Bad Credit Loans: Tips for Getting Approved

When you apply for a loan, there are certain factors that lenders consider in order to approve or deny your loan request. Knowing what lenders look for when approving or denying your loan can help you improve you chances of getting approved, even if you have bad credit. Read these tips to educate yourself on improving your chances of getting approved for a loan:

Know Your Loan to Value Ratio

Your loan-to-value ratio (LTV) is the amount you are borrowing divided by the value of what you are buying. For example, if you are borrowing $90,000 on a home that is appraised at $100,000, then your LTV is 90%. Likewise, if you are borrowing $10,000 on a car that has a blue book value of $10,000, then your LTV is 100%. LTV is a major factor in loan approval because it represents the amount of risk that the loan company is taking on by lending to you. The lower your LTV, the more likely that, should you default on your loan, the loan company will be able to resell your home or car and make their money back.

Borrowers with bad credit usually receive better interest rates on loans with lower LTVs. In fact, 100% LTVs are generally reserved for borrowers with very good credit. So, how do you lower your LTV? You can lower it in one of two ways: either make an educated down payment or shop wisely for a house or car that sells for less than its worth. Knowing your LTV can help you get approved for your loan even if you have bad credit -- loans with 80% LTV are almost always approved.

Clean Up Your Credit Report

If you have bad credit, looking at your credit report is something you generally try to avoid, however, not paying attention to your credit report only damages your credit further. Credit reports are frequently full of mistakes, and those mistakes are easily removed. Best of all, cleaning up the mistakes on your credit report is the fastest way to significantly raise your credit score.

To clean up your credit report, you'll want to order reports from all three major reporting agencies: Equifax, Experian, and TransUnion. Study all three reports carefully for mistakes such as payments that are recorded as late that were not, open accounts that you did not authorize, accounts that have duplicate recordings, paid collection accounts that are recorded as unpaid, etc. You can dispute any mistakes directly through the website of the reporting agency. Gather both your credit report number and any necessary documentation and submit your dispute to the agency. It generally takes 30 days for the agency to investigate your dispute.

While the investigation is being disputed, avoid applying for credit. A pending investigation on your credit report can either postpone your approval or cause you to be declined. When the investigation has been completed, you will be notified with the results. If the matter remains unresolved, you can choose to leave a note on your credit report that can be read by potential lenders explaining the mistake.

Pay Down Your Debts

Another way to improve both your credit score and your chances of loan approval is to pay down your credit card debts. The closer your balance is to your total credit line, the lower your credit score. Lenders generally favor applicants that owe no more than 30% of their maximum credit line on all of their credit accounts. There's a simple calculation to determine what percentage of your total credit line that you owe:

First, add the maximum credit lines together on all of your credit accounts. If you have a Visa with a $500 credit line, a Sears card with a $250 credit line, and an American Express with a $250 credit line, then your total available credit is $1000. Then, add the balances on all three of those accounts. Add the $400 balance on the Visa to the $200 balances on both the Sears card and the American Express. The total amount you owe on all of your credit accounts would then be $800. Divide this amount by your total available credit. You owe 80% of your total credit.

However, if you can manage to pay those cards down so that you owe only $300 on all three, then you will owe the desired 30% on all three accounts. This will both raise your credit score and improve your chances of getting approved for a loan.