Bad credit scores are traditionally seen as a stumbling block for loan applications. So, with no security to offer, a $25,000 unsecured personal loan was a virtual impossibility. But that is not an accurate reflection of the state of affairs. There are lenders willing to lend to bad credit borrowers, if the criteria are satisfied first.
Bad credit is not the killer blow to loan applications that so many people claim it to be. Affordability is the most important factor when seeking loan approval with bad credit, and affordability has more to do with income and existing debt than anything else.
So personal loan approval is possible, even with credit histories taken on board, as long as the applicant has the ability to repay. All that we really need to know is what the lenders look at when they assess an application. Here are three key ones.
1. How Big is the Loan?
Simple mathematics can work out whether a loan is affordable or not. For example, getting a $25,000 unsecured personal loan is not going to be a major problem if the monthly repayments are comfortably lower than the size of the monthly income.
But there is more to it than that, with high earners not always qualifying for loans that medium earners do. The reason? Debt-to-income ratio. This measures whether there is sufficient excess income to cover a loan repayment once existing debts are accounted for. With a limit of 40% afforded to repaying debts, getting loan approval with bad credit is dependent on new loan repayments not exceeding that limit.
With small personal loans of between $1,000 and $10,000, this is not a major factor in the approval process, but with larger sums it plays a much more significant role.
2. The Interest Rate Bracket
Credit scores do have an influence on the affordability of a loan as they dictate the interest rate the borrower will be charged. The lower the score, the higher in interest rate, so bad credit borrowers may have to pay as much as 1% more in interest on a $25,000 unsecured personal loan, than someone with an excellent credit score.
Of course, what this translates to is a higher monthly repayment sum, with perhaps as much as $40 per month depending on the term and size of the loan. This factor has a definite effect on affordability, so getting loan approval with bad credit can be difficult, if the existing debt-to-income ratio is already close to the 40% limit.
A way around this problem is to reduce the size of the existing debt before applying for the personal loan. A small consolidation loan, which could replace some of the debt with a single low-cost loan would make the difference.
3. The Loan Term
Lenders also take a careful look at the loan term an applicant is seeking. The longer the term, the lower the monthly repayments, and that can be significant when seeking a $25,000 unsecured personal loan. If this loan were repaid over 5 years, the monthly repayments would be around $430. But if the term were lengthened to 10 years, the repayments would fall to half that figure. And with a longer term, the chances of getting loan approval with bad credit are much greater.
Lenders do take a look at some other factors, such as the job security of the applicant with a preference for the long-term employed than the self-employed. However, even with bad credit scores to their name, applicants can get personal loans without the benefit of collateral, if the application has everything they want to see.