How To Get A Loan With Bad Credit
Getting a loan when you have bad credit can feel like an impossible task, especially if you've been turned away by several lenders. However, there are ways to get a loan with bad credit, including working with lenders that specialize in loans for borrowers with less than perfect credit scores.
What Are Bad Credit Loans?
A bad credit loan is just another way of saying a loan for borrowers with bad credit. Typically, these are loans with subprime interest rates, which tend to be above 20 percent.
Depending on why you're borrowing money, you can get a bad credit loan with or without collateral. For example, if you're purchasing a car, you can get a bad credit loan with the car serving as collateral, which may help you negotiate a lower interest rate.
With most bad credit loans, you'll receive a lump sum of money up front and then pay it back in monthly installments. You can get a bad credit loan from a bank or credit union, and there are also a number of online lenders that work with people with bad credit.
Some lenders that offer bad credit loans won't check your credit score, while others consider other factors in addition to your score when making a lending decision. Either way, you should expect to pay a higher interest rate when you borrow from a lender that offers bad credit loans.
What Is Considered a Bad Credit Score?
There are several kinds of credit scoring models, but the FICO score is by far the most popular. It's a three-digit number ranging from 300 to 850.
Generally, a score between 580 and 669 is considered "fair." With a score in this range you're considered a medium to high risk by lenders and might have trouble qualifying for a loan.
A FICO score that falls between 300 and 579 is considered "poor." With a score in this range, you'll pay the highest interest rates and might have a hard time getting approved for a loan, especially if you try to go through a traditional bank.
Does Bad Credit Affect Borrowing?
Bad credit can impact your ability to borrow money in a variety of ways. Besides making it harder to borrow in the first place, a low credit score usually means less favorable terms when you do get approved.
Lenders assess every borrower based on how much risk they pose. In other words, banks try to estimate the likelihood of a borrower defaulting on a loan.
Someone with good credit and a history of paying their bills on time is less likely to default, making them a low risk. By contrast, a borrower with bad credit might stick to old habits, which might include paying late or filing bankruptcy.
This is why lenders often turn away people with bad credit. Or, if they offer them a loan, the interest rates are high compared to someone with a good credit score.
5 Types of Bad Credit Loans
Most bad credit loans are just a variation of a personal loan, which is a type of installment loan. However, there are a few types of short-term loans that fall under the general heading of a "bad credit loan" as they're usually one of the limited options available to people with very poor credit scores.
1. Debt consolidation loans
As the name suggests, a debt consolidation loan is a lump sum of money you use to pay off all your debts. This can be ideal when you want to pay off credit cards with high interest rates.
2. Personal loans
The term "personal loan" is something of a catchall phrase for an unsecured loan you can use for anything. For example, you might need cash for a home renovation or to pay for a wedding.
Generally, people take out a personal loan as an installment loan, which means they pay back the money in monthly installments over a set period of time. If you have bad credit, you may have a difficult time qualifying for a personal loan.
3. Payday loans
Payday loans are a well-known and controversial type of bad credit loan. These loans, which are meant to help you get from payday to payday, are notorious for their high interest rates, which can trap people in a cycle of debt.
Most payday loans have short terms, as you're supposed to pay off the loan as soon as you get paid. However, because the interest rates are sometimes in the triple digits, many people are forced to borrow more money, putting them on a debt hamster wheel.
4. Cash advances
Cash advances aren't really a loan in the usual sense, but they're worth mentioning because many people use them as an alternative to a bad credit loan.
With a cash advance, you get money up front from your credit card and then pay it back over time. Instead of using your card to buy something, you're tapping your available credit for a lump sum of money.
5. Title loans
Like payday loans, title loans are mired in controversy because many title lenders take advantage of vulnerable people. When you take out a title loan, you put your car up as collateral for the loan, pledging your car's title to the lender.
If you default on the loan, the lender can take possession of your car and sell it to recoup the loan balance. As with payday loans, title loans generally come with high interest rates, which can make it hard to pay them off.
Pros and Cons of Bad Credit Loans
Bad credit loans don't get much praise, but they aren't bad. Despite several drawbacks, there are some benefits associated with bad credit loans.
Emergency funds - If you get into an emergency situation like a blown car engine or a flooded basement, a bad credit loan can provide a much-needed injection of fast cash when you need it.
