Qualifying for a loan can be difficult, especially if you’ve got bad credit or a short credit history. Thankfully, it’s still possible to secure a personal loan to help you accomplish your financial goals — though it may be more challenging, and you may not get the best rates or terms available.
Some lenders specialize in helping borrowers with fair or poor credit secure bad credit loans. Certain lenders also allow you to add a cosigner to your application, which may improve your chances of qualifying for a lower rate. Just keep in mind that even though you might get a better rate with a cosigner, they’re responsible for repaying the loan if you default.
- What is a bad credit loan?
- Types of bad credit loans
- Where can you get a bad credit loan?
- How to get a bad credit personal loan
- How to raise your credit score
- Watch out for predatory loan scams
What is a bad credit loan?
A bad credit loan is one that lenders make available to borrowers with less-than-ideal credit scores and histories. FICO credit scores range from 300 to 850, with the following classifications:
Any financial institution can offer loans specifically tailored to borrowers with bad credit, though there’s usually a downside. While a bad credit loan may have more flexible eligibility requirements, you’ll likely pay higher interest rates and may be limited to smaller loan amounts.
These requirements are generally put in place to protect the lender. Because borrowers with bad credit scores are considered risky borrowers, lenders want to safeguard themselves as much as possible.
Types of bad credit loans
There are various types of bad credit loans, including:
- Secured personal loans: Secured personal loans require you to use collateral, such as a car. While secured loans are easier to qualify for than unsecured loans, a lender can seize your collateral if you fail to repay your loan. With a personal loan, you borrow a lump sum of money and repay it in monthly installments with interest.
- Cosigned loan: When you add a cosigner to your loan application, that individual agrees to take responsibility for the loan if you can’t repay it. While you may be able to qualify for a better interest rate with a cosigner, you could damage your relationship with your cosigner — and both of your credit scores — if you default on the loan.
- Payday loan: A payday loan is a small short-term loan — usually $500 or less — designed to be repaid on your next payday. You typically must postdate a check for the loan amount and any fees, or allow the lender to debit the money from your bank account. If you fail to repay the loan when it’s due, the payday lender can withdraw that money or cash your check. These loans can be attractive since many lenders don’t require a credit check, but they have sky-high annual percentage rates (interest rates plus fees), or APRs, sometimes nearly 400%.
Where can you get a bad credit loan?
Bad credit loans are legitimate loans that you can get from reputable financial institutions or online lenders. You have multiple options for sourcing a bad credit loan, including:
- Banks: Traditional banks can offer bad credit loans to virtually any customer, though their eligibility requirements may vary depending on the loan amount and your credit history. If you have a good relationship with your bank, you may want to consider this option first.
- Credit unions: Credit unions are not-for-profit financial institutions, so their profits often translate to savings on loan rates for their members. You may be able to apply for a bad credit loan from a credit union even if you’re not a member, but you generally have to become a member of the credit union to accept the loan.
- Online lenders: These lenders offer convenience, since you don’t need to apply in person. You also have an array of lenders to choose from, so it’s important to compare rates and terms for multiple lenders before deciding on one. You can typically prequalify for a loan with an online lender without affecting your credit.
It’s a good idea to compare both online and traditional lenders to find the best bad credit loan for your unique financial situation.
How to get a bad credit personal loan
Each lender has its own application process, but you’ll likely need to follow these steps to receive a bad credit personal loan:
- Compare lenders. It’s important to compare at least 3 lenders to find the one that’s right for you. Interest rates and terms can vary widely between lenders.
- Prepare your documentation. You typically need to provide proof of identity, income, and residency when you apply. You may need to supply a copy of your most recent pay stub or tax return, as well as a copy of your driver’s license or other form of ID. If you’re applying with a cosigner, they’ll likely need to provide the same information.
- Complete the application. Once you have your documents ready, complete and submit your application. Most lenders will run a hard credit check when you apply, which could temporarily drop your credit score by up to five points. This inquiry will remain on your credit reports for up to two years, but your credit score may only be affected for a few months to a year.
- Wait for approval. Loans may be approved as soon as the same business day, but funding times vary by lender. Be sure to factor in this timing when you choose a lender.
- Receive your funds. If the lender approves your application, you’ll generally receive the funds via a direct deposit in your account.
How to raise your credit score
It’s important to keep in mind that you can improve your bad credit score. Doing so will help you qualify for more financial products in the future, and with better terms. Here are a few ways that you can raise your credit score:
- Pay bills on time. Paying bills late negatively impacts your credit score. Before a bill is due, reach out to the company and explain your situation if you don’t think you can make the payment on time.
- Pay down existing debt. Lenders may be wary of loaning money to borrowers with a lot of debt. Paying down what you owe can improve your credit score and show lenders that you’re not taking on more debt than you can handle.
- Review your credit reports and dispute errors. Sometimes, a mistake on your credit report can significantly lower your score. Review your credit reports from all three major credit bureaus — Equifax, Experian, and TransUnion — and dispute errors with the appropriate bureau. You can get a free weekly copy of your credit report from each of the bureaus through the end of 2023 with AnnualCreditReport.com.
Your credit score gives a lender an indication of how likely you are to repay your loan on time. When you have a high credit score, lenders generally assume you’re less likely to default on the loan. Most will reward this lack of risk with a lower interest rate and better terms compared to those offered to borrowers with lower scores.
If you can wait to borrow money, it may be a good strategy to work on improving your credit score before applying for a loan. Even a small increase in your score can transition your credit from poor to fair, which may help you qualify for better rates.
Watch out for predatory loan scams
Predatory lending specifically targets people with bad credit. These loans may seem like a viable way to cover your expenses, but many predatory loans can actually trap you in a cycle of debt.
Some predatory scammers will promise you a loan no matter your credit score, as long as you pay an initial fee. Known as advance-fee loan scams, these bad actors may charge you an upfront fee for processing, insurance, or an application — then disappear. Remember, no lender can promise a loan without first considering your loan application.
Other predatory loans may be legitimate loans, but their astronomical interest rates, fees, and inflexible terms are more harmful than helpful. Some of these loans include payday loans and car title loans (which require you to use your vehicle title as collateral).
For example, payday loan lenders may charge between $10 and $30 per $100 borrowed in a two-week term, according to the Federal Trade Commission. If you pay $15 per every $100 borrowed, that translates to a 391% APR, compared to the average personal loan APR of 11.48%, as reported by the Federal Reserve.