Having bad credit doesn’t mean you can’t get a personal loan. But it does mean that your choices will be more limited. Many lenders won’t approve loan applicants with bad credit at all, and if they do, your rate may be less than stellar.
Here’s everything you need to know about getting a personal loan with bad credit.
1. Find Out What’s Causing Your Bad Credit
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Many factors can contribute to a low credit score, such as late or missed payments, collections accounts, bankruptcies, or account charge-offs.
Payment history is the most critical piece of your credit score. In fact, this factor alone makes up 35% of your FICO credit score. Your payment history includes any record of payments that were made late or never made at all.
If you need to know how to get a personal loan with bad credit, you probably already know that you have bad credit. However, it’s best to dive a little deeper into your credit report. Try to understand what exactly is behind your poor credit score.
There might be an account or derogatory mark that you’re not aware of or don’t understand. Worse, there could be an error on your report (an account that doesn’t belong to you, an incorrect date, etc.).
To ensure that there aren’t any inaccuracies and get a better idea of how you appear as a loan candidate, carefully look over your credit report. Once you know what factors reduced your score, you will be better equipped to address issues and improve your credit.
You can request a full credit report from each of the three credit bureaus—Experian, Equifax, and TransUnion—once per year.
Will Credit Repair Improve Bad Credit?
Contrary to popular belief, credit repair services are unlikely to help you get a personal loan with bad credit.
These services can improve your score but don’t provide any additional benefits over steps you can easily take on your own. They simply file disputes for you if they identify inaccurate information and can’t do anything to remove legitimate accounts, which you’ll need to pay or settle.
2. Decide Whether to Move Forward With a Personal Loan
With a better understanding of your credit report in mind, you need to decide if you really want to move forward with applying for a personal loan. If it appears that you may receive a denial or unacceptable terms, it may be best to wait until you have a better chance of approval to avoid the additional inquiry on your credit report.
Common reasons for denials include:
- Too many recent credit inquiries (indicating you’re seeking large amounts of new credit)
- High balances on existing credit lines
- One or more of your loans isn’t in good standing
In general, try to wait at least 30 days to apply for a loan after opening a new line of credit and aim to utilize no more than 30% of your total credit capacity.
3. Improve Your Credit Score
If you decide to continue with the process, here’s how to get a personal loan with bad credit.
Start building up your credit as soon as possible. This depends on what’s bringing your score down.
For example, if you have any delinquent accounts, try to settle them. If you have late or missed payments, call the creditor, make a payment if necessary, and ask if they would be willing to remove the negative mark from your report. Often, if you don’t have a history of late payments, they would do so. If you have any maxed-out credit cards, pay off as much of the balance as you can. –
If your credit is poor because you don’t have enough credit history, you can build credit by getting a secured credit card, becoming an authorized user on someone else’s account, or requesting that utility bills be added to your report.
How much effort it will take to move your score from poor to good depends on how low your current score is. To give you a better idea of where you stand, the table below shows what credit ranges correspond with what ratings in both FICO and VantageScore 3.0 models.
|Very Poor / Poor
|300 – 499
|300 – 579
|Poor / Fair
|500 – 600
|580 – 669
|Fair / Good
|601 – 660
|670 – 739
|Good / Very Good
|661 – 780
|740 – 799
|781 – 850
|800 – 850
Can You Get a Loan With a 600 Credit Score—or lower?
Anything below a 600 credit score is considered poor but still possible to work with. However, because most lenders require a credit score of at least 660 for a standard loan, you will need to look specifically into “bad credit loans,” which often come with higher interest rates and fees.
4. Research Bad Credit Loans
When you’re looking for a bad credit loan, you’ll have plenty of options to choose from. But, unfortunately, many lenders try to take advantage of those with poor credit.
Don’t forget to be on the lookout for scams. Here are some signs that a lender is more than likely not reputable, and you should steer clear:
- Offers you a loan without looking into your credit history
- Makes a loan offer over the phone
- Asks for money before loan disbursement
All creditors are required to be registered with the Federal Trade Commission (FTC) for your state as well. Likewise, if a “lender” doesn’t have a customer service department, phone number, or website, they are probably not running a legitimate business.
Always confirm that a prospective lender is legitimate before giving out personal information, and ask multiple lenders for quotes.
Many institutions are willing to offer loans to borrowers in spite of poor credit. Rather than compiling all of your options yourself, try a marketplace like LendingTree. Their marketplace creates a list of loan providers for you. By submitting one application, which requires only a soft credit pull, you will receive at least five pre-qualification offers. You can apply with the best lender directly from the site.
This LendingTree review for bad credit goes into detail about how to use this service and why it’s great for comparing bad credit loans.
If you’re wondering how to get a personal loan with bad credit, you should already have an idea of how much you need to borrow. But if you don’t, now is the time to figure that out as well.
What Types of Loans Are Available for Borrowers With Bad Credit?
Both secured and unsecured personal loans are available to borrowers with bad credit. Secured loans require collateral, while unsecured loans do not. Either loan type can be fixed- or variable-rate.
The better your credit and income, the more choice you will have. Generally, secured personal loans offer lower interest rates. But whatever you borrow against can be seized if you fail to make repayments. Unsecured personal loans typically offer rates that range anywhere from 5% to 36%.
Debt consolidation loans, emergency loans, and personal loans used for large purchases are common amongst borrowers with bad credit.
5. Find a Cosigner
Consider getting a cosigner to apply with you. Getting a creditworthy individual to cosign on a personal loan with you will improve your chances of being accepted and get you a better interest rate.
Your cosigner should be a trustworthy individual with a higher income and credit score than you. However, keep in mind that not all personal loan lenders allow cosigners. Some only allow joint accounts or don’t allow multiple parties to be involved at all.
The most significant difference between a cosigner and a joint loan is that the other party can also access the loan with a joint account. In both cases, both parties will be held responsible for late payments or delinquencies.
Will Applying for a Loan Affect My Credit?
Applying for a personal loan affects your credit, but the negative effect is temporary and relatively minimal.
Applying for a loan requires a hard credit pull or inquiry. According to Consumer Education Specialist, Jennifer White, at Experian, you can expect your credit score to drop less than five points after a hard pull. You will slowly recover these points over the course of a year.
If you are able to get prequalified for a personal loan, you will be given rate quotes and tentative terms before submitting an official application. Prequalification only requires a soft pull, which doesn’t negatively impact your credit.
Get as many quotes as you can, but don’t actually apply for loans until you’ve chosen the best one.
The Bottom Line
Now that you know how to get a personal loan with bad credit, there’s nothing stopping you from borrowing the money you need. However, if getting a loan can wait, it’s best to work on improving your credit first. Doing so could lead to significant savings when it comes to your interest rate.