For applicants with poor credit histories, loans are hard to get approved when no security is offered. But that is not to say that approval is impossible. There are a variety of loan options available, and even when seeking unsecured personal loan with bad credit, there are ways to get the green light. After all, what really matters is not the credit score, but criteria and a realistic application.
While it is true that lenders are cautious when considering bad credit borrowers, they understand that some circumstances that lead to these poor scores are outside the control of the applicant. So, when it comes to granting approval without security, having confidence in the applicant is key.
Still, applicants must accept some costly compromises if they are to get an unsecured personal loan. These can include higher interest rates, a low loan limit and stricter penalties. But with the right lender, the terms of the loan can at least be competitive.
Why Lenders Grant Unsecured Loans
Most people would expect that bad credit applicants would never be able to get an unsecured personal loan with bad credit. With collateral to use as compensation, lenders are much more willing to accept the risk of granting a loan. That way they can at least get their money back.
But it is well known amongst lenders that bad credit borrowers are statistically more interested in rebuilding their credit reputation than in worsening it. This means that granting loan approval without security is not such a major risk at all. What is more, when loans of $5,000 or $10,000 are required, it is difficult for anyone to find collateral worth that amount.
With unsecured personal loans, the only basis on which to grant approval, is that the applicant has a large enough income to afford to make the repayments. There is no guarantee that repayments will be made, so a risk does still exist.
Why Income Is So Important
As mentioned, income is hugely significant when it comes to seeking unsecured personal loans with bad credit. Proving an ability to make the necessary repayments is essential, and the size of the monthly salary can do this. But income is not the sole issue that lenders look for.
The debt-to-income ratio of an applicant is arguably even more important. This is because it reveals the amount of available excess income with which to make the repayments. For example, if an applicant has a monthly income of $5,000 but existing monthly obligations of $4,500, then approval without security rests on the $500 left over.
But the debt-to-income ratio stands at 40:60, which means only 40% of available income can be used to repay new loans. So, of the $500 in excess, repayments for the unsecured personal loan cannot be more than $200.
Keeping Things Real
Successfully applying for an unsecured personal loan with bad credit also relies on keeping the application as realistic as possible. Looking for large loans with no collateral is not going to be entertained by lenders, while the absence of any genuine purpose for the funds can also be damaging.
It is generally accepted that for small and modest loans ($3,000 or $5,000), approval without security is possible. The main reason is that the repayments will be manageable, but the lender also considers the applicant to have a mature attitude by seeing what they know they can afford to repay.
Lenders are not against granting unsecured personal loans to bad credit borrowers, but they need to feel assured repayments will be made. But with such loans a perfect opportunity to rebuild their credit ratings, applicants seeking realistic sums are likely to be trustworthy anyway.