Everything You Need To Know About Personal Loans After Bankruptcy

by Jerry Brown

Forbes Advisor

Monday April 26, 2021
Originally published on April 23, 2021

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Stock image  (Source:Getty Images)

Bankruptcies damage your credit score and remain on your credit report for up to 10 years, making it difficult to qualify for a personal loan because you're a high-risk applicant. However, although it may be difficult, getting a personal loan after bankruptcy isn't impossible. You'll have to accept the fact that the lender will likely charge higher fees, along with a higher interest rate.

To increase your chances of qualifying for a personal loan after bankruptcy, learn what factors lenders consider when reviewing your application.


5 Ways Bankruptcy Can Impact Your Ability to Get a Personal Loan

If you want to apply for a personal loan after bankruptcy, lenders may approve or deny you based on these five factors.

1. Type of Bankruptcy

There are two types of personal bankruptcies — Chapter 7 and Chapter 13 — that can impact how soon you can apply for loans after bankruptcy. Under each bankruptcy type, you can apply for a personal loan once your debt is discharged. However, it's easier for you to apply for loans after Chapter 7 bankruptcy because it takes less time to discharge your debt.

On average, Chapter 7 bankruptcy takes about four to six months to complete. In contrast, it can take up to five years to discharge debt under Chapter 13 bankruptcy. Once your debt is discharged, you can apply for new credit.

2. When You Filed for Bankruptcy

Since a bankruptcy remains on your credit report for up to 10 years, your filing date is another key factor. For Chapter 7 bankruptcy, it takes 10 years for the main credit bureaus to remove it from your credit report; Chapter 13 bankruptcies fall off after seven years. Once your bankruptcy no longer shows on your report, you may find it easier to apply for a personal loan.

3. Credit Score & History

Lenders review your credit score and history to assess the risk you pose when you apply for a personal loan. If the bankruptcy still shows on your credit report, a lender may decide to reject your application. Even if you're approved, it's likely you won't secure the best interest rate. Lenders typically give the best rates to borrowers with good to excellent credit scores (at least 670).

While you're in bankruptcy, you still can take steps to improve your credit score. For example, if you repay new credit on time, lower your credit usage, or get a credit-builder loan, you can boost your score.

4. Income

To assess whether you can repay the loan, lenders will verify your income. Having a stable income shows your ability to repay the loan. Lenders typically use your income as a metric of how much loan you can afford, therefore determining how much to lend you, if you're approved.

5. Type of Personal Loan

There are two types of personal loans you can apply for: secured or unsecured. Secured loans require you to pledge collateral, such as a car or certificate of deposit account (CD), to secure the loan; lenders are able to repossess this asset if you fail to meet your repayment obligations. Unsecured loans, on the other hand, don't require you to pledge collateral and put an asset at risk but typically come with higher interest rates.

Unsecured loans are riskier than their secured counterparts because the lender can't seize a personal asset to recoup its losses in the case you fail to repay your loan. Because of this, you may find that lenders are more likely to approve you for a secured loan after bankruptcy.


What to Look Out for in Loans for People in Bankruptcy

When you search for a loan after bankruptcy, you should avoid no-credit-check loans and other loans with sky-high fees. If you're having trouble getting a loan with a lender that checks your credit, these options may be tempting, but do the math before you move forward.

Although some personal loan lenders charge borrowers a max annual percentage rate (APR) of 36%, some no-credit-check loans, such as payday loans, charge fees that work out to an APR of 400%. With fees that high, you risk landing in a bad place financially.


How to Apply for a Personal Loan After Bankruptcy

  • Prequalify for your personal loan: Prequalifying for a personal loan with multiple lenders will allow you to compare potential offers. You'll receive an estimated APR, which is a better measurement than interest rates because it accounts for any loan fees a lender may have. You should also check whether each lender charges an origination fee.
  • Decide how much money you need to borrow: Before you apply for a personal loan, calculate how much you need to borrow. You can use a personal loan calculator to estimate how much the monthly loan payments will be.
  • Apply for your personal loan: Once you've found a lender, apply in person or online. The lender will ask you to provide personal information, such as your income, address and Social Security number (SSN). If you plan to apply in person, call ahead to learn about the required documents you need to bring to verify your income or residence.
  • Review and sign loan agreement: If the lender approves your loan application, it will send you a loan agreement to review. After you sign it, you'll receive your funds.
  • Repay your personal loan: Repay your personal loan in fixed monthly installment payments. Some lenders offer rate discounts if you sign up for autopay. Additionally, autopay will ensure you never miss a payment and therefore boost your credit score.


    Alternatives to Personal Loans for People in Bankruptcy

    If you can't qualify for a personal loan after bankruptcy or want to secure a lower interest rate, consider the following alternative options for your borrowing needs.

    Secured Credit Cards

    A secured credit card is different from a regular credit card in that it requires a refundable cash deposit. Instead of having a credit limit that's based on your creditworthiness, your provider bases your limit on the amount of money you deposit into a collateral account. Like other forms of secured debt, the lender can seize your cash deposit if you fail to pay back the amount you borrow.

    If you need to rebuild your credit after bankruptcy, this is a solid option. Making on-time payments can improve your credit score, helping you to qualify for future loans.

    Home Equity Line of Credit

    A home equity line of credit (HELOC) allows you to borrow money on an as-needed basis from your home's equity. At the beginning of the loan, there's a draw period where you're only responsible for making interest payments. Once the draw period ends, the repayment period begins; you're responsible for repaying the principal and interest balances during this time.

    To be eligible, lenders require you to have 15% to 20% equity in your home. Because your home secures the line of credit, lenders are usually able to offer lower interest rates.

    If you're able to secure a lower interest rate, this can be a better option than a personal loan. However, keep in mind that, in the event that you default on the loan, the lender may foreclose on your home.

    Co-signer Loans

    One way to improve your chances of qualifying for a personal loan after bankruptcy is to find a co-signer. A co-signer with good to excellent credit and sufficient income can boost your approval chances for a personal loan. You might also be able to secure a lower interest rate than you would have without a co-signer.

    Co-signers are not responsible for monthly payments unless you fall behind on payments or default on your loan. This also means any negative payment activity can impact their credit score.

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