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Personal loans can be used for multiple purposes, including home improvements, debt consolidation and much more. But can you still access the financial versatility of a personal loan after bankruptcy?
It’s possible but will take some smart financial moves by you and finding the right personal loan lender.
Can I get a personal loan after bankruptcy?
Rebuilding your credit report following Chapter 7 or Chapter 13 bankruptcy is challenging. It takes time, disciplined repayment of current debt — and patience. Eventually, with a track record of on-time payments, your credit score will rebound, and new borrowing eligibility will be available to you.
Depending on the type of bankruptcy, the blemish will remain on your credit history for seven to 10 years. During those years, you will be best served by keeping your unsecured debt load low.
It’s often best — and sometimes court-mandated — to wait until your bankruptcy has been discharged before applying for new credit.
Getting a personal loan after Chapter 7 bankruptcy discharge
There are income limits to those who can qualify for a Chapter 7 bankruptcy, because it wipes your financial slate clean. A Chapter 7 bankruptcy is a liquidation of your qualifying debt without a repayment plan. Any secured personal loan backed by property that isn’t protected by state law as exempt is sold, with the proceeds going to the lenders.
Qualifying for a personal loan following a Chapter 7 bankruptcy will take time for your credit history to heal. Because creditors received no payments on unsecured debt during the liquidation, you will need to show a renewed commitment to paying off small loan amounts, such as credit cards, before a lender might consider extending you a lump sum in a personal loan.
Getting a personal loan after Chapter 13 bankruptcy discharge
A Chapter 13 bankruptcy requires a repayment plan for some or all of your debts over three to five years. Creditors may see these debt payments as an indicator of a better credit risk compared to a Chapter 7 bankruptcy liquidation.
The credit profile impact of Chapter 7 and Chapter 13 bankruptcies are similar. In either case, you can expect your credit score to fall. However, with a fresh financial start, you can work toward rebuilding your credit history and showing personal loan lenders improved eligibility. Lenders will carefully consider your recent history of debt repayment and may charge you higher interest rates.
The best alternative loans after bankruptcy
Look into a secured personal loan
The best personal loan — and likely the easiest to gain loan application approval following a bankruptcy — may be a secured personal loan. That’s a type of personal loan where you’ll have to pledge something of value to guarantee the debt, such as a vehicle or savings account. Unsecured debts are harder to qualify for, while a secured personal loan may boost your eligibility. It may also help lower your interest rate.
Consider a cosigner
Another option is to use a cosigner. That’s when a friend or family member puts their name on the loan agreement with you, promising to pay the debt if you can’t. It’s a heavy burden to place on someone, and you should only ask someone with good or even excellent credit. And be gracious if they decline to take on such a responsibility.
Investigate a credit-builder loan
You may also seek a financial provider offering “credit-builder loans.” These alternative loan programs are designed to provide small personal loan amounts, often held in a bank account and accessible only after you make full repayment. Your monthly payments are reported to the credit bureaus and help to improve your credit score.
A secured credit card might be the way to go
Secured credit cards are another way to help erase a bad credit history. Your line of credit is secured with a one-time cash security deposit. Often, the credit limit reflects the amount of your deposit. Banks, credit unions, other financial institutions, and credit card issuers offer secured credit cards for borrowers looking to build a fresh payment history.
How to apply for a personal loan following a bankruptcy
The process for making a loan application for a personal loan following either a Chapter 7 or Chapter 13 bankruptcy is much the same. Here are the steps you’ll want to consider:
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Know where your credit score stands. If a low score is a barrier to your loan eligibility, you can take more time to improve your credit history. Better interest rates may be ahead for those who wait.
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Prequalify with more than one lender to see loan offers. Determine the best annual percentage rate you can earn.
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Make sure the repayment terms are well within your budget. Will the monthly payment be affordable? If not, work on your credit score for a while longer to qualify for a lower interest rate.
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Make an official loan application to the lender with the most favorable loan terms.
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Pay on time — even early, if you can. Every monthly payment made promptly moves you closer to good credit.
Watch out for credit scams
You may be anxious to improve your bad credit situation and frustrated by the higher-interest-rate options you have following bankruptcy. You’ll likely see tempting same-day loan offers that seem desirable. In reality, these alternative loans could be toxic to your financial future and to your healing credit. Be wary of:
Payday loan providers. This may be the most costly, short-term, high-interest solution for distressed borrowers. The immediate relief of same-day cash is followed by expensive payment plans that can be difficult to pay off. The government personal finance watchdog, the Consumer Finance Protection Bureau (CFPB), says a fee of $15 per $100 borrowed is typical for payday loans — which translates to an annual percentage rate of nearly 400% for a two-week loan.
Title loans. Another alternative loan that can bring more pain than relief. Pledging the title of a vehicle to a lender for quick cash is a short-term, high-interest rate loan that is frequently renewed again and again by borrowers trying to pay off title loans.
No-credit-check loans. Often offered by “buy here, pay here” car lots, the unfavorable loan terms could mean you end up paying thousands of dollars more than the vehicle’s actual worth, the CFPB says.
“Guaranteed approval” offers. Many states have outlawed lenders claiming to offer “guaranteed approval” of a loan. Too many consumers have been scammed by high-interest rates, predatory financing mark-ups or other deceptive loan offers.
Shady credit repair operations. In August 2023, the CFPB announced a multibillion-dollar settlement with some of the largest credit repair companies in the nation. A court ruling said the companies collected “illegal advance fees for credit repair services through telemarketing.”
The CFPB says consumers should be cautious of credit repair companies that:
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Push for payment in advance.
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Promise to remove negative credit information from their credit history.
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Urge them not to contact credit reporting companies.