Need a personal loan after bankruptcy? Here’s what to do

Although bankruptcy should always be a last resort, sometimes it’s financially necessary. While bankruptcy can help you make your finances more manageable, a common consequence is damaged credit. Poor credit can make it difficult to qualify for new credit products after bankruptcy.

Fortunately, the effect of bankruptcy on your credit report isn’t permanent — it diminishes over time. It’s possible to get approved for a personal loan after bankruptcy. Learn how to borrow after bankruptcy and whether or not this is the right option for you.

• How bankruptcy affects your credit
• How to get a personal loan after bankruptcy
• 8 bad credit personal loan lenders to consider
• Alternatives to a personal loan after bankruptcy
• Tips for rebuilding your credit after bankruptcy

How bankruptcy affects your credit

Filing for bankruptcy may be the best decision for your financial situation, but it’ll negatively impact your credit for years. Bankruptcy lowers your credit score, making it harder to qualify for personal loans and other new lines of credit at favorable interest rates — and it may make it difficult to qualify at all.

Chapter 7 and Chapter 13 bankruptcies are both legal proceedings that can relieve you of your debt obligations. But each type of bankruptcy is structured differently.

Chapter 7 bankruptcy

• This liquidation bankruptcy requires you to sell some or all of your property to repay your debts.
• It discharges your debts.
• Individuals and businesses can file for it.
• This type of bankruptcy requires income low enough to pass a means test.
• It allows trustees to pay creditors by selling nonexempt property.
• Debt is usually discharged in three to five months.

Chapter 13 bankruptcy

• This reorganization bankruptcy allows you to retain your property if you successfully complete a three- to five-year court-ordered repayment plan.
• It reorganizes your debts to make them more affordable, giving you the chance to catch up on mortgage, car, and other eligible debt payments.
• Only individuals can file for it.
• To be eligible, you can’t have more than $419,275 of unsecured debt or $1,257,850 of secured debt.
• This type of bankruptcy allows you to keep your property, but if you have nonexempt assets, you may have to repay your creditors an amount equal to their value.
• Debt is discharged after completion of a three- to five-year repayment plan.

How long will bankruptcy remain on a credit report?

Fortunately, bankruptcy doesn’t stay on your credit report forever. All negative information eventually cycles off your credit report, including bankruptcy.

A Chapter 7 bankruptcy can remain on your credit report for 10 years from the date of filing. By contrast, a Chapter 13 bankruptcy may fall off your report after seven years if you complete the payment plan.

How to get a personal loan after bankruptcy

Because a bankruptcy’s effect on your credit score can diminish over time, your chances of getting approved for a personal loan may increase the longer it’s been since your bankruptcy discharge. Plus, some lenders offer personal loans to borrowers with lower credit scores.

Taking these steps could help you get a personal loan after bankruptcy:

• Comparison shop with lenders who give poor credit loans. Shopping around gives you the opportunity to compare rates and terms from multiple lenders to find the best fit for your situation.
• Prequalify for multiple loans. Many lenders allow you to prequalify without affecting your credit, which can help you identify the personal loan lender with the lowest possible annual percentage rate (APR).
• Assess your loan offers, including terms and fees. These factors help you determine the actual cost of a loan. You can also use a loan payment calculator to get a better idea of what a loan will cost you.
• Pick your loan and complete your application. Once you submit your application, you’ll receive a final rate offer based on a full credit check.
• Sign your loan agreement, receive your funds, and begin repaying the loan. If you agree to the loan terms, all that’s left to do is sign the contract. Once the loan closes, the contract is official, and the funds are distributed in one lump sum. Depending on your lender, you may receive the funds as quickly as the same day or the next business day (though it could take longer).

Rates, costs and offers can vary from lender to lender. Comparison shopping can help ensure you get the best rate available to you. Checking your personalized personal loan rates is easy when you visit Credible.

8 bad credit personal loan lenders to consider

If your credit score isn’t where you’d like it to be, you may still qualify for a personal loan. The following eight Credible partner lenders offer personal loans to borrowers with less-than-ideal credit. Of course, there’s no guarantee a lender will agree to give you a loan after bankruptcy, but your chances might be better with a lender that has a lower minimum credit score requirement.

