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How to Get a Loan if You Have Bad Credit

March 5, 2024

Don’t let a low credit score stop you from getting a personal loan. Personal loans can be lifelines for emergencies, help finance big purchases, or consolidate debt. But they’re not always easy to get if you have a bad credit score.

Credit scores span a range of 300 to 850, with scores below 670 typically categorized as “low.” While a low credit score might pose challenges in securing a conventional personal loan, it’s important to note that it doesn’t render loan approval impossible.

5 steps to get a personal loan with bad credit

1. Know your credit score

Lenders typically have a minimum credit score threshold, and if your score falls below it, your application can be denied. Many financial companies, including ChoiceCreditScore, provide access to your credit score and AnnualCreditReports.com offers a free detailed credit report. Take a look at your report, and if you find any errors, request corrections since fixing them can boost your credit.

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2. Find lenders specializing in bad credit loans

Not all lenders have the same requirements when it comes to personal loans. Research and identify lenders who specialize in working with borrowers with less than stellar credit. These lenders include:
– Online lenders
– Credit unions
– Peer-to-Peer lenders
– Family and friends
These tend to consider alternative criteria like employment stability, income, education, and banking history, as well as your credit score. 

3. Prequalify for loans and compare

No two lenders will offer the same rates so it pays to compare options. Before you apply for a loan, check if you prequalify. This will let you see the loan amount, rates, and repayment terms without hurting your credit score. When you do apply, the lender will do a hard credit check which temporarily lowers your credit score.

Prequalifying lets you see if you can get approved and compare loan rates and terms without hurting your credit. Then you apply for the best offer you got.

4. Consider collateral or a co-signer

Look into co-signed, joint, and secured loans. Lenders are more likely to approve co-signed or secured loans with better rates because they lessen the risk to the lender. If you don’t pay, your co-signer will have to pay the loan or the lender can seize your collateral. Lenders will review the co-signer’s financial details and/or the collateral value (home, vehicle, assets) for approval and rates.

5. Apply for small loans

Ask only for what you need and can afford to repay. If the lender thinks the amount you asked for will overextend your finances they are more likely to decline you. Lenders want to be repaid so they’ll only lend what they think you can handle.

Instead, ask for a smaller amount and be sure to add all your income. This includes nonemployment income like alimony, child support, retirement, or Social Security payments. Responsibly managing a small loan can build trust with lenders and lead to larger loan approvals in the future. 

Tips to Get Approved for a Personal Loan with Bad Credit

Securing a personal loan with bad credit can be challenging, but it’s not impossible. Here are some strategic tips to increase your chances of approval:

  1. Consider a Co-signer: Having a co-signer with a strong credit history can significantly improve your chances of getting approved. A co-signer agrees to take responsibility for the loan if you default, providing the lender with added security.
  2. Opt for a Secured Loan: Secured loans, which require collateral such as a car, savings account, or other valuable assets, are easier to obtain for individuals with bad credit. Collateral reduces the lender’s risk, making them more likely to approve your application.
  3. Research Lenders: Not all lenders have the same criteria for approving loans. Some specialize in working with individuals who have poor credit. Research and compare different lenders, including credit unions and online lenders, to find one that caters to your financial situation.
  4. Improve Your Debt-to-Income Ratio: Lenders assess your debt-to-income (DTI) ratio to determine your ability to repay the loan. Paying off some existing debts to lower your DTI ratio can make you a more attractive loan candidate.
  5. Include All Sources of Income: Most lenders let you put down alternative sources of income like government benefits, child support, and alimony.
  6. Provide Detailed Documentation: Prepare to provide comprehensive documentation that demonstrates your ability to repay the loan. This may include proof of income, employment history, and any other financial assets. Detailed documentation can reassure lenders of your financial stability.
  7. Seek Pre-Approval: Many lenders offer pre-approval processes that do not impact your credit score. Pre-approval gives you an idea of what loan terms you might qualify for without the risk of a hard credit inquiry.
  8. Be Realistic with Loan Amounts: Requesting a smaller loan amount can improve your approval odds. Lenders are more likely to approve smaller loans as they pose less risk.

By following these tips, you can improve your chances of securing a personal loan even with bad credit. While the process may require extra effort and diligence, obtaining a loan with favorable terms is achievable with the right approach.

Where to Get a Personal Loan with Bad Credit

Finding the right lender is crucial when you have bad credit. As you probably already know, traditional banks are usually not the most accommodating. Here are some options to consider:

Credit Unions: Credit unions often have more flexible lending criteria and lower interest rates compared to traditional banks. They are member-focused and may be more willing to work with individuals who have less-than-perfect credit.

Online Lenders: Many online lenders specialize in offering loans to people with bad credit. These lenders use alternative data and technology to assess creditworthiness, often providing quicker approval processes and competitive rates.

Peer-to-Peer Lending Platforms: Peer-to-peer (P2P) lending platforms connect borrowers directly with individual investors. These platforms often have more lenient credit requirements and can offer a variety of loan options tailored to different credit profiles.

Community Banks: Smaller, community-focused banks may offer more personalized services and be more willing to consider your overall financial situation rather than just your credit score.

