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Can You Get a Personal Loan After Bankruptcy? It Depends.
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Bankruptcy can severely damage your credit. But if you need financing, you may still be able to get a personal loan after bankruptcy. Your ability to qualify depends on whether you filed for Chapter 7 or Chapter 13 bankruptcy proceedings and how your credit score is affected.
Even if you qualify for a personal loan after bankruptcy, you’ll likely face higher interest and fees and potentially be the target of predatory or scammy lenders. Fortunately, there are ways to check your eligibility for reputable loans without affecting your credit. There are also other borrowing alternatives that may be within close reach.
What affects your ability to get a personal loan after bankruptcy
Type of bankruptcy filed
When you filed for bankruptcy, you likely took one of the two most common paths: Chapter 7 or Chapter 13. The form of bankruptcy you chose could impact your eligibility for a personal loan differently, on top of any restrictions imposed by the court.
- A Chapter 7 bankruptcy, also known as a liquidation bankruptcy in which most of your property is sold to repay creditors, can stay on your credit report for up to 10 years.
- A Chapter 13 bankruptcy, also known as a repayment bankruptcy is usually erased from your credit report after a maximum of seven years. Consequently, its impact on your ability to get a personal loan is shorter than Chapter 7.
Also, since new credit is generally discouraged during your Chapter 13 repayment plan, you may have to work with the courts to get permission to take out additional credit unless you apply after bankruptcy discharge.
Developing better money management habits after bankruptcy is essential to improving your credit score. If you never charge more on a credit card than you can repay at the end of the month and you make all your payments on time, getting credit limit increases and rebuilding your credit will be much easier and you will increase your chances of securing personal loans after bankruptcy.
“I have clients who a few months after filing were able to get an unsecured credit card, and a few months later qualified for a car loan,” says Gregory Germain, director of Syracuse University’s Bankruptcy Clinic, which offers bankruptcy relief to poverty-stricken clients. “So it can be done pretty quickly, and by developing proper money management habits, (you) will be able to develop an excellent credit score.”
Another method of increasing a credit score after bankruptcy is by having a secured credit card. Unlike your typical credit card, a secured credit card requires a refundable security deposit that serves as your credit limit. For example, if you deposit $200, your limit is $200 or less depending on applicable fees. Secured cards are a good option if you can’t get a regular credit card and want to rebuild a healthy payment history.
Finding personal loans after bankruptcy
To get bad credit personal loans after bankruptcy, you’ll need to find a bankruptcy-friendly lender who is willing to work with you. There are many lenders who are known for working with borrowers whose credit scores are damaged following bankruptcy. A few online lending companies that may be willing to work with borrowers with fair credit include:
You can check out loans from banks and credit unions, too. Credit unions could be a good choice because they tend to have lower rates than traditional banks.
When applying for a personal loan after bankruptcy, it’s a good idea to evaluate the overall cost of the loan with the interest and fees to make sure it’s affordable over the full term and that it’s reasonable, considering what you’ll use it for. High interest rates are par for the course; so be prepared for rates you may not have faced pre-bankruptcy.
Applying with a cosigner
You might increase your chances of qualifying for a personal loan after bankruptcy if you apply with a creditworthy cosigner attached to your application. A personal loan cosigner might also help you score a lower interest rate on the loan you were eyeing anyway.
Just keep in mind that your cosigner would be legally responsible for repayment if you become unable to meet your monthly dues. If you miss a monthly payment, for example, your cosigner’s credit profile will take a hit.
Predatory lending and scam risks
As you search for loans after bankruptcy, beware of predatory lenders. They tend to target people fresh out of bankruptcy since they might be in a more vulnerable position.
Personal loan scams present another risk to be aware of. Some signs that you might be receiving scammy personal loan offers include:
- Promises of guaranteed approval
- Upfront fees or payments required
- Urgency created with limited-time offers
Securing your first personal loan after bankruptcy
1. Prequalify for several loans
Most personal loan applications take just a few minutes to fill out. In most cases, you can fill out a prequalification form to see if you’d be likely to qualify with the lender, and for what terms.
Prequalification often only requires a soft credit check, which won’t affect your credit. You can prequalify with several lenders and compare offers and fees before submitting a formal application.
Expect to provide the following information:
- Personal information, such as your name, address and Social Security number
- Loan purpose and preferred loan amount
If you’re applying with a cosigner, they will need to provide their information as well.
2. Determine whether a 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 you’re considering to see exactly what you’re getting into. Our personal loan payment calculator can do the math for you. Do not proceed if you’re not sure you can make the monthly payment by the due date.
3. Fill out a formal application
When you’re ready, fill out a formal application with the lender of your choice. Expect to not only provide the information we outlined above but also show proof of your financial information. For example, you may be asked to submit pay stubs as proof of income and a copy of your passport to prove your identity.
Many lenders will provide a loan decision within one business day. But others may take several days to respond.
4. Sign your loan agreement and begin repayment
If you’re approved and you accept your loan terms, you can expect funding within a few business days. Funds can be directly deposited into your bank account, but you may request loan funds be sent to you by another method.
You will need to sign your final loan documents before the loan is disbursed. Once the funds hit your account, you should have a plan in place to make your monthly payments. Remember, missing a single payment due date could harm your credit score. One good way to avoid missteps is to use a budget.
5 alternatives to unsecured personal loans after bankruptcy
1. Payday alternative loan (PAL)
Payday alternative loans are small-dollar loans that federal credit unions offer to members. They are a safe alternative to payday loans. 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. If you’re considering a payday loan, this is a far safer option.
2. Secured personal loan
If you have collateral to put up, you might be able to get a secured personal loan. 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.
This option poses added risks, however, because if you default on the loan, the lender could take possession of your collateral.
3. 401(k) loan
With a 401(k) loan, you withdraw funds from your retirement account, repaying principal and interest back to the account. It may sound ideal, but fees can be quite high for these types of loans. When taken before you reach age 59 ½, you may be penalized and taxed if you don’t repay the loan. If you leave your employer while the loan is outstanding, you may be required to pay the full amount back 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.
4. Home equity loan
If you have equity in your home, then 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, there is a risk of foreclosure because you’re using your home as collateral.
5. Home equity line of credit (HELOC)
If you own a home with some equity but aren’t sure how much you need to borrow, then a HELOC could be a good fit. These revolving lines of credit let you draw from your home’s equity for a set period of time, much like a credit card. Once the drawdown period is over, principal repayment begins based on the amount you borrowed. As with a home equity loan, there is a risk that you could face foreclosure if you’re unable to make payments.