Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
Updated on Tuesday, January 19, 2021
Yes, it is possible to get a personal loan after bankruptcy. However, it may be difficult to find a lender if your credit score is low or if you filed bankruptcy recently enough that it’s still showing up on your credit report. A secured loan or another alternative may be more viable than your typical personal loan. Let’s take a closer look at the nuances of getting a loan after bankruptcy.
- 3 factors that affect personal loan eligibility after bankruptcy
- Applying for a personal loan after bankruptcy
- What if you can’t qualify for an unsecured personal loan?
- How to rebuild your credit score after bankruptcy
3 factors that affect personal loan eligibility after bankruptcy
1. The chapter of bankruptcy you filed
Consumers generally file either Chapter 7 bankruptcy, in which their property is sold to repay creditors; or Chapter 13, in which a repayment plan lasting no longer than seven years is established. Each of these brings its own complications in terms of getting a personal loan after bankruptcy:
- Chapter 7: While this type of bankruptcy immediately discharges debt, it shows on your credit report for up to 10 years, which means it can impact your credit score negatively for that length of time.
- Chapter 13: This type of bankruptcy stays on your credit report only up to seven years, so it will have a shorter-term effect on your credit score, but consumers aren’t encouraged to get new credit while they are fulfilling their repayment plan, which means you might struggle to secure a loan until the bankruptcy is discharged.
2. How recently you filed for bankruptcy
For some lenders, simply seeing a bankruptcy on your credit report might be enough to prompt the refusal of your personal loan application. When applying for loans after bankruptcy with these lenders, you may need to wait until your bankruptcy drops off your credit report. For Chapter 7 bankruptcy, that would be 10 years out; for Chapter 13 bankruptcy, that would be seven years out.
With other lenders, the impact the bankruptcy has on the credit score is a more pressing factor. Since bankruptcies make their greatest impact on your score early on, the ideal strategy may be to monitor your credit for a few months and wait until the score rises.
3. Your current credit score
A barometer for the amount of risk you present to lenders, your credit score is one of the most important factors evaluated by lenders when you apply for a personal loan after bankruptcy. The higher your score, the more likely lenders will approve your application and the lower the interest rate you will be able to secure.
Bankruptcy doesn’t always have a drastic impact on credit scores, although when it does it certainly affects the ability to get a personal loan. But for many consumers, since an inability to repay debt is one of the factors prompting a bankruptcy, their credit might already be poor and may actually see an improvement shortly after declaring bankruptcy. Another factor that can impact your post-bankruptcy credit score is the number of accounts included in your bankruptcy. The more there are, the greater the impact on your credit score.
Applying for a personal loan after bankruptcy
When you find yourself up against an immediate need for a short-term personal loan after bankruptcy — and your post-bankruptcy budget allows you the room to repay it — there are several steps you can take to prepare yourself for the loan and to help secure the best rate possible.
- Get a copy of your credit reports. You can get a free copy of your credit reports from all three credit bureaus — Equifax, Experian and TransUnion — through AnnualCreditReport.com. Once you have your credit reports, you can check to see if the information is accurate and up to date. If any information is inaccurate, you can file a dispute to have it corrected or removed from your credit report altogether.
- Determine your debt-to-income (DTI) ratio. In addition to your credit score, personal loan lenders will also want to know your debt-to-income (DTI) ratio. Be prepared with the right documents to prove your income, such as pay stubs, bank statements, a W-2 or tax returns.
- See if you’re eligible by prequalifying through lenders. Many personal loan lenders let you prequalify for a personal loan, which determines your eligibility and potential loan terms without hurting your credit score. This will give you a better idea if you’d be eligible for a personal loan with a particular lender.
- Compare loan offers. With so many different lenders, rates, funding timelines and terms, it’s crucial to compare offers before applying for a personal loan after bankruptcy. In general, you should compare the APRs of each offer; the APR is a better measure of a loan’s affordability as it includes the interest rate plus fees. Consider loan terms, as well, as this will affect your monthly payments and how long you could be in debt.
- Formally apply through the lender. Depending on the lender you select, you may have the option to apply online or in person. Either way, be prepared to present sources for income and identity verification.
What if you can’t qualify for an unsecured personal loan?
Search for secured personal loans
If you have a savings account or other collateral, a secured personal loan might be the next best option. Secured personal loans can offer opportunities for approval that you might not get with an unsecured loan. They may also have lower interest rates than you’d otherwise be offered. Should you default on the loan, however, you could lose your pledged collateral.
Enlist the help of a cosigner
If your credit score isn’t high enough to help you get a personal loan after bankruptcy with an affordable interest rate, you might consider getting a cosigner with a good credit rating to sign the application with you and guarantee repayment. This reduces the risk for the lender by giving them another person to potentially collect the debt from if you stop paying.
Before taking this step, remember that not only could the cosigner be on the hook for loan payments if you stop making them, but late payments and defaults will also impact their credit and they may be responsible for paying the loan back upon your death.
Check with your local credit union
As nonprofit organizations, credit unions often offer more attractive interest rates, fees and terms on their personal loans. In addition, if you have a credit union you’ve been using for a while, you may have the opportunity to talk to a loan officer and explain the bankruptcy situation and show them why your present financial situation is more secure.
How to rebuild your credit score after bankruptcy
As you’re working to get your credit back on track, it’s important to know how your actions affect your credit score.
Here’s a list of factors that FICO uses to calculate your credit score, along with how important they are:
- Payment history (35% of your score)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
The most important thing you can do to boost your credit score is to make payments on time. How much you owe is also important, so avoid borrowing more than you need. Consider applying for a secured credit card and maintaining a low balance. This will help you maintain a low credit utilization rate, which is an important element of the “amounts owed” factor.
Having both a secured credit card and an unsecured personal loan can help diversify your credit mix, but you should be careful about submitting too many applications; too much new credit can hurt your score.