Credit builder - A bad credit loan can help you rebuild your credit score. When you make your monthly payments on time, your lender reports your payment history to the credit bureaus, and this will boost your score over time.
Reasonable repayment terms - Payday loans and title loans may be easier to get, but a bad credit loan from a legitimate lender will typically come with a repayment term spanning anywhere between one and five years. This is much more reasonable than the average payday loan, which has a 400% interest rate and a two-week repayment period.
High interest rates - Having a bad credit score makes you a risk to lenders. To mitigate this risk, they charge a high interest rate, which makes most bad credit loans expensive.
Fees - Lenders sometimes reduce their risk further by charging a whole menu of fees. It depends on the loan, but you might end up paying a loan origination fee, late payment fees, returned payment fees, processing fees, and prepayment fees.
Collateral requirement - Depending on your creditworthiness, your lender may require you to pledge collateral before they'll loan you money. They'll usually ask for a significant asset, such as your car or house.
Autopay - Some lenders that offer bad credit loans require borrowers to enroll in autopay, which means your monthly payment is automatically deducted from your account.
How to Get a Loan with Bad Credit (5 Tips)
Just because you have bad credit doesn't mean you're out of luck when it comes to loans. Here are a few strategies for bettering your chances of getting that all-important approval.
1. Review your credit report and check your score
It's tough to know what you're up against when it comes to your credit score if you don't know your score in the first place. Likewise, if you have no idea what's in your credit report, you'll never know why lenders keep rejecting your loan applications.
You can also get access to your credit score without paying anything. To get your free credit score, just sign up for the Discover Credit Scorecard. You don't need a Discover credit card to sign up, and the service is totally free.
2. Work on improving your credit
It takes time to improve your credit, but there are some things you can do right away to start raising your score. There are five factors that affect your credit score, and it helps to pay attention to each one as you rebuild your creditworthiness.
Payment history - This accounts for 35 percent of your credit score, so it's the most important thing to pay attention to. Do whatever you can to pay your bills on time, as even a couple late payments can really hurt your score.
Credit utilization - Your credit utilization is the ratio of how much credit you're using compared to how much available credit you have. It's best to keep your credit utilization below 30 percent.
Credit history - Credit history refers to how long you've been using credit. You can't do much to improve this, but make sure you avoid closing any old accounts unless you absolutely have to.
Credit mix- Your credit mix refers to the various types of accounts you have. It's best to have a variety rather than one or two types of credit, but you shouldn't run out and open a bunch of new accounts just to enhance your credit mix.
New credit - New credit is how many new accounts appear on your credit report. Having too many new accounts can hurt your score.
3. Compare lenders
Don't be afraid to shop around for the best deal on a bad credit loan. While you might be tempted to accept the first offer you receive, it's generally best to compare rates and terms across several lenders before you commit.
Fortunately, the internet makes it easy to comparison shop for bad credit loans. You can even use a loan marketplace like Lending Tree or Bad Credit Loans to gather offers from lenders within an entire network, then choose the one that best fits your budget.
4. Consider a cosigner
If you've struggled to qualify for a loan on your own, you might want to consider adding a cosigner. This can help lower your risk in the eyes of lenders, as they'll look at your cosigner's creditworthiness in addition to yours.
However, the cosigner is equally responsible for the loan balance if you default, so it's important to make sure you can actually afford the loan payments.
5. Know which bad credit loans to avoid
Not all credit loans are the same. While some can give you quick access to cash, others charge such high interest rates they end up sinking you deeper into debt.
For example, payday loans and title loans are best avoided. If you think you're out of options and you're tempted to take out a payday or title loan, it's best to consider an alternative, such as borrowing from a friend or applying for a credit card that allows a cash advance.
Best Companies for Bad Credit Loans
The following are some of the best companies for bad credit loans. These are all lenders worth checking out if you have less than perfect credit and need to borrow money.
Bad Credit Loans is a loan marketplace rather than a direct lender, so it doesn't actually service loans or lend money. However, it has a network of banks and financial institutions that specialize in working with those with poor credit scores.
Interest rates range from 5.99% to 35.99% and you can expect to pay more if your credit score is truly low. You can borrow anywhere from $500 to $10,000, and repayment periods run from three years to 36 months.
There is no fee to apply, and you don't have to pay anything to receive loan offers. However, you'll get offers from all kinds of different lenders with various terms and conditions, so it's important to read the fine print on each one.
