There was a time when the chances of getting approved with bad credit seemed pretty grim. In fact, a $25,000 unsecured personal loan was believed to be out of the question. Yet, the truth is that proving an ability to afford repayments is the only thing that really matters, even with the specter of bad credit histories having over applicants.
Actually, a credit score has a very limited influence in the whole affair, effectively making the chances of getting loan approval with bad credit so much more likely. As long as the right boxes are ticked, then a large loan is within reach, and the lender is happy to grant it.
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What this means, of course, is that personal loans are available to anyone who can get an application form in proper order. Knowing what it is that lenders see as important is the best way to estimate the strength or weakness of your application. So, what needs to be known?
The Loan Limits
One of the key assessments made by lenders is the ability a borrower has to repay the loan they seek. With a $25,000 unsecured personal loan, for example, one applicant may be better able to make the monthly repayments than another, even if their respective incomes are the same. This also shows that the income alone is not enough to secure approval.
The reason for this apparent anomaly is the debt-to-income ratio, and whether the existing debts are too high. Lenders set strict loan limits for applicants. Between $1,000 and $5,000, where repayments are generally low, loan approval with bad credit is usually easier. But loans of $10,000 and $40,000 are less assured, and very large loans ($50,000) are more seriously scrutinized.
Usually, security is a standard requirement for larger loan applications, as the lender wants some kind of compensation in case the borrower defaults. But to get personal loans without any security, $25,000 is generally the limit.
Are Credit Scores Used?
Credit scores are not completely ignored, and are used to calculate the interest rate to be charged on a particular loan. The basic rule is: the lower the score, the higher the rate. So, the interest rate influences the size of the repayments. On a $25,000 unsecured personal loan, a good credit score could see repayments at $420 over 5 years; a bad score might increase it to $455.
In turn, the size of the monthly repayment influences whether or not the loan is affordable, through the debt-to-income ratio. The ratio states that no more than 40% of income can be used to repay debts, keeping the remaining 60% free for everyday expenses and bills. So, getting loan approval with bad credit rests on the keeping within the 40% limit.
Reducing the existing debt is a good way to ensure staying inside the limit, and getting the personal loan approved. This can be done by taking out a series of small loans to pay off specific debts.
Other Application Tricks
There are other tricks to an application that can greatly enhance the chances of getting approved. With a large loan with no security provided, like a $25,000 unsecured personal loan, a longer loan term can do the trick.
Repaying a loan over 5 years, rather than 3 years, reduces the share of the principal repaid each month, thus reducing the size of the monthly repayments. And with smaller amounts to pay, the task of getting loan approval with bad credit becomes a lot easier.
Another trick that can work is to describe in great detail the purpose of the loan, and how that purpose will be executed. A personal loan could be used for practically anything, and lenders want to know the funds will not be wasted.
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