Everything you need to know about personal loans after bankruptcy – Forbes Advisor
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Bankruptcies damage your credit score and stay on your credit report for up to 10 years, making it difficult to qualify for a personal loan because you are a high risk applicant. However, while it can be difficult, obtaining a personal loan after bankruptcy is not impossible. You will have to accept that the lender will likely charge a higher fee, as well as a higher interest rate.
To increase your chances of qualifying for a personal loan after bankruptcy, learn about the factors lenders take into account when reviewing your application.
5 Ways Bankruptcy Can Impact Your Ability To Get A Personal Loan
If you want to apply for a personal loan after bankruptcy, lenders can approve or deny you based on these five factors.
1. Type of bankruptcy
There are two types of personal bankruptcy (Chapter 7 and Chapter 13) that can affect how quickly you can apply for a loan after bankruptcy. Under each type of bankruptcy, you can apply for a personal loan after paying off your debt. However, it is easier for you to apply for loans after Chapter 7 bankruptcy because it takes less time to pay off your debt.
On average, Chapter 7 bankruptcy takes about four to six months. In contrast, it can take up to five years to discharge a debt under Chapter 13 bankruptcy. Once your debt is paid, you can apply for new credit.
2. When you have filed for bankruptcy
Since bankruptcy stays on your credit report for up to 10 years, your filing date is another key factor. For Chapter 7 bankruptcy, it takes 10 years for the major credit bureaus to remove it from your credit report; Chapter 13 bankruptcies fall after seven years. Once your bankruptcy no longer appears on your report, it may be easier for you to apply for a personal loan.
3. Credit rating and history
Lenders look at your credit rating and history to assess your risk when applying for a personal loan. If bankruptcy still shows up on your credit report, a lender may decide to deny your application. Even if you are approved, chances are you won’t get the best interest rate. Lenders generally give the best rates to borrowers with good to excellent credit scores (at least 670).
While you are in bankruptcy, you can still take steps to improve your credit score. For example, if you pay off new credit on time, reduce your credit usage, or get a credit loan, you can increase your score.
To assess whether you can repay the loan, lenders will check your income. Having a stable income shows your ability to repay the loan. Lenders typically use your income as a measure of how much loan you can afford, determining how much to lend to you, if you are approved.
5. Type of personal loan
There are two types of personal loans that you can apply for: secured or unsecured. Secured loans require you to pledge collateral, such as a car or certificate of deposit account (CD), to secure the loan; lenders can repossess this asset if you fail to meet your repayment obligations. Unsecured loans, on the other hand, don’t require you to post collateral and put an asset at risk, but they usually come with higher interest rates.
Unsecured loans are riskier than their secured counterparts because the lender cannot seize personal property to recoup their losses if you do not pay back your loan. For this reason, you may find that lenders are more likely to approve you for a secured loan after bankruptcy.
What to watch out for in loans for bankrupt people
When looking for a loan after bankruptcy, you should avoid loans without a credit check and other loans with outrageous fees. If you’re having trouble getting a loan from a lender who checks your credit, these options may be tempting, but do the math before you go ahead.
While some personal loan lenders charge borrowers a maximum annual rate (APR) of 36%, some loans without a credit check, such as payday loans, charge a fee that is an APR of 400%. With fees this high, you risk ending up in a bad financial situation.
How to apply for a personal loan after bankruptcy
- Pre-qualify for your personal loan: Prequalifying for a personal loan from multiple lenders will allow you to compare potential offers. You will receive an estimated APR, which is a better metric than interest rates because it takes into account any loan charges a lender may have. You should also check if each lender charges origination fees.
- Decide how much money you need to borrow: Before you apply for a personal loan, calculate how much you need to borrow. You can use a personal loan calculator to estimate the amount of monthly loan payments.
- Apply for your personal loan: Once you’ve found a lender, apply in person or online. The lender will ask you to provide personal information, such as your income, address, and Social Security Number (SSN). If you plan to apply in person, call ahead to find out what required documents you need to bring to verify your income or residence.
- Review and sign the loan agreement: If the lender approves your loan application, they will send you a loan agreement to review. After signing it, you will receive your funds.
- Repay your personal loan: Repay your personal loan in fixed monthly payments. Some lenders offer rate reductions if you sign up for automatic payment. Plus, auto-pay will ensure you never miss a payment and thus boost your credit score.
Alternatives to personal loans for bankrupt people
If you can’t qualify for a personal loan after bankruptcy or want to get a lower interest rate, consider the following alternative options for your borrowing needs.
Secured credit cards
A secured credit card is different from a regular credit card in that it requires a refundable cash deposit. Instead of having a credit limit based on your creditworthiness, your provider bases your limit on the amount of money you put into a security account. Like other forms of secured debt, the lender can foreclose your cash deposit if you don’t pay back the amount you borrow.
If you need to rebuild your credit after bankruptcy, this is a solid option. Making payments on time can improve your credit score and help you qualify for future loans.
Home equity line of credit
A Home Equity Line of Credit (HELOC) allows you to borrow money as needed from the equity in your home. At the start of the loan, there is a withdrawal period during which you are only responsible for paying the interest. Once the draw period is over, the repayment period begins; you are responsible for repaying the principal and interest balances during this period.
To qualify, lenders require that you hold 15-20% of the equity in your home. Because your home secures the line of credit, lenders are usually able to offer lower interest rates.
If you are able to get a lower interest rate, this may be a better option than a personal loan. However, keep in mind that in the event of a default, the lender can foreclose on your home.
One way to improve your chances of qualifying for a personal loan after bankruptcy is to find a co-signer. A co-signer with good to excellent credit and sufficient income can increase your chances of getting approved for a personal loan. You might also be able to get a lower interest rate than you would have without a co-signer.
Co-signers are not responsible for monthly payments unless you are in arrears or default on your loan. It also means that any negative payment activity can impact their credit score.