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Getting a loan at a bank or credit union when you have bad credit can be difficult. Credit union loans for bad credit are out there, but your approval depends on the specific credit union and other factors, such as your income.
Do Credit Unions Check Your Credit?
There are many differences between credit unions and banks, but both routinely check credit reports and credit scores as part of their application process. Lenders, including credit unions, typically establish minimum credit score requirements for various loan types, as well as standards for income and debt-to-income ratio (DTI).
Will a Credit Union Give Me a Loan With Bad Credit?
Credit unions' organizational structures, legal standing and even their individual mission statements may give them grounds to consider applicants with less than ideal credit.
Unlike traditional banks, credit unions are owned by their members and focused on serving members' needs. Membership may be open to all in a given geographic area or limited to affiliate groups such as military servicemembers and veterans, trade union members or employees of certain companies.
Federal law permits credit unions to offer special purpose credit programs for the benefit of their members. If you qualify and join—typically a matter of opening an account with a nominal deposit—your credit union may offer special programs you can tap, even with tarnished credit.
Credit unions are not-for-profit institutions, so they funnel any financial gains back into programs for their members (or, in some cases, dividend payments to members). Because of their nonprofit nature, a credit union may be more willing to accept riskier borrowers or offer better borrowing terms than banks and finance companies can.
Each credit union sets its own lending criteria and determines the interest rates and fees it charges, within legal limits. If a particular credit union offers loans to individuals with credit in the fair to poor range, they will usually include higher rates and fees, and possibly steeper down payment or collateral requirements, than required of applicants with higher credit scores.
Types of Loans for Bad Credit
Loans available from credit unions include:
- Secured credit union loan: When you take out a secured loan, you must use personal property or funds as collateral on the loan. That means if you fail to repay the loan, the credit union can seize the collateral and use it to recoup what you owe. Mortgages and auto loans are considered secured loans, because the lender typically can seize the financed asset if the loan is unpaid. Collateral on a personal loan can include property or cash in the form of a certificate of deposit.
- Home equity loan: A home equity loan is a special type of secured loan available to homeowners who have built equity in their homes. They enable qualified applicants to borrow between 75% to 85% of the portion of the market value of their home they own outright. These loans use the house as collateral, and failure to repay them can lead to foreclosure or a forced sale of the house.
- Unsecured credit union loan: When a credit union issues an unsecured loan, also known as a personal loan, it provides you with cash you can use for virtually any purpose, with the understanding that you'll repay the sum, with interest, in a series of monthly installments. Eligibility, loan amount and the interest rate will depend on your income, credit score and other debts. Lack of collateral makes them riskier for the credit union, so they may come with higher interest charges and fees than secured loans would.
- Payday alternative loans (PALs): Credit unions offer payday alternative loans for sums of $2,000 or less, with repayment terms no longer than 12 months. As the name implies, these loans, which carry a maximum interest rate of 28%, are designed to be less costly alternatives to payday loans, which can carry interest charges equivalent to annual percentage rates (APRs) of up to 400%.
- Credit-builder loan: Designed to help individuals establish credit from scratch or rebuild damaged credit, a credit-builder loan is both a savings strategy and, as the name implies, a means for improving your credit history. The credit union issues you a small loan (typically up to $1,000) and, instead of giving you the cash, it places it in a special savings account that you can't touch until you've paid off the loan. If you fail to repay the loan, the credit union keeps the money. If you make all monthly payments (typically over a term of one year or less), the money—plus interest—is yours, and you'll have added a series of positive payments to your credit reports.
How to Apply for a Loan at a Credit Union
While credit union lending policies may differ from those of commercial banks, their loan application processes are typically much the same, except for the requirement that you become a member of the credit union to apply for a loan.
- Check your credit scores. Do this before you apply for the loan to know where you stand and whether you're likely to meet minimum loan eligibility requirements.
- See if you're eligible. If you're considering multiple credit unions, check their websites or speak with a member services representative to find out their loan eligibility requirements and to make sure you qualify for membership.
- Join your chosen credit union by opening a deposit account. Depending on the credit union's policies and the type of loan you seek, you may have to wait at least 90 days before submitting a loan application.
- File a loan application. You'll also need to provide required documentation such as proof of ID and your Social Security number, which the credit union requires to run a credit check. Proof of income in the form of tax returns or pay stubs may also be needed, but that requirement may be waived if you have an established account with direct paycheck deposit.
- Await the lending decision. Depending on the loan type and amount, you could have a decision within days or a few weeks. If your application is denied, ask your credit union loan officer for advice on improving your chances for next time, and work toward further building your credit before applying again.
How to Build Your Credit
There are no quick fixes for credit that's damaged by misfortune or mistakes, but there are many proven methods for steady, gradual credit improvement.
One tactic that works is the credit-builder loan mentioned above. Here are some other things to consider:
- Secured credit card: Consider opening a secured credit card and pay every bill promptly to shore up your payment history. Because these require you to "secure" the credit card with a deposit, it's often easier to qualify for one than a typical credit card.
- Authorized user: Become an authorized user of a credit card that belongs to someone with a great credit record. Their credit history will help boost yours.
- Sound credit habits: Adopt and stick to credit habits that align with the factors that influence credit scores, such as paying your bills on time, avoiding high revolving credit balances and taking out new credit only as needed.
The Bottom Line
If your credit has been tarnished, a credit union, with its focus on member service and greater flexibility in setting lending criteria, may be more apt to give you a loan than a commercial bank or finance company. Keep in mind, however, that you'll still need to meet eligibility criteria for income, debt-to-income ratio and credit score. To know where you stand before you begin seeking a loan, you can check your credit score for free from Experian and, if necessary, take steps to improve your credit before you apply.