Even if you have bad credit, there may be ways to get a loan. It can seem very difficult to get the loan on decent terms you need when you have a bad credit history. It can feel like the whole world is working against you. Fortunately, all hope is not lost. There may be a way to borrow money even if you have bad credit.
What Is a Bad Credit Personal Loan?
When you apply for a loan, lenders check your credit score and credit history to determine how much they are at risk of lending your money. Bad credit is when you have a low credit score that can be caused by things like short credit history, late payments, or exhausted credit cards.
If you have bad credit and are in need of a loan, you may need to narrow your search to lenders offering bad credit loans. These loans are either secured (backed by collateral such as a house or a car) or unsecured. Interest rates, fees, and terms on these types of loans vary depending on the lender.
Various banks, credit unions, and online lenders offer loans to people with poor creditworthiness, but the “creditworthy borrower” threshold varies by institution. Some lenders have stricter requirements than others, which is why it is important to look for the best option.
Even with a bad credit rating, it is possible to take out a loan. While your credit score is holding you back from getting a good APR, you can still find interest rates that are much lower than options like credit cards or payday loans. Our recommendations for the best bad credit personal loans have flexible eligibility requirements and relatively low-interest rates for the credit band.
What is considered a bad credit score?
There are a few credits rating models available that you can use to check your credit score, but FICO’s credit rating system is one of the most popular. FICO scores range from 300 to 850, with scores on the lower end considered poor or fair.
According to FICO, bad credit scores are in the following areas:
- Fair credit: 580 to 669.
- Bad credit: 300 to 579.
A bad or fair credit score can affect your ability to be approved for a loan and can even affect your ability to rent an apartment or buy a house. If you are approved for a bad credit loan, you will likely be charged the highest interest rates and higher fees.
However, there are long-term habits you can develop to improve your credit score, such as paying your bills in full each month and checking your credit report regularly to spot any mistakes.
What makes up a bad credit score?
FICO calculates your credit score using five pieces of information:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
If your finances are insufficient in one or more of these areas, your score will go down. For example, a history of late payments will have a huge impact on your score because the payment history is the main contributor to your score. Things like bankruptcies, foreclosures, and high debt relative to your income can also lead to poor credit ratings.
How Does Bad Credit Affect Your Ability to Get a Loan?
With credit scores of 300 to 850, a score less than 670 could be considered a poor credit score by lenders. Bad credit can limit your options and lead to more expensive loan offers.
People with poor credit ratings tend to have negative marks on their credit reports, such as late payments or overdue accounts or collections. The resulting low credit rating tells a lender that the person is more likely to miss out on a loan payment in the future, which could cost the lender money.
Some lenders choose to limit their risk by only working with top-notch borrowers (with good credit ratings). Others see it as a business opportunity and focus on providing loans to sub-prime (bad credit) borrowers. There are also lenders who offer full credit to borrowers.
In general, lenders offering loans to borrowers with poor credit ratings can offset their risk by charging a higher initial fee and interest rate, resulting in a higher annual percentage rate (APR).
For example, say you want to borrow $10,000 and repay the loan over three years.
- If you have bad credit, you might receive a loan offer with a 5% origination fee and 29% interest rate—adding up to a 32.8% APR. You’d wind up paying about $419 each month and $5,086 in interest by the time the loan is paid off.
- If you have good credit, you might get a loan offer with a 1% origination fee and 10% interest rate a 10.69% APR. You’ll pay about $323 each month and $1,616 in total interest.
The APR on a loan takes into account the interest rate, fees, and repayment time. For this reason, comparing the APR of loan offers can help you determine which loan is the cheapest overall. Lenders often advertise their loans with an APR, and the rates you offer may vary based on your credit rating, loan amounts, and repayment terms.
How To Choose the Best Bad Credit Loan Company?
There’s no single best loan company for everyone. The best bad credit loan company for you depends on a few factors:
- Eligibility requirements. Many lenders will list eligibility requirements on their websites, including minimum credit scores, minimum income levels and maximum debt-to-income ratios.
- Interest rates and fees. Lenders use different criteria to calculate your interest rate. Get quotes from a few lenders and compare interest rates, origination fees and prepayment penalties to determine which will have the cheapest loan interest for you.
- Repayment terms. Personal loan lenders may offer repayment terms of anywhere from one year to 12. A shorter repayment period means that you’ll be out of debt sooner and will pay less overall in interest. A longer repayment period, on the other hand, will reduce your monthly bill.
