A credit score below 670 makes it more difficult to get approved for a loan.
Consumers have a right to get a free copy of their credit report once every 12 months.
The annual percentage rate (APR) includes the interest rate charged and any other fees incurred.
Consumers with low credit scores may struggle to secure a loan. Getting a loan approved with a 500 credit score is more difficult, but it may be possible if you do the research. We'll explore the factors determining your credit score, impact loan eligibility, and borrowing options for bad credit loans.
What Determines Your Credit Score?
The Fair Isaac Corporation or FICO score is the most common credit-scoring provider. When you apply for a loan, lenders typically use your FICO score and other details for credit score lending. Lenders assess credit risk, the risk that a borrower won’t repay the loan.
FICO evaluates five areas to determine a borrower’s ability to repay a loan:
- Payment history: What is the total history of loan applications, debt repayments, or late payments? If a borrower made late payments five years ago but has made payments on time since then, that factor must be considered.
- Current level of indebtedness: How much total debt does the borrower have outstanding? How many different loans?
- Types of credit used: Debts may include a home mortgage, vehicle loans, personal loans, or credit card debt.
- Length of credit history: A 10-year history of consistently paying debts on time is a strong indicator of creditworthiness.
- New credit accounts: Has the borrower taken out other loans recently? If so, it may indicate that the individual is carrying too much debt or is in financial trouble.
FICO scores range from 300 to a high of 850, and scores of 670 or higher are considered good scores. If your score is below 670, you have a low credit score.
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Other Factors That Impact Credit Decisions
A lender will consider other factors in addition to the credit score.
Level of income
Lenders consider the borrower’s income because a higher income makes it easier for a borrower to repay a loan. Over time, an individual’s income may change substantially.
Someone struggling financially while in a medical school residency program will make a much higher income as a full-time doctor. The individual will have to repay medical school loans, but the income as a doctor may be very high. As a result, lending to a full-time doctor creates far less credit risk.
Years at current job
The longer an individual works for a company, the more reliable a lender may view their income. Over time, the individual builds skills, gains experience, and may be promoted. The company might view the worker as more valuable, and the employee may be more likely to retain the job and earn the income.
Type of credit application
A secured loan is less risky for the lender than an unsecured loan. A secured loan includes collateral, or a specific asset that the lender can sell if the loan is not repaid. If a home mortgage is not paid, the lender can take title of the home and sell it to recover the loan amount.
Unsecured loans do not include collateral and are only secured by the borrower’s ability to make the payments. Credit card balances, for example, are unsecured loans. If you’re applying for a loan and can provide collateral, you may be more likely to be approved.
These factors can help you get loan approval, even with a poor credit history.
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Steps to Apply for a Loan with 500 Credit Score
Once you understand the variables that impact a loan’s approval, you can follow these steps to apply for a loan.
1. Check Your Credit Score
Equifax, Experian, and TransUnion are the three major credit bureaus that collect borrower information and calculate your credit score. The Federal Trade Commission states that consumers have a right to get a free copy of their credit report once every 12 months.
Review your credit report to verify that the information is correct. Your lenders should report all activity regarding your loans, including positive information (on-time payments and debts that are fully paid). If data is missing from your credit report, you can dispute the credit bureau information and get the reporting corrected.
2. Search for the Right Lenders
Once you’ve verified that your credit score is correct, search for a lender that may approve your loan based on your credit score. Determine the minimum credit score required to apply for a loan if that data is provided. Look for online lender reviews that provide specific feedback on lenders.
3. Get prequalified for a loan
Getting prequalified allows a borrower to shop for the most attractive loan without damaging your credit score. When you’re prequalified, the lender will provide the loan terms, including the amount, interest rate, and required monthly payments. You’ll also know about any other fees and costs related to the loan.
A prequalified loan is not a guarantee of approval, and you’ll still need to apply for the loan. However, the process allows the borrower to determine the loan terms without hurting his or her credit score.
4. Apply for a Loan
If you’re been prequalified for a loan, the lender will already have much of the data needed to approve a formal loan. Here are some of the items needed to complete a loan application:
- The loan amount and the purpose of the loan
- Credit score range
- Employment status, including how long you’ve worked at your current job
- Annual income
- Monthly home mortgage cost or rental payment
If your credit score is low, you can improve your chances of loan approval by finding a co-signer. The co-signer provides his or her annual income and credit report to your lender, and commits to repaying the loan if you cannot repay.
Loan Details You Must Consider
Whether you get prequalified for a loan or not, there are additional factors that you must understand. Keep these points in mind as you search for a loan.
The annual percentage rate (APR) is the annual cost of your loan, and APR includes the interest rate charged and any other fees incurred. Lenders to borrowers with poor credit may charge an APR ranging from 9% to as high as 35%.
This is a fee paid to the lender to process a loan application. If you have a low credit score, the loan origination fee maybe 5% of the loan amount or higher. The fee is charged at the beginning of the loan, and increases the amount you must repay.
Term of Your Loan
Borrowers with poor credit may pay a higher APR than other loan applicants. It’s important to think about the term of your loan, because a longer loan term will sharply increase the total cost of your loan.
The Bottom Line
Securing a loan with a 500 credit score may be possible, but you must do your homework. Understand the factors used to calculate your credit score and weigh the other factors that impact loan approval. If you’re approved for a loan, carefully consider the APR, other fees, and loan terms.
Dealing with a low credit score can be frustrating, but if you educate yourself and research, you may find financial solutions that are right for you.
What is the impact of new credit accounts on a borrower’s credit score?
New credit accounts may lower the credit score. If the borrower has taken out other loans recently, it may be an indication that the individual is carrying too much debt.
Why might a secured loan be viewed as less risky for the lender than an unsecured loan?
A secured loan includes collateral, or a specific asset that can be sold by the lender if the loan is not repaid.
What is the benefit of getting prequalified for a loan?
Getting prequalified for a loan allows a borrower to shop for the most attractive loan without damaging the credit score.