Filing for bankruptcy is a difficult choice, but it can also be the best way to get a fresh financial start. The downside is that lenders may be less willing to consider you for unsecured personal loans or a line of credit with a bankruptcy on your credit history.
Someone with a good-to-average credit score can expect their score to drop by as much as 100 points following a bankruptcy.
If your credit score is already low due to multiple delinquencies, charge-offs or collection accounts, the damage caused by bankruptcy may be much worse. Bankruptcy can stay on your credit report for up to 10 years, depending on which type you file.
Before Taking on a Personal Loan
Before applying for unsecured personal loans, begin reestablishing your credit. Start small with a secured credit card, which is a great option to get a credit card with bad credit. With this type of card, you deposit a specific amount of cash with the card issuer, which then serves as your credit line.
As long as you're paying all your bills on time, you should begin to see your credit score improve. Generally, you'll want to work on rebuilding your credit for at least six months after the bankruptcy before applying for a personal loan.
Secured vs. Unsecured Personal Loans
With a secured personal loan, you deposit cash or relinquish property to the lender as a condition of borrowing the money. If you default on the loan, the lender can keep the collateral.
On the other hand, unsecured personal loans aren't attached to any type of collateral. However, if you fail to pay the loan, the lender may use other means to collect, including wage or bank account garnishments.
The type of loan you choose depends on how much you want to borrow, how much time you need to repay the loan, whether you have any property or assets to use as collateral and how much your credit has improved since the bankruptcy. While you can get a better interest rate and longer repayment terms with a secured personal loan, you need to be sure you can make the payments so you don't lose your collateral.
Bad Credit Personal Loan Lenders
You have several options when applying for a bad credit personal loan, starting with your bank. Find out what the basic requirements are for getting secured or unsecured personal loans and what type of repayment terms the bank offers. Depending on your credit, the bank may only consider you for a secured personal loan, at least initially.
Credit unions are another potential source for secured and unsecured loans. With this lender, you'll need to join a credit union in order to apply for a loan and each credit union has different requirements for membership.
One of the primary advantages of credit unions is that they typically offer better interest rates than traditional banks, which can save you money if you're approved for a personal loan.
If you don't want to go the traditional route, you may also consider using an online lender. Peer-to-peer lending has made it possible for borrowers to get loans for bad credit without having to go through a bank.
Investors pool money to fund loans to borrowers; there's no collateral required and your loan approval is based on your credit history. You may even be able to get a better interest rate with a peer-to-peer loan than you would with a traditional lender.
Don't Qualify for a Bad Credit Personal Loan?
You may simply need to allow more time for your credit score to improve if you can't get approved for a bad credit personal loan immediately after bankruptcy.
Continue paying your bills on time and don't apply for too many credit cards at one once. If you need to borrow money right away, you can look for alternate sources of funding, such as payday loans, title loans or cash advance loans. Keep in mind these loans are likely significantly more in interest and considered high-risk options.
Applying for a personal loan can be a stressful and time-consuming process, especially if you're worried about a recent bankruptcy. The more proactive you are in improving your score, the more attractive you'll be to potential lenders.
This article was contributed by Rebecca Lake on behalf of CanDoFinance.com.