- Type of lender. You can find personal loans from banks, credit unions and online lenders. Online lenders often have the lowest rates, but you won’t have the in-person service of a bank. Additionally, a local credit union that you already do business with may be more willing to extend you a bad credit loan based on your existing relationship.
5 Steps to Apply for A Bad Credit Loan
- Check your credit. Lenders typically have a minimum credit score requirement, and an applicant with a lower score than the minimum could be rejected. Many financial companies, give access to free credit scores and detailed look at your credit behavior over the years. You may find errors on your credit report that once fixed will boost your credit.
- Compare lenders. No two lenders have the same borrower requirements or rate ranges, so it pays to compare multiple options. The best bad credit lenders offer a rate you can afford and other helpful features like credit-building tools, fast funding or a mobile app to manage loan payments.
- Pre-qualify. Pre-qualification tells you what rate, loan amount and repayment terms to expect, and it doesn’t affect your credit score. It’s especially useful if you’re trying to determine whether you qualify for a loan and want to compare loan offers. Most online lenders and some banks offer this feature.
- Add to your application. Co-signed and secured loans can help you qualify or get a lower rate on a personal loan. With a co-signer, another person’s credit and income information are added to the application, and that person agrees to pay the loan if the borrower can’t. Secured loans let you offer up collateral — typically a car or an investment account — that a lender can take if the loan isn’t repaid.
- Apply. It’s helpful to gather the documents you need to apply for a loan beforehand, to speed up the process. These can include W-2s, pay stubs, financial statements and your Social Security number. Some lenders will give you a decision the same day or the next after applying, but most will decide within a few days.
Where To Get a Loan with Bad Credit
Credit unions. You have to be a member of a credit union to get credit, but they are one of the best places to go when you have a poor credit history.
Credit unions take into account a loan applicant’s history as a member in making their decision, which means that a good relationship with the credit union could help with approval.
You may also get a lower interest rate from a federally chartered credit union, as the APR are capped at 18%. Other lenders’ interest rates can go up to 36%.
Online lender. Some online lenders such as Avant and Universal Credit lend loans to borrowers with poor credit ratings. Online lenders usually offer user-friendly features such as quick financing and advice on building your credit.
It is best to compare online loans with each other and with other offers to find the cheapest interest rate.
Tip: Some lenders with poor creditworthiness add a processing fee, which is typically 1% to 10% of the loan amount. Most lenders will cut the loan off before depositing the funds into an account, which means you will end up with less money than you expected. If the fee is included, then before signing a loan agreement, you should be clear about how this will affect the loan amount.
Avoid no-credit-check loans
It might seem appealing to borrow from a lender that won’t even look at your credit score, but these lenders can be just as predatory as payday loans.
A lender that doesn’t review information like your credit score isn’t thoroughly assessing your ability to repay. Some no-credit-check lenders trap borrowers in a cycle of debt by lending them money with high rates and unaffordable repayments, causing them to borrow again when the payment is due.
How To Spot Bad Credit Loan Scams?
While shopping for a personal loan, look out for red flags that may be a sign you’re walking into a scam:
- Guarantees without approval: Reputable lenders generally want to see your credit report, income and other information before extending an offer. If you come across a lender that isn’t interested in your payment history, you might be getting lured into a bad situation.
- No registration in your state: The Federal Trade Commission requires that lenders be registered in the state where they do business. Research whether the business is licensed in your state.
- Poor advertising methods: Phone calls and door-to-door solicitation are not considered legitimate advertising practices for trustworthy lenders. Similarly, loan offers that pressure you into taking action immediately are designed to get you to accept without due consideration.
- Prepayment: While application, origination or appraisal fees are common loan charges, these charges are often deducted from the total amount of your loan. If a lender requires you to provide cash or a prepaid debit card upfront, it’s not legitimate.
- Unsecured website: A lender’s site should be secure, meaning the website address should begin with “https” and feature a padlock symbol on any page where you’re asked for personal information.
- No physical address: A reputable lender should have a physical address listed on its website.
Getting the money, you need when you have poor credit may seem difficult, but it is not impossible.
You should familiarize yourself with your credit scores and credit reports, and work to improve both of them to the best of your ability, before applying for a loan. When you are ready to apply, make sure that you shop around to find the best possible loan for your situation. Finally, when all else fails, don’t forget about nontraditional loan options, such as credit card loans. Loans from friends and family.
Now that you have learned the tips for getting a bad credit loan, you can start working towards the loan you need and managing debt responsibly so you can improve your credit score.