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How to Get a Loan With Bad Credit
Bad credit personal loans have been around for some time, but they tend to gain popularity in times of financial tumult. It wasn’t too long ago that a bad credit score was a major obstacle that could not be overcome, and lenders wouldn’t consider a score that dipped below 670.
But a few things happened in the last decade or so to change that. We experienced the chaos of the mortgage crash and the subsequent recession, and of course, COVID-19. Mass job losses and furloughing have also played their part in bad credit. There’s also a group of consumers that don’t have a credit score and need to start somewhere.
So what happens when a person with bad credit needs a loan? And how do they navigate that process?
What is a bad credit personal loan?
A bad credit loan is a personal loan for borrowers who have lower scores than what lenders would consider as fair. On the FICO Score scale of 300 to 850, a bad credit score is one below 670. More specifically, a score between 580 and 669 is considered fair, and one between 300 and 579 is poor.
Applicants with scores above 670 have access to more variety of loans at lower costs. One of the ways lenders make up for the risk of lending to someone with bad credit is by increasing the interest rate. It’s unlikely for anyone to have a score below 300. However, those who have no credit may have a score of 0.
How to get a personal loan with bad credit
Check your credit online.
Before applying for a loan, run a credit check on your own. That way, you’ll know ahead of time what your credit score is and how likely you are to get a personal loan. Once you know your credit score, you can shop around for lenders that offer loans to borrowers in that range.
Credit scores range from 300 to 850. If your score is in the high 700s or above, you likely won’t have any trouble getting a loan at a competitive interest rate. Many lenders require borrowers to have a credit score of at least 600 to 650. But keep in mind that if your credit score is in this range, you’ll probably end up paying a higher interest rate.
Once you know your credit score, it’s time to shop around for a loan. Ideally, you want to find the lender that offers you the best interest rate for the loan amount and loan term you’re looking for. Choose a few lenders that fit your criteria, and fill out an application. As you compare the loan offers, there are a few things to keep in mind:
- APR: Look for lenders that will give you the lowest interest rates for the loan terms you want.
- Loan amount: Each lender has a minimum and maximum amount it’s willing to lend. Make sure the lenders you’re considering offer the amount you need.
- Repayment term: Personal loan terms can range from one year to several years. Consider how quickly you want to pay off your debt.
- Fees: Different lenders charge different fees. The best-case scenario is finding one that charges no fees at all. If that’s not possible, consider the APR and fees that each lender charges to determine which loan will be most affordable in the long run.
[ Read: What is a Good Credit Score? ]
Apply for the loan
Once you’re happy with the terms of the loan you’d like to apply for, it’s as simple as completing the information and pressing the submit key. Once you’ve submitted the application, this will show up as a hard inquiry on your credit report. If you’re still doing research, request a pre-qualification quote instead.
Types of bad credit loans
These loans come in handy when you’re in pinch a few days before payday. There are a few advantages to the loan, such as the high likelihood of approval and the fast turnaround. Some things to consider include the high APR and that the maximum loan amount might not be enough. These loans also need to be paid back pretty quickly, usually within a month or less.
[ Read: The Best Payday Loan Alternatives ]
Credit union loans
Credit unions require you to join as a member. The advantage is that credit unions are usually small enough to have a better understanding of the unique circumstances their members face. This makes it easier to apply for a loan, even if you have bad credit.
Secured personal loans
A personal loan can be secured or unsecured. You may have to use an asset as security, such as money in a fixed term account, a car or a property that has equity (also see HELOCs for bad credit). Banks prefer this to unsecured loans for bad credit, as the risk is somewhat mitigated. For consumers, this option might result in them losing their assets if they’re unable to repay their loan.
Benefits of bad credit loans
- You can build or improve your credit score: By diligently keeping to the repayment agreement, your credit score should improve over time. Be sure to make payments on time, for the right amount and in the right frequency. For those building up their credit score for the first time, a small loan with a manageable installment is a good place to start.
- You may improve your cash flow: The right bad credit loan might be a perfect substitute for smaller, higher-installment loans. By replacing the smaller ones with higher installments with a single installment, you can free up your cash flow. It’s important to check whether the new interest rate and repayment terms are worth it, as you may end up paying more in the long run.
