How to qualify for a loan with fair credit
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Earning a perfect credit is no easy feat. In fact, less than 1.5 percent of people have one, according to Experian. But having fair credit, a FICO score between 580 and 669, doesn’t mean securing a loan is impossible. Rather, it just takes some extra consideration to ensure you still sign off on a loan with competitive rates and terms.
Steps to qualify for a fair credit loan
When beginning your journey to find a fair credit loan, consider the following tips to get the best possible loan for your needs and creditworthiness.
Use a cosigner
Adding a co-signer increases your likelihood of approval and better rates as it increases your overall creditworthiness. When looking for a co-signer it is best to add someone with strong credit and a close relationship, as it does incur risk on their end.
The addition of a co-signer helps the lender gain confidence that you — or your co-signer — will in fact pay off your loan in full and on time.
Apply for loan prequalification
Prequalification is one of the easiest ways to garner a firm grasp on how much your loan will cost you. This especially gives you the upper hand as a fair credit borrower because you are able to see if you qualify. By prequalifying, you can confirm your chances of loan approval without the drop that a hard credit pull would cause to your score when formally applying.
What’s the difference between prequalification and preapproval?
Preapproval is a more in-depth process where the lender likely does a hard credit pull, and is usually associated with home buying, whereas prequalification is a simpler process that just provides an idea of your monthly payment.
Pay down current debt — especially credit cards
Similar to your credit score, your debt-to-income ratio serves as a measure of your ability to pay off a loan. If you aren’t on a time crunch to finance, paying down your debt prior to a loan application will make you much more appealing to lenders. Make use of a debt-to-income calculator to determine where your DTI currently sits.
Credit cards are especially important to pay down and keep down. Revolving credit, especially ones that you use heavily and carry a balance with, can hurt your ability to qualify when your credit is on the fair end of the spectrum.
Explore loans from a local bank or credit union
If you have a history with a local bank or credit union it is likely that these institutions will offer more lenient rates to borrowers they trust. So, even if your credit is less than perfect, your personal relationship with the bank could work in your favor.
Alternatives to a fair credit loan
If you are struggling to sign off on a personal loan due to your fair credit standing, consider alternatives.
- Low APR credit card balance transfer. One way to consolidate debt is with a 0 percent APR credit card. In this case, you simply move your card balance to ensure that interest doesn’t add up and in turn have a period — usually 12 months — to pay down your debt.
- Home equity loan or line of credit. Homeowners can dip into cash found in the equity of their homes with a home equity loan or a home equity line of credit (HELOC). While you can use the value as collateral, remember that missed payments can result in home foreclosure.
- Paycheck advance. If you have an emergency expense, an advance on your next check may be useful. Just be careful — you’ll be short that money when your next check rolls around, so you’ll need to budget accordingly.
Getting a loan with fair credit takes patience
While it can be more challenging to secure a competitive rate as a fair credit borrower, it is still doable. The process just takes a bit more thought so you can still sign off on the best loan for your budget and needs. Consider starting your journey at a local bank or credit union or working to pay down debt ahead of your application to ensure the best rates and terms.