Applying for unsecured personal loans with bad credit is no simple matter. The reason is down to the fact that the lender needs to be convinced the loan will be repaid. This is usually done by meeting their set criteria.
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When it comes to traditional lenders, like banks, personal loan approval with no security is quite difficult to get, especially when a bad credit score is part of the equation. Banks like to know that they at least have something from which to get compensation should the loan be defaulted upon. Not having that security makes them nervous.
Understandably, getting unsecured loans approved requires a more selective approach, but it is important to know that it is by no means impossible to get the funds that are needed. Often, the difference between success and failure is the application itself, not the bad credit status.
Why Unsecured Loans Exist
There is no great mystery as to why lenders are willing to grant unsecured personal loans with bad credit. Statistically, most people do not possessions of the required value to provide as collateral. So, if unsecured loans were not offered, then lenders would miss out on a large amount of business.
Also, personal loan approval with no security is not such a detrimental move by lenders, with statistics showing that the vast majority of borrowers do repay their loans. By charging a higher rate of interest to compensate for the perceived extra risk, lenders make higher profits that cover losses from defaulted loans.
Also, being able to get unsecured loans approved, means that borrowers (if they have valuable items) do not need to put any of their own possessions at risk for what might be a relatively small loan.
Apply for What is Realistic
With that in mind, knowing what is possible is a key aspect when applying for unsecured personal loans with bad credit. Put simply, no lender will approve a loan that is too expensive to repay, so a person earning $5,000 will not be approved for an unsecured loan of $1 million. Realistic applications are far more likely to succeed.
Knowing your credit score is a good place to start when assessing what is affordable. The chance of getting unsecured loan approval with no security is greater when this is known, because the application can be tailored to suit. For example, a very low score like 500 will not help when seeking a loan of $25,000, but may be okay when seeking $3,000.
Of course, scores can be improved over time. It is easier to get small unsecured loans approved, such as payday loans, which can be repaid in full in a short period of time.
Income and Debt
Sometimes what the applicant thinks is affordable is not what the lender thinks is affordable. Granting an unsecured personal loan with bad credit is a risk for any lender, but the income and the amount of existing debt the applicant has is a core issue.
All lenders go by the debt-to-income ratio when bad credit scores are a factor in the equation, but it is especially important when considering personal loan approval with no security. The ratio refers to the amount of debt an applicant already has compared to the amount of available income.
Set at 40:60, it means that debt is limited to 40% of the available income, so the borrower does not over-extend himself, even when getting an unsecured loan approved, even with bad credit.