After bankruptcy, a personal loan can be a great way to get back on your feet, but it may be more difficult than you think to get approved. Here are the steps you need to take to get a personal loan after bankruptcy.

Why does bankruptcy affect your chance to get approved for a personal loan?

If you have filed for bankruptcy, there is typically a record of problems on your credit report. The trail usually starts with a string of late or missed payments that go to collections. Since your payment history is the biggest factor in your credit score, the chain of events leading to bankruptcy can significantly decrease your credit score, affecting your ability to get approved for a personal loan.

A personal loan is a borrowing option that can be expensive, and the best personal loans with competitive interest rates may not be available to you until your credit is repaired. There are some exceptions to the rule, but generally speaking, if you have filed for bankruptcy, your chances of being approved for a personal loan are slim.

The factors that affect your credit score

Your credit score is one factor that lenders consider when deciding whether to approve a personal loan for you. It’s a measure of your creditworthiness, based on a few key factors. If you have filed for bankruptcy in the past, you’ll likely need to work on many of these areas:

  • Amount of on-time payments. Your payment history is the most significant factor affecting your credit score, as it accounts for 35% of your overall score.
  • Credit utilization rate. Credit utilization is the percentage of your available credit that you use. A high credit utilization rate can indicate you are overextending yourself and could lead to higher interest rates on a personal loan. Credit utilization accounts for 30% of your score.
  • Length of credit history. Lenders typically want to see how long you’ve maintained a good-standing relationship with other lenders. Your credit history accounts for 15% of your credit score.
  • Type of credit (credit cards, mortgages, etc.). The more diverse a mix of credit, the better your score will be. Credit mix accounts for 10% of your overall score.
  • Hard inquiries. Hard inquiries (also known as “hard pulls”) are requests for information about your credit score. They account for 10% of your credit score.

How to get approved for a personal loan after declaring bankruptcy

If you have filed for bankruptcy, it may be challenging to get approved for a personal loan. Many lenders will only approve loans to people who are not in bankruptcy. However, that doesn’t mean you cannot get approved; you’ll just need to work a little harder. Here are a few ways you can improve your chances for approval on a loan:

  • Get a loan from a family member or friend and avoid dealing with traditional lenders and their requirements altogether.
  • Find a lender specializing in lending to people who have filed for bankruptcy.
  • Consider getting a secured credit card instead. Secured credit cards work like a loan, but you must put down a security deposit that is typically equal to the amount of the credit card. This will help improve your credit score and make it easier for you to get approved for a personal loan in the future.
  • Try getting approved for a loan through the government’s financial assistance programs, such as the Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program (HAMP).
  • Work on improving your credit score. Your bankruptcy will fall off your credit report after seven years or so, but your credit score will continue to affect your ability to get approved for a loan in the future. Focus heavily on the two most critical factors: your payment history and credit utilization rate, to help mitigate the bankruptcy’s damage.

The bottom line

After bankruptcy, a personal loan can be a great way to get back on your feet. Follow these steps to ensure you’re approved even after bankruptcy.

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Name: Carolina Darbelles
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