecured loan, can make the difference.
3. The Loan Term
Another key to making a loan more affordable is to lengthen the term of the loan. The principle is quite simple, with the more months in the term meaning the principal owed is divided into more (and smaller) monthly repayments. When seeking a $20,000 unsecured loan with bad credit, this is a major factor in getting approval.
If this loan were repaid over 60 months (5 years), the repayments would be around $450. But over 120 months (10 years), the repayments would fall to $220. So, with a longer term, the chances of getting approval with bad credit are much greater.
Lenders examine other factors too, like job security and whether the applicant is long-term employed or is self-employed. However, even with bad credit scores to their name, applicants can get large unsecured loans, if the application has everything they want to see.