Getting a personal loan with bad credit may require you to take extra steps to prove you can repay the loan, but it’s not impossible. Lenders consider a low credit score to be a sign that you’ve had problems managing your credit. For this reason, interest rates and fees on loans with bad credit can be higher, and the loan amount should be lower than a loan with fair or good credit.
If you have a low credit score, knowing what it takes to get approved and then comparing lenders is the best way to get a personal loan with a low credit score.
How to get a loan with bad credit
Most lenders consider a credit score below 580 to be a bad credit score. However, some lenders set the minimum for a bad credit score below 670, so be sure to check your lender’s requirements. Whether you’re consolidating high-interest credit cards or covering emergency expenses, knowing what you need to get a personal loan can help you prepare for the process.
1. Check your credit score and credit report
Your credit score is the most important factor in determining the personal loan interest rate you will be offered. Personal loan interest rates typically range from 1 to 36 percent. However, the lower your score, the more likely you are to be offered an interest rate of 30 percent or more.
If you haven’t checked your scores recently, contact your credit card company or bank. They may be able to check one or all three of your credit scores for free. If your score is lower than you’d expect, visit AnnualCreditReport.com to request a free credit report. By federal law, you are entitled to receive a free copy of your credit report each week from each of the major credit reporting agencies, including Equifax, Experian and TransUnion.
At least 30 days before applying for a personal loan, check your report for errors or past debt and dispute them to have them corrected. Credit reporting agencies respond to disputes within up to 30 days.
2. Consider your income and other liabilities
Lenders with bad credit pay special attention to whether you have a stable enough income to pay for a new personal loan. Lenders measure the percentage of your monthly income that goes towards paying off your debt. In lender lingo, this is called your debt-to-income ratio (DTI), and the maximum value for it varies from lender to lender.
Remember: If a lender advertises approval for DTI ratios up to 50 percent, read the fine print carefully. This limit may only apply to borrowers with higher credit scores, meaning you’ll be limited to a lower DTI ratio based on your score. Or, the lender may lower your loan amount if your DTI ratio is above the limit when you apply.
To be approved with bad credit, you’ll likely need to prove that you have a steady income from a salary or full-time hourly job. Fluctuating income from self-employment, commissions, or tips may not be accepted by lenders with bad credit.
3. Calculate your monthly payment options
Monthly payments on a personal loan with bad credit can be much higher than you expect, especially if you’re making minimum payments on credit cards. Use a personal loan calculator to see if your monthly payments fit your budget.
Enter the highest interest rate possible to get a realistic idea of what you might pay. The calculator may be pre-populated with a lower interest rate than you’re eligible for. Even if a lender advertises a seven-year repayment option, choose a term between three and five years. Longer terms are usually for borrowers with better credit.
4. Compare bad credit lenders
Bad credit loan terms vary widely from lender to lender. Apply to at least three lenders and compare interest rates and fees to get the best idea of what terms are available to you. If you have a relationship with a local bank or credit union, see if they offer interest rate discounts or lower fees for existing customers.
Online personal loan lenders may offer the most options for borrowers with bad credit. Some companies have looser approval criteria than traditional banks, such as work history and education history. When comparing lenders, check each company’s website or ask for the following information:
- Minimum credit score: Depending on the lender, it could be as low as 500 or as high as 670.
- Loan amount range: Some lenders offer competitive options for small loans under $2,500. Some personal loan lenders offer larger loans, up to $100,000, but bad credit lenders tend to limit you to $50,000 or less.
- Repayment Terms: Bad credit loans usually have terms between one and five years. To get the lowest possible payments, choose a longer term. Five years is probably the maximum, but some lenders offer longer terms at lower loan amounts.
5. Get pre-screened
Getting pre-qualified allows you to see your chances of qualification and projected interest rates without impacting your credit score. It’s a free tool offered by most lenders that can give you an idea of what competitive interest rates will be like. Once you’ve done your lender comparison shopping, get pre-qualified with at least three lenders.
This process only involves a soft credit pull, so it won’t affect your credit score; however, if you formally apply to a lender, a hard credit inquiry will be generated, which could lower your score by a few points.
6. Add a co-signer or co-borrower if needed
If you can’t get pre-qualified for the amount you need, see if the lender allows you to add a co-signer or co-borrower to increase the loan amount. A co-signer is usually a creditworthy friend or family member who agrees to be equally responsible for the loan but doesn’t have access to the funds.
A co-borrower is the same as a co-signer, except they have access to the borrowed funds. Be careful when deciding whether to add other people to your loan application.
Before you sign, make sure you set up a repayment plan with your co-signer and have clear communication when it comes to making payments.
7. Gather financial documents
Generally, only a few financial documents are required to be approved for a personal loan. However, if you have bad credit, you may need to submit additional documentation to get approved for a personal loan. This could include W-2s, tax returns, bank statements showing where you direct your paycheck, etc.
