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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, getting a personal loan after bankruptcy is not impossible. You will have to accept the fact that the lender will likely charge higher fees, as well as a higher interest rate.
To increase your chances of getting a personal loan after bankruptcy, learn about the factors lenders consider 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 bankruptcies (Chapter 7 and Chapter 13) that can affect how soon you can apply for a loan after bankruptcy. Under each type of bankruptcy, you can apply for a personal loan once your debt has been paid. 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 the debt under Chapter 13 bankruptcy. Once your debt has been paid, you can apply for new credit.
2. When you filed for bankruptcy
Since a 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 look at your credit score and history to assess the risk you pose when applying for a personal loan. If bankruptcy still appears on your credit report, a lender may decide to reject your application. Even if you are approved, chances are you won’t get the best interest rate. Lenders generally offer the best rates to borrowers with a good to excellent credit score (at least 670).
While you are bankrupt, 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 steady income shows your ability to repay the loan. Lenders generally use your income as a measure of how much loan you can afford, thus determining how much to lend you, if you are approved.
5. Type of personal loan
There are two types of personal loans you can apply for: secured or unsecured. Secured loans require you to post collateral, such as a car or a deposit account (CD) certificate, to secure the loan; lenders are able to repossess this asset if you fail to meet your repayment obligations. Unsecured loans, on the other hand, do not require you to post collateral and put an asset at risk, but usually come with higher interest rates.
Unsecured loans are riskier than their secured counterparts because the lender cannot seize personal property to recover their losses in case you do not repay your loan. For this reason, you may find that lenders are more likely to approve you for a secured loan after bankruptcy.
What to Look for in Bankruptcy Loans
When looking for a loan after bankruptcy, you should avoid loans without credit checks and other loans with exorbitant 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.
Although some personal lenders charge borrowers an annual percentage rate (APR) of up to 36%, some loans without a credit check, such as payday loans, charge a fee that amounts to an APR of 400%. With such high fees, you risk landing in financial trouble.
How to Apply for a Personal Loan After Bankruptcy
- Prequalify for your personal loan: Prequalifying 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 fees a lender may have. You should also check whether each lender charges an origination fee.
- Decide how much money 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 monthly loan payment amount.
- 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 residency.
- 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 rate reductions if you sign up for autopay. In addition, automatic payment will ensure that you never miss a payment and therefore increase your credit score.
Alternatives to Personal Loans for Bankrupt People
If you cannot qualify for a personal loan after bankruptcy or want 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 deposit in a collateral account. Like other forms of secured debt, the lender can seize your cash deposit if you don’t 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 and help you qualify for future loans.
Home equity line of credit
A home equity line of credit (HELOC) allows you to borrow money when needed against the equity in your home. At the start of the loan, there is a drawdown period where you are only responsible for paying the interest. Once the draw period ends, the redemption period begins; you are responsible for the repayment of principal and interest during this period.
To qualify, lenders require you to have 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, it may be a better option than a personal loan. However, keep in mind that in the event of default, the lender may foreclose on your home.
One way to improve your chances of getting a personal loan after bankruptcy is to find a co-signer. A cosigner with good to excellent credit and sufficient income can increase your chances of being approved for a personal loan. You might also be able to get a lower interest rate than you would without a co-signer.
Co-signers are not responsible for monthly payments unless you are late paying or failing to repay your loan. It also means that any negative payment activity can impact their credit score.