How to Get a Loan With Bad Credit

This page includes analysis of our favorite cards from The Simple Dollar's advertisers and the marketplace. Visit our advertiser disclosure to learn more.

Regardless of your credit score, life goes on. And with life, there are times that you may need access to a loan to fulfill a financial obligation. Knowing how to get a loan with bad credit is critical in these situations. Not only will it help you to meet your current financial needs, but it can also help you to build better credit for the future. If you need to get a loan with bad credit for necessities, you have options.

Check Your Personal Loan Rates

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

How to get a loan with bad credit

Step 1. Get a copy of your credit reports, and gather any and all relevant financial documents.

You’ll need to know just how bad your credit score is to know your available options. Get copies of your current credit report. Additionally, collect things like bank account statements, pay stubs and any other asset documents you have. This will help a lender verify income and determine how risky of a borrower you are.

Step 2. Determine the type of loan you need.

Figure out the best type of loan for your needs. Some popular options include payday loans, car title loans, personal loans, PAL loans and peer-to-peer lending loans. While all of these are options, not all of them are good options. Ensure you fully understand the terms of each loan, what’s at risk, the costs and what happens if you’re unable to pay back your new loan on time. Failure to comply with the terms and conditions agreed to could result in a derogatory mark on your credit report.

Step 3. Begin shopping lenders.

Once you know the type of loan you need, it’s time to find the right lender. Many lenders have easy pre-approval processes that can be done online. You’ll put in some of your basic information, and the lender will let you know if you are pre-approved or not. If you are able to get preapproved, this will typically occur without a hard credit pull (until you finalize your application). Avoid applying for multiple lenders in a short amount of time if they do not offer a soft-pull preapproval. Too many hard inquired on your credit report will dock your score and it does not look good to lenders.

Step 4. Complete the final approval process and develop a plan of action.

Once you’ve decided on a lender, push forward with the full approval process. While you wait for final approval, develop a strict budget for spending the money and how you plan to repay the loan. If you don’t have a clear plan for repayment, you may be setting yourself up for financial failure. Lenders may provide you with a payment schedule to keep track of your loan, as well.

Types of bad credit loans

Bad credit loans  are not going to give you the best flexibility, the lowest rates or even the most favorable repayment terms. For this reason, those with good to great credit should stick to loans designed for those with better credit.

However, these products can still help those with bad credit get things turned around. Just make sure you understand all the terms of your loan and what you are agreeing to before you sign. It’s easy only to look at your short-term needs and ignore the long-term implications.

Payday loans

A payday loan is a form of borrowing where lenders give you access to future paychecks early. These loans are small in size but carry massive costs, including an interest rate as high as 400%. Sadly, these loans are predatory and designed to target vulnerable people in need. They can drag borrowers into a cycle of debt that is inescapable. Before you look into a payday loan, make sure you have exhausted all other options like credit cards, loans from family or friends, payday loan alternatives or even getting a paycheck advance from work.

Car title loans

Borrowers looking to get a bad credit loan may be able to get a car title loan. These loans offer fast approval with funds available often the same day or the next business day. The problem is these loans carry a considerable risk if you’re not able to pay back on time. You’ll be putting your car up as collateral, which means the lender can take your car if you don’t pay. Often, the risk outweighs the reward significantly.

Unsecured personal loans

A quality option that borrowers with bad credit should look into is unsecured personal loans. Some of the best unsecured personal loans offer fair interest rates, extended repayment terms, and the ability to get money without putting up valuable assets as collateral. The rates will be somewhat expensive, but nowhere near what something like a payday loan will cost.

Secured personal loans

For those with collateral looking to borrow, a secured personal loan may be a viable option. Additionally, what you’re trying to purchase may be able to be used as your collateral. For example, you can get an auto loan with bad credit by putting up the car you are buying as collateral. This process is the same for people with good credit. The only difference may be a higher interest rate and less favorable repayment terms. That being said, rates on secured personal loans vs. unsecured personal loans should be better regardless of your credit score.

P2P lending

Peer-to-peer (P2P) lending companies connect those that need money with investors looking to get a better return on investment. These bad credit loans operate like traditional loans, except your lender will be an individual and not a bank or credit union. These forms of borrowing can be expensive with fees and rates but may be a viable option if you’ve exhausted all other options.

Payday loan alternatives

There are several other options you can use to get a bad credit loan. Before you use some of the higher risk options on this list like payday loans, make sure you look at all of your other available options. For example, credit cards may be a viable option for quick access to much-needed cash. Additionally, this option allows you to continue borrowing and re-borrowing up to your credit limit instead of having to reapply every time.

The federal government also has options available that resemble payday loans but without all the predatory characteristics. Payday alternative loans (PALs) are available through participating credit unions. Application fees are capped at $20 and you can get up to $1,000 or $2,000, depending on which PAL version you pursue. Originally, PAL loans required you to be a member of the credit union for at least a month. With PAL version II, though, that requirement is waived.

While borrowing money with less-than-great credit is not ideal, there are options that can work.

How to use a loan to improve your credit score

Just because you have bad credit now does not mean you are destined to have bad credit forever. Your credit score is a reflection of your past borrowing habits and your ability to make good on loans. By demonstrating good borrowing habits, you can improve your credit score, which will open up better borrowing opportunities in the future.

When you take out a loan to improve your credit score, make sure the lender you are using reports to all three credit bureaus. There are three different companies that monitor credit reports, and you are going to want every single one of them updated about your better borrowing behavior.

From there, it’s up to you to demonstrate those good habits by making your payments on time. As you continue to make on-time payments, your credit history will improve. Your missed and late payments will gradually fall off of your credit reports, and they will be replaced by on-time payments. Good credit doesn’t happen overnight, but it also does not take major grandiose moves to accomplish. By doing the right thing and making your payments on time over and over, your score will gradually get better.

The more money that you borrow and make good on, the higher your credit score will rise. Bad credit loans can be a tool to get you the money you need now, but they can also set you up for more favorable borrowing options in the future.

Advertiser Disclosure

The bottom line

Borrowing money with less-than-great credit is never an ideal situation. But the past is the past, and that does not change your current need for cash. By taking the time to find the right bad credit loan, you can fulfill your current financial obligations while building up better credit for the future.

Related Articles

Best Personal Loans for Bad Credit
Best Personal Loans Rate
Quick ways to borrow money

Jason Lee
Jason Lee
Contributing Writer

Jason Lee is a U.S.-based freelance writer with a passion for writing about dating, banking, tech, personal growth, food and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill sets with the rest of the world. Follow Jason on Facebook here

The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved, or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

Loading Disqus Comments ...