Upstart's interest rates range from 4.66% to 35.99% and you can borrow anywhere between $1,000 and $50,000 depending on your creditworthiness. Upstart looks at your credit score, but it also factors in your employment history and education when making a decision about your application.
Most borrowers can get their money as soon as the next day. On the downside, Upstart charges a loan origination fee that can run as high as 8% of the loan amount.
You can get both secured and unsecured loans through OneMain Financial, which offers loans starting at $1,500 and going all the way up to $20,000. Interest rates range from 18% to 35.99%, and you can choose a repayment term of 24 months, 36 months, 48 months, or 60 months.
Unlike a lot of other lenders that offer bad credit loans, OneMain Financial has around 1,500 brick and mortar locations, so you can bank in person if you want to.
One drawback is that OneMain charges an origination fee that varies by the borrower's home state. Depending on where you live, you could pay anywhere between $25 and $400, or you might be required to pay a percentage of the amount you're borrowing.
At Avant, you can borrow any amount between $2,000 and $35,000, with interest rates starting at 9.95% and going up to 35.99% depending on your credit score. Repayment terms are between 24 and 60 months.
Avant typically makes loan funds available the next day, but it also charges an administration fee that can run as high as 4.75 percent. It also charges late fees and insufficient funds fees.
LendingPoint is available everywhere but West Virginia. It offers an easy online application, and many borrowers can get their funds as soon as the next day following approval.
You can borrow anywhere from $2,000 to $25,000, and interest rates go from 9.99% to 35.99%. Repayment periods range from 24 to 48 months.
A possible drawback to watch out for is the origination fee, which can go as high as 6 percent for borrowers in some states. LendingPoint also requires borrowers to make at least $35,000 per year to qualify.
At $1,000, Upgrade's lending threshold is lower than many of its competitors. Borrowers can apply for up to $35,000, and interest rates range from 7.99% to 35.97%.
Upgrade lets you use your personal loan for whatever you wish, but you might have to pay a loan origination amount ranging between 2.9 percent and 8 percent. Repayment periods are either 36 months or 60 months.
Keep an Eye Out for Bad Credit Loan Scams
Unfortunately, there are unscrupulous people out there looking to take advantage of those with bad credit. If you're in the market for a bad credit loan, it's important to recognize red flags when you see them.
The lender doesn't ask about your credit background - Some bad credit lenders won't run your credit, but they'll still base their lending decision on other factors, such as your income, job history, or even how long you've lived at your current residence. Be wary of a lender that doesn't ask any questions about your finances.
The lender can't do business in your state - Federal law requires financial institutions to register in each state where they want to do business. A reputable lender will tell you right away if they can't work with you, and most of them list the states where they operate directly on their website.
The lender asks for a prepaid debit card - One common scam involves fake lenders asking borrowers to send a prepaid debit card to cover fees. In reality, there is no loan and the whole deal is just a scam to get the cash on the card.Some lenders require you to pay fees, such as closing costs, but they deduct the fees from your loan amount when they disburse your funds. You should never have to pay anything up front.
The lender calls you or knocks on your door - Legitimate lenders don't need to go door-to-door to solicit sales, and they don't cold call people over the phone. In fact, federal law prohibits this, so be wary of any company that seeks you out instead of the other way around.
The lender's contact information is vague or nonexistent - The lender should clearly state its address, phone number, and email on its website. While a post office box is okay, also look around for information about where the lender is headquartered so you can be certain it's a real company.
The lender pressures you - Steer clear of any lender that claims its loan offer is a limited time deal or set to expire within a short period of time. While many lenders put an expiration date on their offers, they typically give you at least a week and usually longer to make a decision.
The lender says approval is guaranteed - No lender can guarantee that every applicant will get approved. Reputable lenders look at your financial background before approving an applicant.
The lender is vague about terms or fees - If you look at the websites of highly regarded lenders, you'll notice they post their fees and conditions on their websites for any and all to see. In other words, they don't hide their terms or conditions.Legitimate lenders may charge fees, including a loan application fee or origination fee, but they'll tell you up front how much you need to pay and how it gets deducted from your loan.
How to Improve Your Credit Score for Loan Borrowing
If you've been turned down for a loan, there are things you can do to improve your credit score and increase your chances of getting approved in the future. Raising your credit score will also help you qualify for better terms and a lower interest rate.