You may be required to provide some or all of the following information with your application:
- Personal contact information, such as social security number, name, and address.
- Driver’s license or other government-issued personal identification.
- Details of your personal loan, why you need the loan, the amount you need, the desired tenure etc.
- W-2 forms for the past two years.
- Federal tax returns for the past two years.
- Two recent bank statements for all bank accounts.
- A recent pay slip.
- A utility bill or mortgage statement to verify your address.
To ensure the loan process goes smoothly, provide any additional requests promptly. Before sending your documents, make sure they are legible. Blurry or hard-to-read documents will be rejected by the lender.
8. Be prepared for strict credit checks
Once you’ve chosen the lender you want to borrow from, you’ll formally apply for a personal loan. As mentioned above, the lender will conduct a hard credit check called a hard pull. A hard pull will temporarily lower your credit score by a few points.
Making on-time payments for a few months can offset the minor impact a hard check has on your score, but too many hard checks in a short period of time can cause long-term damage to your credit report. Lenders may interpret this as a potential risk because it may appear that you’re applying for multiple loans or products that you can’t afford to pay.
If you need to get multiple hard credit inquiries, do so within 45 days to minimize damage to your credit. According to the latest FICO scoring model, if you apply for the same type of product multiple times within a 45-day period, multiple hard checks will register on your credit report as one inquiry.
9. People with bad credit can get personal loan funding
Once you submit the documents, the lender can fund your loan within one business day. Funds are usually deposited directly into your bank account. If you choose a debt consolidation loan, some lenders may offer you the option to make repayments directly to your creditors.
Most lenders offer an autopay option, which will deduct your monthly payment from your bank account when the payment is due. As an added perk, you may be offered a lower interest rate or discounted fees if you set up autopay.
Tips to improve your chances of getting a loan even if you have bad credit
It can be hard to get approved for a personal loan if you have bad credit, but there are ways to improve your chances. Some methods may take longer, but they’re all worth considering.
- Apply with a co-signer or co-borrower.
- Choose a smaller loan amount.
- Consider secured options, which require collateral.
- Please disclose all sources of income on your application.
- Shop around until you find the right lender.
What people with bad credit should consider before taking out a loan
A personal loan for bad credit can be a great tool to simplify your finances and improve your credit score over time. That said, you should consider the downsides of adding a fixed monthly payment to your budget before making a final decision.
You will pay a higher interest rate
If you apply for a loan with a low credit score, unfortunately, you will end up paying more interest than if you had a higher credit score. However, your interest rate will likely be lower than if you had maxed out your credit card. Most bad credit loans can be used to pay off credit card balances, which can have a positive impact on your credit score.
Paying off your revolving credit card debt directly impacts your credit utilization ratio, which shows how much of your available credit you’re using. It can significantly improve your credit score and allow you to replace high-interest, bad credit loans with higher-interest, good credit loans.
The cost of loans will be higher
With bad credit loans, you could end up paying fees as much as 12 percent of the loan amount, and these fees are typically deducted from your loan funds, leaving you with less cash to put towards debt consolidation, home improvements, or emergency expenses.
Beware of unscrupulous lenders who ask for upfront fees to get approved. All fees should be deducted from the loan proceeds. You should run away, not walk away, from companies that pressure you to pay upfront fees for loans with poor credit.
The loan amount may be lower
Lenders offering personal loans to borrowers with poor credit typically set the limit at $50,000, and the amount can be significantly lower if you have a very low credit score (below 580) or a high DTI ratio.
Generally the period is shorter
In the eyes of lenders, a low credit score indicates that you may have had issues with credit management in the past, and as a result, lenders may ask you to commit to repaying the loan for three to five years, rather than the six or seven years offered to borrowers with good or excellent credit.
The good news is that if your credit score improves over time, you can refinance into a longer-term personal loan and use the money you save to pay off your loan balance more quickly.
Alternatives to personal loans for bad credit
If a personal loan with bad credit isn’t right for you, you have a few options: These are three common options, but they’re not limited to them: You can also get a HELOC or borrow money from friends and family if you have the ability to do so.
- Credit card: Credit cards do have high interest rates, but they can be convenient if you manage your payments responsibly. Making payments on time not only improves your credit score, but it also gives you the flexibility to access your funds when needed.
- Peer-to-peer loans: Peer-to-peer loans are a type of personal loan funded by a group of individuals or businesses, so they can be easier to qualify for than traditional loans, but they often have higher fees than other loan types.
- BNPL loans: BNPL (pay later) loans let you split large payments into monthly installments. They’re usually offered by online retailers for larger purchases, and many don’t require a credit check.
Conclusion
Having bad credit doesn’t mean you can’t get a personal loan, but you should be prepared for higher interest rates, higher fees, and potentially larger monthly payments.
Compare lenders to find out which one offers you the best terms. Even if you don’t qualify for the most competitive interest rate, you’ll know which options fit your budget.
