Ask any loan applicant and they’ll admit that, in their eyes, the biggest obstacle to getting a big loan is their credit history. And when nothing is provided as a guarantee, they view approval as virtually impossible. But even a $20,000 bad credit unsecured loan is within reach, if the criteria are met first.
Bad credit is a negative influence on loan applications, but not influential enough to ruin your chances of approval. The main concern for lenders is whether the applicant can pay the loan repayments. Once confirmed that it is, approval with bad credit is very likely.
So with the approval of a large unsecured loan possible, bad credit applicants have a route to vital funds to alleviate their financial situation.
But with credit scores largely ignored, what are the top issues lenders consider when evaluating whether a loan is affordable?
1. Size of the loan
The basic idea behind loan approval is that the borrower can make the monthly payments without being pressured. Getting a $20,000 unsecured loan with bad credit may seem easy when the income earned each month is high, but what matters is the size of the payments compared to the excess income.
What complicates the situation is the debt-to-income ratio that applies to all applications. This ratio sets the repayment limit at 40% of excess disposable income, after taking into account monthly living expenses. This means that if there were $1,000 excess income available, the maximum repayment allowed is only $400, which would affect the size of the loan.
Since getting approved with bad credit isn’t the key issue, keeping your loan size as low as possible goes a long way. Unsecured loans between $1,000 and $10,000 may be in the range, but $20,000 may require additional preparation efforts.
2. The interest rate
Credit scores have some influence on the affordability of loans, since they dictate the interest rate charged. A lower score will result in a higher interest rate being charged, so it may be worth the effort to improve your score, especially when looking for a $20,000 bad credit unsecured loan.
A high interest rate means a higher monthly payment amount, and depending on the term and size of the loan, an improvement of up to 25 points could save $50. While getting approved for a loan with bad credit can be complicated by debt-to-income ratios, these savings go a long way.
Improving the interest rate depends on increasing the credit rating, which in turn depends on the reduction of existing debt. Getting a few small ($500) payday loans that are quickly paid off in full, before applying for the larger unsecured loan, can make all the difference.
3. The Term of the Loan
Another key to making a loan more affordable is to lengthen the term of the loan. The principle is quite simple, with more months in the term, which means that the principal owed is divided into more (and smaller) monthly payments. When looking for a $20,000 unsecured loan with bad credit, this is an important factor in getting approved.
If this loan were paid off in 60 months (5 years), the payments would be around $450. But for 120 months (10 years), the refunds would be reduced to $220. So with a longer term, the chances of getting approved with bad credit are much higher.
Lenders also look at other factors, such as job security and whether the applicant is in long-term employment or self-employment. However, even with bad credit scores to their name, applicants can get great unsecured loans, if the application has everything they want to see.
