Can You Get a Personal Loan After Bankruptcy?
Personal loans come with a lot of responsibility, but they can be an invaluable tool in a financial pinch. But can you get a personal loan after bankruptcy? Possibly, but you can certainly expect to pay a higher interest rate. Your eligibility depends on the type of bankruptcy you filed, how long ago you filed and your credit score.
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Factors that affect your ability to get a personal loan after bankruptcy
The type of bankruptcy you filed
- Chapter 7 bankruptcy: Also known as a liquidation bankruptcy, Chapter 7 requires you to sell some of your assets to repay eligible debt. This type of bankruptcy can stay on your credit report for up to 10 years.
- Chapter 13 bankruptcy: Also known as a repayment bankruptcy, Chapter 13 does not require you to sell your assets. Instead, you work out a three- to five-year repayment plan with your creditors. Chapter 13 usually remains your credit report for up to seven years.
At first, you might think your chances of obtaining a personal loan may be better if you’ve filed Chapter 13 bankruptcy instead of Chapter 7, but this isn’t always the case. Chapter 13 appears on your credit report for a shorter amount of time, but you are generally discouraged from applying for new credit during your Chapter 13 repayment period. Until your bankruptcy is discharged, you may even need to get permission from the court to borrow more money.
Your credit score is one of the most significant factors lenders look at when determining whether you qualify for a personal loan. If you don’t meet a lender’s minimum credit score requirements, they will deny your loan application. Your credit score also plays a big part in the interest rate you’re offered.
Another way to improve your credit score after bankruptcy is to use a secured credit card. Unlike a standard credit card, a secured card requires a refundable security deposit that also serves as your credit limit.
For example, if you deposit $200 onto your secured credit card, your limit is $200 (or less, depending on fees). If you fail to pay, the credit card company will collect your balance from your security deposit and possibly close your account. However, if you pay in full and on time, your credit score should increase, potentially unlocking access to other types of credit and lower interest rates.
Where to find a personal loan after bankruptcy
To get a personal loan after bankruptcy, you may want to contact lenders that offer bad credit loans. Although we can’t guarantee you’ll be approved, some online lenders that are known for working with borrowers with less-than-stellar credit scores include:
Banks and credit unions
Banks and credit unions sometimes offer unsecured loans after bankruptcy, so it may be worth contacting your current financial institution. This could be especially true if you’re a member of a credit union, as credit unions tend to have lower rates than online loan lenders and traditional banks.
Spotting predatory lending and personal loan scams
As you search for loans after bankruptcy, beware of predatory lenders and scammers. They tend to target people fresh out of bankruptcy since they might be in a more vulnerable position.
By offering loans that are nearly impossible to repay, predatory lenders make a quick dime by taking advantage of desperate borrowers.
You may have found a predatory lender if the loan has:
- A triple-digit APR
- A weeks-long repayment term
- A balloon payment due at the end of your term
You should be prepared for higher interest rates if you have bankruptcy on your credit report, but never settle for a loan with unfavorable terms. If you do, you could end up trapped in a debt cycle.
Personal loan scams
If your personal loan offer seems too good to be true, it probably is. Some personal loan scams exist to steal your identity, while others get you to sign up (and pay for) a loan even though the “lender” has no intention of disbursing funds.
Avoid being on the receiving end of a personal loan scam by watching out for the following red flags:
- Promises of guaranteed approval
- Upfront fees or payments required
- No credit checks
- Time-sensitive, high-pressure offers
Taking out a personal loan isn’t a decision to make lightly. Take your time and vet your lender before making a final decision.
How to secure your first personal loan after bankruptcy
1. Consider applying with a cosigner
Applying for a personal loan with a cosigner could boost your approval odds and help you find lower interest rates than if you applied on your own. Just keep in mind that your cosigner will be legally responsible if you fail to repay your loan. If you miss a monthly payment, for example, both you and your cosigner’s credit scores will take a hit.
2. Prequalify with multiple lenders
If you’re still reeling from bankruptcy, repairing your credit may be your number one priority. Avoid taking a ding to your credit score by prequalifying for a loan before submitting a formal application. Prequalifying only requires a soft credit pull and can help you shop around for the loan with the most favorable terms for your unique situation.
During prequalification, expect to provide your:
- Personal information, such as your name, address and Social Security number
- Loan purpose and preferred loan amount
- Cosigner information, if applicable
3. Determine if your loan is worth it
An unsecured loan is a major financial obligation, so make sure you can afford the monthly payments. Add up all the costs associated with each loan offer (including any applicable fees) to understand the total cost of borrowing. Our personal loan calculator can do the math for you. If you’re unsure whether you can make on-time payments each month, applying for a personal loan may not be a wise choice.
4. Create a budget
Before you borrow any money and take on additional debt, you should create a budget. Remember, missing a single payment could damage your credit score, which may already be suffering due to bankruptcy.
5. Fill out a formal application
After you’ve prequalified and compared a few offers, it’s time to fill out a formal application with the lender of your choice. In addition to the information we outlined above, you’ll also need to submit documents like pay stubs, driver’s license or passport.
Many lenders will provide a loan decision within one business day, while others may take several days to respond.
6. Sign your loan agreement and begin repayment
If you’re approved, you’ll need to sign some final loan documents. Then, you can usually expect funding within a few business days (either by direct deposit or check). Be sure to understand the repayment timeline outlined in your loan agreement so you can begin rebuilding your credit with on-time payments.
4 alternatives to unsecured personal loans after bankruptcy
Payday alternative loan
If you’re considering a payday loan, payday alternative loans are the far safer choice. These small-dollar loans are offered by some federal credit unions to their members.
Loan amounts typically range from $200 to $1,000 with a repayment term of one to six months. Credit unions are only permitted to assess a maximum $20 application fee, covering only the cost to process your application. You must be a member of a participating federal credit union for at least 30 days before you’re eligible for a payday alternative loan.
Secured personal loan
If you’re willing to put up collateral, you might be able to get a secured personal loan after bankruptcy. Since your loan will be backed by an asset, like the balance of your savings account or the title to your car, you may get a lower interest rate than with a traditional personal loan. However, if you default on the loan, the lender could take possession of your collateral.
With a 401(k) loan, you withdraw funds from your retirement account, repaying the principal plus interest back to the account. This loan may sound ideal, but fees can be high and there is some risk.
If you take a 401(k) loan before you’re 59 ½ years old, you may be penalized and taxed if you don’t repay the loan. If you leave your employer while the loan is outstanding, you could be required to repay the full amount within 90 days. The decision to take funds from your account also means losing out on potential investment growth and repaying the loan with after-tax dollars.
Home equity loan
If you have equity in your home, you might be able to borrow against it. Home equity loans give you the loan amount in a lump sum and typically have lower interest rates than unsecured loans. However, if you can’t keep up with your payments, you risk foreclosure since you’re using your home as collateral.