Review your credit report and dispute any inaccuracies
According to a study from the Federal Trade Commission (FTC), 1 in 5 Americans has an error on their credit report and 5 percent have a mistake that could lead to higher interest rates and less favorable terms on loans.
If you've been turned down for a loan, it might be due to a mistake on your report. This is why you should review your credit reports and dispute any errors or inaccuracies.
Pay your bills on time
Your payment history is the most important factor in determining your credit score, and even a couple late payments can hurt your score. When lenders get your loan application, they look at whether you have a history of paying on time, as your past is usually a decent indicator of how you'll behave in the future.
If you're running late on some of your bills, get them current as soon as you can. Late payments stay on your credit report for seven years, so also review your credit report to see if any past late payments are due to drop off.
Pay down debt
Your credit utilization rate makes up 30 percent of your credit score. Ideally, you should keep this figure below 30 percent, which means only using 30 percent or less of your available credit.
For example, if you have a credit card with a $10,000 limit and you owe $2,000 on it, your credit utilization rate is 20 percent. You can improve your credit utilization by paying off debt and freeing up additional credit.
When you have a high credit utilization rate, it can be a red flag to lenders. They might assume you're living outside your means, which is forcing you to charge expenses to your credit cards.
Avoid taking on new credit
If you're trying to qualify for a loan, it's best to avoid taking on any new credit accounts in the near future. Opening a bunch of new accounts can signal lenders that you're desperate for cash, and they might decline your loan application as a result.
Likewise, be careful about submitting too many loan applications. This can cause hard inquiries to accumulate on your credit report, which can lower your score.
Don't close old credit accounts
Avoid closing old accounts if you can help it. When you close an old account, you deprive yourself of valuable credit history, which makes up 15 percent of your credit score.
On the other hand, if you have an old credit card with an annual fee, it's probably better to close it rather than continue paying.
Bad Credit Loan FAQs
The following are some of the most frequently asked questions and answers about bad credit loans.
Will I be able to get a loan with bad credit?
Depending on your creditworthiness, you may be able to get a loan with credit. If you're concerned about your credit score holding you back, look for lenders that consider additional factors, such as your income and employment history.
Which loan company is easiest for bad credit?
If your credit is truly poor, the easiest way to get credit is probably through a payday lender. However, this option is one best avoided, as payday loans are notorious for being riddled with sky-high interest rates and predatory fees.
Instead, consider shopping around and comparing your options among legitimate bad credit lenders. While you'll probably end up paying a higher interest rate, it won't be as high as a payday loan, and you can get a more reasonable repayment term.
Can you get a personal loan with a credit score of 500 or 550?
It may be challenging to find a lender willing to give you a personal loan if your credit score is between 500 and 550. In most cases, the lenders who offer loans to people in this score range charge very high interest rates as well as high fees.
If your score falls in this range, you might be better off asking someone with good credit to cosign for you. Just be certain you can afford the monthly payments, as the cosigner will be on the hook for the loan balance if you default.
Can you get a loan if you're unemployed, have no checking account, or with no credit check?
You can probably get a loan with one of these factors but you're unlikely to qualify if you have all three.
Different lenders consider various factors when making a lending decision. For example, some lenders require regular income but it doesn't necessarily have to come from employment.
Instead, you may be able to qualify as long as you receive regular income from Social Security, spousal support, or disability benefits.
Likewise, some lenders will work with you even if you don't have a checking account. On the other hand, many lenders that give loans to borrowers with bad credit make autopay mandatory, which requires a checking account.
You may also be able to find a lender that will consider factors besides your credit report, but be cautious, as some lending scams claim they'll approve you with no credit check. In most cases, lenders that don't run a credit check will want to see proof of income, a solid employment history, or other indicators of stable finances.
Do I need collateral to get a bad credit loan?
It depends on the lender, as each lender has its own criteria for approving a loan. While it's standard for personal loans to be unsecured, some lenders require borrowers with bad credit to provide collateral.
Bad credit can make it hard to qualify for a loan, but there are still plenty of options available for borrowers willing to shop around. As long as you're careful to avoid potential scams and you're okay with paying more in interest, you should have a decent chance of finding a loan that works with your budget.
About the Author
Mike is a recognized credit expert and founder of Credit Takeoff. His credit advice has been featured in CNBC, Investopedia, CreditCards.com, Bankrate, Huffpost, The Simple Dollar, Reader's Digest, LendingTree, and Quickbooks. Read more.