Avant

• Minimum credit score: 550
• Loan amounts: $2,000 to $35,000
• Loan terms: 2 to 5 years

Best Egg

• Minimum credit score: 600
• Loan amounts: $2,000 to $50,000
• Loan terms: 2 to 5 years

LendingClub

• Minimum credit score: 600
• Loan amounts: $1,000 to $40,000
• Loan terms: 3 or 5 years

LendingPoint

• Minimum credit score: 580
• Loan amounts: $2,000 to $36,500
• Loan terms: 2 to 4 years

OneMain Financial

• Minimum credit score: None
• Loan amounts: $1,500 to $20,000
• Loan terms: 2 to 5 years

Universal Credit

• Minimum credit score: 560
• Loan amounts: $1,000 to $50,000
• Loan terms: 3 or 5 years

Upgrade

• Minimum credit score: 560
• Loan amounts: $500 to $50,000
• Loan terms: 2 to 7 years

Upstart

• Minimum credit score: 580
• Loan amounts: $1,000 to $50,000
• Loan terms: 3 to 5 years

Alternatives to a personal loan after bankruptcy

Personal loans are a popular option when you need money quickly. But they’re not the only option. These alternatives to personal loans may help you in different ways, depending on your situation:

• Payday alternative loan (PAL) — A PAL is a small loan some credit unions offer to their members who need money on short notice. The main downside to PALs is that their APRs can be as high as 28%. That’s still more affordable than getting a payday loan, though, which can have fees that equate to an APR of nearly 400%, according to the Consumer Financial Protection Bureau (CFPB).
• Credit-builder loans — These loans are ideal for anyone looking to build their credit. But you won’t get the money right away. With credit-builder loans, you make fixed payments to the lender (which are reported to the credit bureaus), but you won’t receive the loan amount until the end of your loan term.
• Secured personal loan — Secured personal loans are often easier to qualify for because lenders accept collateral to offset their risk. These loans can help you establish or build credit, but you could lose any deposit or property you put up as collateral if you fail to pay your loan as agreed.
• Secured credit card — A secured credit card requires you to provide a cash deposit to open an account. These cards can be helpful to those with lower credit scores, as they have higher approval odds. Unfortunately, you must put up a security deposit, and the credit limit is usually equal to your deposit amount.
• 401(k) loan — A 401(k) loan allows you to borrow from your 401(k) account and pay yourself back over time. These loans can help anyone who needs quick cash. Generally, you’ll pay your loan back through partial withholdings on your regular paycheck. But a 401(k) loan should always be a last resort because it depletes your retirement savings, and the money you withdraw will miss out on potential market growth. You could also be on the hook for a tax bill if you don’t repay the loan on time.
• Home equity loan — A home equity loan may be a good fit for homeowners with equity in their homes who are confident they’ll be able to repay the debt. These loans typically come with lower interest rates. Be cautious, though: A home equity loan puts your home at risk since you must use your home as collateral for the loan.
• Home equity line of credit (HELOC) — A home equity line of credit may be attractive to you if you have considerable equity in your home. Like a credit card, a HELOC is a revolving source of funds you can use as you wish. Unlike a credit card, HELOCs are secured by your home, so this line of credit puts your home at risk. Failure to make on-time payments could result in a bank repossession of your home.

Loans to avoid

If you need money quickly, it may be tempting to go to a lender that advertises "no-credit-check loans," but these are rarely a good option. Not only are these loans expensive, but they can also trap you in a cycle of debt. Avoid the following types of loans:

• Payday loans — Payday loans are small loans, typically for $500 or less. They come with high costs and are usually due on your next payday. The average interest rate for payday loans is 391% and can exceed 600%. The combination of excessively high rates and short repayment terms can keep you in a cycle of debt you can’t repay — 80% of payday loan borrowers roll over or renew their loans within two weeks, according to a CFPB report. The majority of these borrowers extend their loans so many times that the total of their fees exceeds their original loan amount.
• Title loans — Title loans require you to put up an asset as collateral. Car title loans, which use a vehicle as collateral, are the most common type of title loans. These loans can be attractive because they don’t consider your credit, and the loans are generally approved quickly. You agree to pay the total amount (plus interest and fees) by a specific date, in exchange for the car’s title. If you pay as agreed, the title is returned. But, like payday loans, title loans come with excessive fees. The typical loan amount is roughly $700 with an APR of about 300%. And 20% of title loan borrowers have their vehicle seized because they can’t repay the debt, according to the CFPB.

Tips for rebuilding your credit after bankruptcy

Taking steps to rebuild your credit after bankruptcy could improve your chances of personal loan approval with a lower interest rate.

Paying all your bills on time is one of the best ways to build your credit, since your payment history accounts for 35% of your FICO credit score. And your credit utilization ratio — how much of your credit you're using at any given time — makes up 30% of your FICO credit score, so it’s a good idea to keep your debt payments below 30% of your available credit.

It’s also wise to review your credit reports periodically and look carefully for any fraudulent errors or reporting mistakes. You can get a free copy of your credit reports at AnnualCreditReport.com — as of January 2022, you can get a weekly credit report at no cost to you. Even one mistake on your reports could drag down your credit score. If you find an error, dispute it with the three major credit bureaus — Equifax, Experian, and TransUnion. By law, these agencies are required to remove or correct any inaccurate, incomplete, or unverifiable information within 30 days.