How to Get a Personal Loan After Filing Bankruptcy

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banking loan, or cash concept

Is it possible to get a personal loan after bankruptcy? While it’s not impossible, it can be tricky. Bankruptcy damages your credit score and can last up to 10 years on your credit report. It also makes it hard to qualify for a personal loan because you’ve become a high-risk borrower. In addition, you’ll have to accept that lenders will most likely charge you higher fees and a higher interest rate.

However, if you need urgent financial help after bankruptcy and need a personal loan, here are the factors lenders evaluate when examining your application, along with other important things to know.

Before applying for a personal loan after a bankruptcy

Your debts should appear with a balance of $0 if you had them discharged with a Chapter 7 bankruptcy. If you filed for Chapter 13, your credit report should appropriately reflect the payments you’ve made as part of your repayment plan.

It’s a good idea to receive copies of your credit report from the three major credit bureaus: Equifax, Experian, and TransUnion. You can also get a free copy annually from annualcreditreport.com. Check for any mistakes in your reports and make sure they accurately reflect your current financial status.

After that, you can apply for personal loans with a variety of lenders, including traditional banks and online lenders. During the application process, make sure you have proof of income on hand, and don’t forget to list all sources of income, including any part-time jobs. The lender may also examine your credit history and debt-to-income ratio.

Factors that can impact your ability to get a personal loan

These five factors will determine whether your loan application gets granted or denied:

1. Bankruptcy type

Chapter 7 and Chapter 13 personal bankruptcies have different effects on how quickly you can qualify for loans after filing for bankruptcy. Once your debt is discharged, you can apply for a personal loan under either category: Chapter 7 bankruptcy usually takes four to six months to complete, while Chapter 13 bankruptcy may take up to five years. You can also apply for fresh credit after your debt has been discharged.

2. Your bankruptcy filing date

Because a bankruptcy can stay on your credit report for up to 10 years, the filing date is also important. It takes 10 years for the major credit bureaus to eliminate a Chapter 7 bankruptcy from your credit report; Chapter 13 bankruptcies are erased after seven years. Note: It may be easier to apply for a personal loan once your bankruptcy is no longer reflected on your credit report.

3. Credit history and score

Filing for bankruptcy has a negative impact on your financial records. A person with a credit score of 680 could lose up to 150 points if he/she files for bankruptcy. Meanwhile, consumers with above-average credit scores, such as 780, will suffer a 240-point drop in their credit score. Depending on the type of bankruptcy you declare, bankruptcy records will stay on your credit report for seven to 10 years.

When you apply for a personal loan, lenders will check your credit score and history to determine the risk you pose. Lenders may reject your application if your bankruptcy is still visible on your credit report.

Filing for bankruptcy, however, is sometimes the best way to cope with unmanageable debt and safeguard your financial future. Don’t let a drop in your credit ratings prevent you from taking necessary action. According to the Federal Reserve Bank of New York, credit ratings can improve by up to 80 points after filing for bankruptcy. When you’re in bankruptcy, you can still work on improving your credit score by repaying a new line of credit on time, lowering your utilization ratio, or getting a credit-builder loan.

So, while bankruptcy may have a negative impact on your credit score at first, you will recover from it over time.

4. Your income

Lenders will check your income to see if you can repay the loan. Having a consistent source of income indicates your ability to repay. Lenders will evaluate your earnings to determine how much loan you can afford and, if you’re approved, how much they will offer you.

5. Type of loan

You can apply for two types of personal loans: secured or unsecured.

Secured loans require you to put up collateral, such as a car or a certificate of deposit (CD), as security for the loan. Lenders can take possession of this asset if you don’t pay back the loan. One example of a secured loan is a mortgage loan. However, getting your credit score high enough to be approved for a conventional mortgage with a lower interest rate may take a few years.

Unsecured loans, on the other hand, don’t require any collateral or risk any assets, but they usually have higher interest rates. Because lenders cannot seize a personal asset to recover losses if you default on your loan, unsecured loans are riskier than secured loans. As a result, lenders may be more willing to approve you for a secured loan following bankruptcy.

Your loan application status is likely to be determined by several factors, such as:

  • How long ago you filed for bankruptcy
  • Whether or not you’ve built up a good credit history since your bankruptcy
  • Type of loan you’ve applied for

If you end up qualifying for a loan, you’ll almost definitely have to pay higher interest rates and other expenses, particularly if your bankruptcy was recent. If your FICO credit score is still fair or bad (less than 670), you should expect to pay a higher interest rate than someone with a higher score.

There are several options for conventional loans:

Credit cards. After filing bankruptcy you’re more likely to qualify for a credit card (with a high interest rate and low maximum balances) than a $10,000 personal loan.

Government-backed loans.  These loans are offered with reduced credit score requirements, so they are easier to qualify for. The federal government provides more than 50 different loan programs to help people get the credit they need to start businesses, farms, and other agricultural ventures as well as assistance with education and home buying.

“No credit check” loans. Irrespective of your payment history, some lenders provide loans without a credit check, guaranteeing approval and rapid payments. However, compared to typical personal loans, these loans often have greater interest rates, costs, and risks, and you could end up with new debt that you can’t afford to repay. These options may seem enticing if you’re having difficulty getting a loan from a lender who checks your credit, but I would suggest doing the math before proceeding.

During the application process, most lenders will ask for the following information:

  • Identity verification
  • Proof of address
  • Verified employment status
  • Verification of income
  • Purpose of the loan
  • Loan amount
  • Preferable loan term

Some lenders will instantly decline a loan application if it contains a bankruptcy; others will talk to customers who have bankruptcies on their credit reports. Keep in mind that just because a lender considers applications with bankruptcies, it doesn’t ensure you’ll get a loan.