- Fast access to cash: While it may take up to a week or two for approval with some lenders, for the most part, these loans are approved and disbursed within a few days.
Are bad credit personal loans worth it?
- They’re expensive: It’s important to run the numbers and decide whether the APR charged is within your budget. When you have bad credit, the interest rate you’ll qualify for will be significantly higher than if you had a good credit score. Depending on the lender, you could end up paying more than 20% interest. And for the lenders with the highest rates on bad credit loans, you could pay in excess of 100% interest on your loan.
- They are still loans: While it’s tempting to finally put a downpayment on that jet ski, it’s important to use debt wisely. It’s important to ask yourself whether a loan is really necessary. A personal loan might be wise if you’re consolidating high-interest debt and can get a better interest rate if you’re starting a business and expect to see a financial return. But loans are less advisable if you’re planning to use the money to fund a large purchase or event.
- You might not be eligible: Lenders have a number of criteria that you need to satisfy before your loan is approved. Each lender will require a minimum credit score. Even lenders that offer personal loans to borrowers with bad credit will have a minimum score they’re willing to accept. You’ll also have to prove that you have stable and sufficient income to pay back the loan. Finally, lenders consider how much debt you already have and prefer not to lend to people with a high debt-to-income ratio.
- You may end up paying fees. Depending on your lender, you could end up with some substantial fees. Many lenders charge an origination fee when they write your loan. You can also expect to pay late fees for any monthly bills not paid by the due date. Finally, some lenders charge a prepayment penalty if you pay your loan off early. Some lenders don’t have any fees, but are typically the lenders with higher credit score requirements.
- You could hurt your credit even more. If you’re struggling with bad credit, chances are that you’ve already been in a situation where you couldn’t make your monthly payments. If you’re considering a personal loan, make absolutely certain you’ll be able to make your payments every month. Otherwise, you risk damaging your credit even more, which could make getting credit nearly impossible in the future.
- There are alternatives available. Depending on what you need the money for, a personal loan may not be your only option. First, consider the interest rate you’re eligible for. While credit card rates are usually quite high, some personal loan rates are even higher. You may be better off using a credit card if the rate is better. You also might consider a secured loan, meaning you put up collateral that the lender can seize if you fail to make your payments. This option sounds risky, but secured loans generally have lower interest rates because the lender is taking on less risk.
What are the interest and fees on personal loans?
Anytime you borrow money, you can expect to pay interest on your loan. Personal loans tend to have higher interest rates than other loans because they aren’t secured. In other words, there’s no collateral the lender can seize if you don’t make your payments. It’s a riskier move for the lender, and it passes that risk along to the borrower in the form of higher rates.
And unfortunately for borrowers with bad credit, the best personal loan rates are reserved for people with excellent credit. If you have a low credit score, you’ll end up with a higher interest rate. The rates for some bad credit personal loan providers range from as low as 5.99% to as high as 299%.
In addition to the interest, you also may pay fees on your loan. Common fees on personal loans include:
- Origination fees: The fee you pay to the lender for writing the loan
- Late fees: The fee you pay anytime you don’t make your payment by the due date
- Prepayment penalties: The fee you pay if you pay off your loan early
A handful of personal loan lenders don’t charge any fees at all, even late fees. But these lenders tend to have higher lending requirements, meaning someone with bad credit may not be able to get a loan from them.
How to use a bad credit loan to improve your credit score
Whether you’re building up your credit score for the first time or rebuilding your score after a tumultuous financial period, you can get a bad credit loan as a starting block to get that score up. For this to work, however, it needs to be managed right.
[ Read: How to Raise Your Credit Score ]
Start off by applying for an amount that’s low enough to manage, even in times where your income takes a knock. This ensures that even in tough months you will be able to honor your commitments.
Opt for a term that’s not too long. Some offer loan terms as short as three months or as long as 72 months. It takes at least six months to see decent movement on a credit score, which means that the term should be long enough to build a decent repayment history.
Last editorial update – 12/17/2020, updated bad credit personal loans buying guide and editorial advice.