Loans are an essential option for us all, with an extra cash injection helping to lighten the financial load. Accessing funds that are needed can be tricky, especially when bad credit scores are part of the equation, but it is not impossible to get even unsecured personal loans with bad credit.
Collateral is a huge advantage when it comes to applying for loans, but lenders can be convinced to grant loan approval without security if an application is strong enough. Simply ensuring the necessary criteria is met and the important boxes are ticked helps make approval more likely.
This is obviously excellent news, but remember that the terms offered with unsecured personal loans are never going to be as good as with secured loans. And as long as the compromises demanded by lenders can be acceptable, then the funds so badly needed can be accessed. What is more, there are ways to secure good terms.
The Role of Income
The first big misconception is that anyone applying for unsecured personal loans with bad credit need to have a big monthly income to stand any chance of approval. But the truth is that having a large salary is no guarantee. What is of much more importance is the state of finances.
It is the ability to repay a loan that matters, and this relates to the share of an income that is excess to requirements before the application is made. So, if an applicant earns $5,000 per month, and has existing monthly outgoings amounting to $4,000, then they have just $1,000 on hand. Getting loan approval without security means repayments must be lower.
This is where the debt-to-income ratio comes into play, which stipulates that no more than 40% of available income can be used in repayments to ensure there is enough left over to meet any unforeseen expenses. So, with excess income amounting to $1,000, approval on an unsecured personal loan depends on the repayments being $400 or less.
Unsecured Is Not a Bad Option
Generally, people believe that the lack of any collateral is a big negative when applying for loans. But this is not necessarily true. Getting unsecured personal loans with bad credit is arguably the most challenging, but there are at least two advantages to doing so.
For a start, since the difference between unsecured and secured loans is an item of cash value, those who offer collateral are actually placing at risk some personal property that they are likely not to want to lose. However, getting loan approval without security means that, should the loan be defaulted upon, the borrower loses nothing.
Also, the influence that low credit scores have is actually minimal. An unsecured personal loan is approved based on the income and the debt-to-income ratio of the applicant, and as long as they are both in a healthy state, the chances of approval are high anyway.
A final word of advice is to know what is affordable before applying for a unsecured personal loans with bad credit. Some applicants are tempted to seek a little more, for example looking for $10,000 when $7,000 is needed. But the extra $3,000 can make the required repayment too expensive, and actually reduce the chances of getting loan approval without security.
So, it is a good idea to do some careful calculation before applying for any loan. That way the lenders are confident of the intentions of the borrower from the start, and can trust they have a mature attitude. And besides, unsecured personal loans are a perfect opportunity to turn your financial situation around, so why sabotage it by looking for too much.