Of course, when one has bad credit, receiving approval for a loan is easier said than done, but this is not to say that financing cannot be gotten from a credit union. Credit unions are member-owned, non-profit organizations that are financial and different from other large commercial banks since they have more freedom in terms of credit granting standards. Here are the important things to know about credit union auto loans for bad credit.
What is Bad Credit?
If your credit score is less than 580 on a scale of 300 to 850, then you are said to have a bad credit. Issues that hurt your credit score and contribute to bad credit include: Issues that hurt your credit score and contribute to bad credit include:
- The records of loan and bill repayments that were sometimes paid later than the due dates
- High credit card utilization rate where your balances are within your credit limits
- Collection accounts
- Bankruptcies and foreclosures
While you may still be approved for a loan even when you belong to the bad credit range, you are likely to be given a limited approval and you may not enjoy the best terms and interest rates. The bright side of being able to repay a credit union loan is that over time, it can improve one’s credit rating.
The Different Kinds of Loans that one can Obtain from Credit Unions
Credit unions offer many of the same loan programs as banks, including:
- Auto loans
- This is especially true with mortgages and home equity loans.
- Consumer loans and credit facilities
- Credit cards
- Debt consolidation loans
As you try to compare the two options to determine which loan is ideal to apply for, then you should know that an amount lower than $40,000 can be easily approved. There are such offers as credit builder or share-secured loans affordable in the $500 up to $2000 range and all of them make it according to most of the bad credit lending rules. You just have to make sure that you are borrowing only that which is necessary to avoid falling into a debt trap.
Getting Pre-Approval With Bad Credit
It is always wise to obtain pre-approval before anything when concerning any credit union loan. Soft credit check is also referred to as pre-qualification whereby the credit union checks your credit report and your income to identify what loan products you are eligible to apply for.
When applying for pre-approval, it is wise to be truthful with the loan officer as regards the current credit status and financial ability. This includes information like:
- For your information, your estimated credit scores are
- Account balances
- Recent late payments
- The debt-to-income ratio is dependent on your salary and expenses for the month.
With such details, the loan officer will provide you with the prospects of approval before filling out a formal application.
Assembling the Credit Union Credit Application
After getting pre-approval, now it’s possible to gather all the necessary documents and forms, which the credit union requires to apply for a loan. To increase your odds of being approved, you need to present all the benefits and hide all the debts, but you should also show the credit bureau that you take full responsibility for the credit problems. Key items to include are:
- Documents submitted after providing own and employment information
- Original documents that show evidence of income such as recent pay stubs.
- Justification note to address any credit derogatory items or concerns
- Documentation of any other sources of income the person might be earning
For instance, while writing the explanation letter, inform your credit bureau if you have had issues such as late payments or collection accounts but prove that you have since changed your behavior. Providing this context may help alleviate some credit-related concerns expressed by the reviewers.
Another good example is where the bad credit risk could be neutralized by having a friend or a relative with a good credit score act as a reference or guarantee you by co-signing the application though remember that defaulting would also affect him or her. In summary, providing a clean and honest picture of your financial status is very beneficial when the application comes to underwriters.
Consequently, credit union loan rates and terms for bad credit borrowers are much better compared to other financial institutions.
Before beginning the process of comparison, ensure that you have realistic expectations on what types of loan products you will be eligible for. If you are an applicant with bad credit, then, credit unions are likely to offer you higher interest rates and less favorable terms than the best credit applicants.
For instance, an auto loan can be 8-14% APR rather than 4-6% for the good to excellent credit population that poses a lesser risk to the financing institution. You also get shorter term periods which keeps the monthly payment fairly small relative to the income level.
They are not designed to penalize those with bad credit but to cover the extra cost that a credit union takes to lend the money. This involves coming up with a balance of both the rate and terms that will enable you to make the required payment while ensuring the credit union gets its money back.
Finding Ways to Increase Your Credit Acceptance Rates
Since credit unions are not-for-profit and their focus is more on their members than their revenue or profits, it might be willing to go beyond the usual loan requirements you see in other banks. A few options that can offset bad credit risk in their decision-making process include:
Paying Down Account Balances: This is because having accounts over their limits or carrying high balances compared to your total credit available pulls down your utilization ratio. This can be desirable and can be achieved by paying off balances before applying for a loan to enhance this metric.
Enrolling in Credit Counseling: Non-profit credit counseling helps you to get credit rebuilding plans involving the settlement of the unpaid balance and explaining how to conduct yourself when paying credit bills in the future. It demonstrates a commitment to personal improvement in self-areas, especially the financial sector, making applicants more desirable.
Becoming a Long-Term Member: Credit unions are therefore likely to value member loyalty and the depth of membership relationships. Holding checking/savings accounts and using other products often credit cards, for example- demonstrate past commitment that is useful for borderline loan applicants with poor credit.
You can therefore see that getting a loan from standard lenders such as credit unions is certainly possible even if you have a poor credit history. The three fundamental things are knowing what one needs, how to organize the application, and showing intent in the stewardship of the funds. By being cautious and exercising some self-control, anyone can take advantage of the opportunity of having access to affordable credit products that will enable him or her toward his or her goals and, thereby, gradually repair his or her credit status.
