Personal loans can be a good way to pay for emergency expenses, finance a major purchase, or consolidate debt. While having a low credit score means you’ll have to pay higher interest rates, it’s still possible to get a personal loan with bad credit by taking some simple steps to improve your score and shopping around with multiple lenders.
Credit scores range from 300 to 850. Generally, anything below 670 is considered “poor”. If your credit score is low, it can make it difficult to get a traditional personal loan, but it doesn’t make it impossible.
How to Get a Loan with Bad Credit
Knowing what to expect when you apply for a personal loan can help you prepare for the process. If you’re in the market for a personal loan and you have imperfect credit, following these steps could improve your chances of approval.
- Check Your Credit Score and Credit Report Before applying for a personal loan, take a close look at your credit report and credit score.
Federal law gives you the right to get a free copy of your credit report from each of the major credit-reporting bureaus: Equifax, Experian, and TransUnion every 12 months. Go to annualcreditreport.com to request your free credit report. It won’t display your credit score, but you can see them for free or for a nominal fee on Equifax and Experian’s websites.
With your report in hand, you’ll know exactly what your credit score is, and you’ll be able to identify any negative marks on your record. If you find that errors or old debts are hurting your score, make sure you request corrections before applying for a personal loan.
- Compare Bad Credit Loans from Various Institutions and Prequalify Applying for a loan at a community bank or credit union with which you already have a relationship could be beneficial. If the bank knows you and your spending habits, it could offset your low credit score.
Similarly, online lenders are a good place to apply for bad credit loans. This is because some lenders use alternative criteria to evaluate your application beyond your credit score, such as your job and education history. This, in turn, could make it easier for you to qualify for an affordable loan, even with less-than-perfect credit.
When comparing options, use a loan calculator to ensure that you can afford the loan. This will help narrow down lenders who offer loans with terms and interest rates that suit your preference.
Once you have those numbers, prequalify with at least three lenders. Prequalifying lets you know if you’re eligible for a specific lender without damaging your credit.
It’s also important to assess any fees charged by the lender, such as origination fees and prepayment penalties. In some cases, if the fees charged by the lender are high then a lower interest rate loan may not be the best deal.
Finally, check if any lender offers secured loans. A secured loan is one that is backed by personal assets such as a house or car. Because secured loans use collateral to back up your loan, their rates are typically better than unsecured loans and they’re easier to qualify for but they also come with more risk. If you default on the remaining balance or fail to make payments on time over an extended period, the lender could seize your property to fulfill the outstanding balance.
3: Adding a Co-signer if Necessary
A co-signer – typically a creditworthy friend or family member – is someone who agrees to sign on the loan with you to help improve your approval odds or help you secure a lower rate. While they can help secure the loan, not every lender offers a co-signer option and bear in mind that if you can’t make payments, they are responsible for making them.
Taking out a loan with a co-signer can cause friction in personal relationships if you struggle to repay the loan, as missed payments will also negatively impact their credit. Before signing on the dotted line, make a plan with your co-signer and practice clear communication when making payments.
4. Gather Financial Documents
When you apply for a loan, the lender will request several financial documents to complete your application. To speed up the process, have the following documents on hand before applying:
- Personal contact information including Social Security number, full name, and address.
- Another form of personal identification issued by the government such as your driver’s license.
- Personal loan details such as why you need the loan, how much you need, and how long of a term you want.
- W-2 forms from the past two years.
- Your federal tax return from the past two years.
- Two most recent bank statements for all bank accounts.
- Recent pay stubs.
- Utility bill or mortgage statement (to verify your address).
Your lender may always request additional documents, so be prepared to provide any additional requests promptly.
5. Be Prepared for a Hard Credit Check
When you’re ready to formally apply for a personal loan, know that the lender will likely perform a hard credit check, also known as a hard pull. In the short term, a hard pull will lower your credit score. Too many hard credit checks in a short time can make it seem like you’re applying for loans that you can’t carry.
Be mindful of how many loans you apply for and be prepared to see a temporary dip in your credit score with each loan application. As soon as you start making payments on time on your loan, you should be able to recover your credit score within a few months.
What to Consider Before Taking Out a Loan with Bad Credit?
When evaluating various costs and risks associated with personal loans, there are some additional things to keep in mind for bad credit loans.
The Cost of Loans is Higher with Low Credit Scores
The unfortunate reality of applying for loans with less than ideal credit scores is that you’ll pay more than someone with a high credit score. Lenders look at your credit score to determine your creditworthiness and your likelihood of repaying the loan. That being said, low scores or weak credit history result in higher interest rates.
Predatory Lenders Target People with Low Credit Scores
People with poor credit scores can also be targets of aggressive direct mail campaigns that advertise personal loans with rates as low as 6% or 8%.
However, these campaigns often advertise an introductory or “teaser” rate that will increase after the limited-time offer ends. If you don’t have a plan for rapid repayment, rates could rise above 30%, which is potentially much higher than what you could qualify for with a reputable lender.
Add-on Costs Can Be Hidden in Fine Print
Since lenders often consider people with poor credit scores as high risk, ensure that you’re clear on how much you’ll pay to secure the loan. Read the loan contract and fully understand how your interest will be applied and what its structure will be; ensure that the rate being charged is annual, not monthly.