Exploring these options can help you find a personal loan that meets your needs, even if your credit is less than stellar. Always compare terms and conditions to ensure you secure the best possible deal.

Bad Credit Loans to Avoid

When you have bad credit, it’s essential to be cautious and avoid predatory lending practices. Here are some types of loans to steer clear of:

Payday Loans: Payday loans are short-term, high-interest loans that are typically due on your next payday. While they offer quick cash, the annual percentage rate (APR) can be exorbitantly high, often exceeding 400%. This can lead to a cycle of debt that’s difficult to escape.

Title Loans: Title loans use your vehicle as collateral and offer a loan based on a percentage of your car’s value. If you fail to repay, you risk losing your vehicle. These loans also come with high interest rates and short repayment terms, making them a risky option.

No Credit Check Loans: Loans that advertise “no credit check” can be tempting, but they often come with extremely high interest rates and unfavorable terms. Lenders offering these loans may not adhere to responsible lending practices, putting you at greater financial risk.

Advance-Fee Loans: Be wary of lenders who ask for an upfront fee before providing the loan. This practice is often a scam, where the fee is collected, but the loan is never disbursed.

Pawn Shop Loans: Pawn shop loans require you to hand over a valuable item as collateral. If you cannot repay the loan plus interest, the pawn shop keeps your item. These loans often have high interest rates and fees.

Avoiding these high-risk loans can protect you from further financial hardship and help you focus on finding more sustainable borrowing solutions. Always read the fine print and seek advice from financial counselors if needed.

What to Consider Before Taking Out a Loan with Bad Credit

Taking out a loan with bad credit requires careful consideration to ensure it’s a beneficial decision. Here are key factors to evaluate:

– Interest Rates: Loans for individuals with bad credit often come with higher interest rates. Compare rates from multiple lenders to find the most competitive offer. Even a small difference in interest rates can significantly impact the total repayment amount.

– Fees and Penalties: Be aware of all fees associated with the loan, including origination fees, late payment penalties, and prepayment penalties. These additional costs can increase the overall cost of the loan.

– Loan Terms: Consider the loan term length. Shorter terms may result in higher monthly payments but less interest paid over the life of the loan. Conversely, longer terms have lower monthly payments but higher total interest costs.

– Monthly Payments: Ensure the monthly payments fit within your budget. Missing payments can further damage your credit score and lead to additional fees. Use a loan calculator to estimate your monthly payments based on the loan amount, interest rate, and term.

– Lender Reputation: Research the lender’s reputation. Look for reviews and ratings from other borrowers. Ensure the lender is reputable and has a history of fair lending practices.

– Purpose of the Loan: Clearly define the purpose of the loan and evaluate whether it’s a necessity. Avoid taking on additional debt for non-essential expenses, especially with high-interest rates.

– Improvement Plans: Have a plan for improving your credit score while repaying the loan. Making timely payments on your loan can positively impact your credit history over time.

By considering these factors, you can make an informed decision and choose a loan that aligns with your financial situation and goals.

Alternatives to a Loan With Bad Credit

If you have bad credit, exploring alternatives to traditional loans can help you secure the funds you need without the high costs and risks. Here are some viable options:

Family and Friends: Borrowing from family or friends can be a cost-effective alternative. Ensure that both parties clearly understand the terms to avoid potential conflicts.

Buy Now, Pay Later Apps: These apps let you make purchases and pay in installments. They can help alleviate financial burdens and free up money so you don’t have to take out a loan.

Community Assistance Programs: Various non-profit organizations and community groups offer financial assistance to individuals facing temporary hardships. These programs can provide grants or interest-free loans.

Credit Counseling Services: Credit counseling agencies can help you manage your debts and finances better, potentially offering debt management plans that consolidate your debts into a single monthly payment with lower interest rates.

Exploring these alternatives can provide financial relief and help you avoid the pitfalls of high-interest loans while working to improve your credit score.

Final Thoughts

Getting approved for a personal loan with bad credit can be tough, but it’s certainly doable with the right approach and mindset. While a low credit score might limit your options, it doesn’t completely shut the door on borrowing opportunities. By taking proactive steps to improve your credit score, such as correcting errors on your credit report, paying down existing debts, and making timely payments, you can enhance your creditworthiness over time.

Selecting the right lenders is crucial. Credit unions, online lenders, and peer-to-peer lending platforms often have more lenient criteria and better terms for individuals with bad credit. These institutions are more willing to consider your overall financial picture rather than just your credit score, offering you a fairer chance at securing a loan.

Don’t underestimate the value of personal connections. A co-signer with good credit can significantly boost your chances of approval. Additionally, borrowing from family or friends might provide you with more favorable terms and lower interest rates, although it’s essential to have a clear agreement to avoid misunderstandings.

Exploring alternatives to traditional loans, such as credit union loans, secured credit cards, and community assistance programs, can provide additional avenues for financial support. With persistence, careful planning, and leveraging available resources, you can navigate the challenges of obtaining a personal loan with bad credit and achieve your financial goals.

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About the author

Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.

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