Personal loan lenders may offer a maximum annual percentage rate (APR) of 36%, but some no-credit-check loans, such as payday loans, have APRs of 400%. These lenders may advertise an offer as:

  • There will be no credit checks
  • They will provide payday loans or short-term loans instantly
  • There will be no documentation needed
  • They offer installment loans with a high APR

These lenders rarely advertise the APR for the types of loans they offer. Instead, they may charge flat-rate fees, making your options difficult, and as a result you may find yourself with a high interest rate. In some cases, the rate of interest may be as high as 400%. With such high costs, you risk getting into financial trouble.

What is the cost of a personal loan?

Personal loan interest rates range from 4.99% to 20.89%, based on the rates of credit unions, banks, and online lenders. You’ll likely pay a higher rate unless you can improve your credit score and convince the lender to ignore your bankruptcy.

Subprime lenders impose substantially higher fees. Their unsecured personal loan rates might reach 35.99%, resulting in high monthly payments. In addition, they may charge you an origination fee and application fee ranging from 1% to 8% of the loan amount. Also, some borrowers are charged  “balance fees” every two weeks throughout the loan term. Be aware of any charges before opting for a personal loan.

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Stages to obtaining a personal loan

1. Get pre-qualified

You can compare available offers by pre-qualifying for a personal loan with different lenders. At this time you’ll be given your projected APR. Check with each lender to see if they charge an origination fee.

2. Calculate how much you need

Before applying for a personal loan, figure out how much money you’ll need. A personal loan calculator can help you figure out how much your monthly loan payments will be.

3. Apply for the loan

Once you’ve found a lender, submit your loan application either in person or online. The lender might ask for personal information, such as your income, residence, and Social Security number. If you plan to apply in person, contact the lender beforehand to find out if there are any documents you’ll need to provide.

4. Review and sign the loan agreement

If your application is approved, the lender will send you a copy of the contract to review. After signing the contract, you will receive your money.

5. Repay your loan entirely

This is the last stage of a personal loan cycle. You’ll be given the option to make fixed monthly installment payments to repay your personal loan. If you sign up for autopay, certain lenders will give you a rate discount. Furthermore, autopay ensures that you never miss a payment, which will improve your credit score.

What to do if you’re approved for a personal loan

Once you’re approved for a loan, it’s a good idea to do the following before signing the contract:

Carefully read the fine print. Because you have a bankruptcy on your financial record, the terms of your offer may not be very enticing, so carefully consider whether you’re getting a fair offer. Personal loans with “average” or “poor” credit may have average annual percentage rates (APRs) ranging from 18% to 32%. Make sure you understand your interest rate and charges. Do not forget to compare offers from various lenders to find the best deal.

Do not take out more than you need. Because you’ll be paying interest on the money you borrow, it’s best to only borrow what you really need and only borrow as much as you can afford to repay on time, as timely repayment is essential to improving your credit.

What if your personal loan is denied?

Don’t give up hope just yet. You may have a few alternatives on how to proceed:

Appeal to the lender for reconsideration. Try to explain what drove you to file for bankruptcy and what you’ve done to improve your situation. Also show your record of on-time payments or increased savings. While lenders may ignore your appeal, there’s always the possibility they will reconsider their decision. You’ll have a better chance with a local credit union, community bank, online lender, or peer-to-peer lender if you’ve worked with them earlier.

Get help from a co-signer. A co-signer with good credit and a steady income may be able to help you get a personal loan. However, keep in mind that if you cannot repay your loan, the co-signer will be fully responsible for repaying the entire loan with interest.

Improve your credit. Your credit score consists of five major factors:

  • History of payments
  • Debt-to-income ratio
  • Credit history length
  • Credit mix
  • New credit inquiries

You may improve your credit score over time by concentrating on these areas and paying off debts, such as student loans or credit debts. Most important, if you live frugally and pay all of your debts on time, your payment history will improve, which is the single most important factor in your credit score.

Personal loan alternatives after bankruptcy

Consider the following alternatives if you can’t get a personal loan after bankruptcy or want to have a cheaper interest rate:

1. Co-signer loans

Finding a co-signer is one strategy to boost your chances of getting a personal loan after bankruptcy. A co-signer with good to excellent credit and enough income can help you get a personal loan sooner. You might also be able to get a lower interest rate with a co-signer.

Unless you fall behind on payments or default on your loan, co-signers are not liable for monthly payments. However, this also means any late payments will negatively impact their credit score.

2. Secured credit cards

In contrast to a standard credit card, a secured credit card requires a refundable cash deposit. Your credit limit is determined by the amount of money you deposit into a bank, rather than your creditworthiness. If you don’t pay back the money you borrow, the lender can seize your cash deposit, just like with other types of secured debt.

A secured credit card is a good alternative if you need to rebuild your credit following bankruptcy. On-time payments can help you enhance your credit score and qualify for future loans.

3. Home equity line of credit (HELOC)

A home equity line of credit (HELOC) allows you to borrow money from the equity in your home. There is a draw period at the beginning of the loan when you need to pay only the interest payments. The payback term begins when the draw period finishes; you must repay the principal and interest during this time.

Lenders require you to have 15% to 20% equity in your house to be eligible for a HELOC. Lenders can also offer lower interest rates because your home secures the line of credit. Keep in mind, though, if you default on the loan, the lender has the right to seize your house.

RELATED: How to Rebuild Your Credit After Bankruptcy



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