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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, although 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, find out what factors lenders take into account when considering your application.
5 Ways Bankruptcy Can Impact Your Ability To Get A Personal Loan
If you want 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 long you can apply for a loan after bankruptcy. Under each type of bankruptcy, you can apply for a personal loan once your debt is cleared. 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. On the other hand, it can take up to five years to discharge the debt under Chapter 13 bankruptcy. Once your debt is cleared, you can apply for new credit.
2. When you have declared 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, you may find it easier to apply for a personal loan.
3. Credit score and history
Lenders review your credit score and history to assess the risk you present when applying for a personal loan. If bankruptcy still appears on your credit report, a lender may decide to reject your request. 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 builder 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 generally use your income as a measure of the loan amount you can afford, thus determining how much to lend to you, if you are approved.
5. Type of personal loan
There are two types of personal loans you can apply for: secure 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, doesn’t require you to pledge collateral and put an asset at risk, but usually comes with higher interest rates.
Unsecured loans are riskier than their secured counterparts because the lender cannot foreclose personal property to recoup their losses in case you fail to repay your loan. For this reason, you may find that lenders are more likely to approve a secured loan for you after bankruptcy.
What to watch out for in loans to bankrupt people
When looking for a loan after bankruptcy, you should avoid loans without credit checks and other loans with exorbitant fees. If you’re struggling to get a loan from a lender who checks your credit, these options may be tempting, but do the math before you go ahead.
Although 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 equal to 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: Pre-qualification for a personal loan with multiple lenders will allow you to compare potential offers. You will receive an estimated APR, which is a better measure than interest rates because it takes into account any loan charges a lender may have. You should also check if each lender charges a creation costs.
- Decide how much you need to borrow: Before applying for a personal loan, calculate how much you need to borrow. You can use a personal loan calculator to estimate the amount of the 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 more about the required documents you must 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 installments. Some lenders offer discounts on the rates if you sign up for automatic payment. Plus, automatic payment will ensure you never miss a payment and therefore increase your credit score.
Alternatives to personal loans for bankrupt people
If you can’t qualify for a personal loan after bankruptcy or want a lower interest rate, consider the following options for your borrowing needs.
Secured credit cards
A secured credit The 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 deposit in a security account. Like other forms of secured debt, the lender can seize your cash deposit if you fail to repay 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, helping you qualify for future loans.
Home equity line of credit
A home equity line of credit (HELOC) allows you to borrow money as needed against the equity in your home. At the start of the loan, there is a drawdown period where you are only responsible for the interest payments. Once the draw period is over, the repayment period begins; you are responsible for repaying the balance of principal and interest during this period.
To be eligible, lenders require that you have 15% to 20% Fairness 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 default on the loan, 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 behind on payments or default on your loan. It also means that any negative payment activity can impact their credit score.