If your credit isn’t great, maybe you’ve considered getting a personal loan to consolidate your debt and get your financial house in order. In fact, this is one of the most common pieces of advice dished out to people looking to get out of debt and improve their credit.
There’s just one problem: To get a personal loan with decent terms, you usually need pretty great credit. So are there any personal loans for people with just fair credit?
Why Personal Loans for Fair Credit Can Be Hard to Find
You’ll be surprised to find out that even if you’ve qualified for a mortgage or a car loan, you might have trouble getting a personal loan. That’s because personal loans are unsecured debt.
When you buy a home or a car, the bank can always take back that collateral if you don’t make payments. However, if you don’t make payments on a personal loan, there’s nothing for the lender to repossess — so it’s inherently a riskier investment on their part.
Thus, your credit score will be the biggest deciding factor when it comes to whether or not you’re going to qualify for a personal loan. That means that if you want to take out a personal loan, the first thing you need to do is find out if you have good credit or not.
Step One: Fix What You Can
Before you go any further, pull your free credit report. Are there any items on your credit report that shouldn’t be there? If so, dispute them and if possible get them removed. That can make a substantial difference in your credit rating almost immediately.
What’s more, if you can reasonably get your debt utilization ratio under 30% — that’s the proportion of your available credit limit you’re currently using – that’s also going to cause your credit score to jump, and quickly.
Taking these steps will not only make it far more likely that you’ll get a personal loan — it also makes it more likely that you’ll get a lower interest rate.
Step Two: Shop Around
There’s no shortage of lenders in the marketplace today. However, you need to be careful because there are also a lot of less-than-reputable ones out there. Companies that don’t pull your credit report before giving you a loan are often little more than payday lenders. The APR on a payday loan can be steep to say the least — as much as 300% or more.
Look for lenders with good reputations and low interest rates. See what their underwriters require as a minimum credit score, then apply to three different lenders that are 20 to 30 points below your current score. That’ll give you a bit of wiggle room, as well as some options so you can compare the best terms.
Step Three: Evaluate Interest and Fees
When you have fair credit, if you get approved for a personal loan you’re going to pay more in interest and fees. In fact, your interest rate might be as high as 36% if you have fair credit — worse than even most credit cards. What’s more, there’s almost always a fee for early repayment, usually equivalent to what you would have paid in interest if you had paid the loan off according to the original terms.
Many online lenders are going to want you to set up automatic payments. If this is the case, make sure that you have money in your account, or you’ll be paying overdraft charges on top of whatever you’re paying for the loan.
The best place to start when looking for a personal loan is to talk to someone at your own bank or credit union. They already work with you, so your paperwork is already in order. Credit unions in particular are known for being more forgiving in terms of their lending policies. You can also try browsing our top picks for personal loans and bad credit loan options.
Remember that you have options other than personal loans. There are secured loans, which are easier to qualify for but require some form of collateral, and there are also zero-interest credit cards. Both are available for people with just fair credit, who have been used them time and again to pay down debt and get their finances back on track.