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It’s not uncommon for people with less than stellar credit to have a hard time getting approved for a loan. This is in part because many lenders view poor credit as a potential risk factor. Luckily, there are loans for people with bad credit. Online lenders, community banks, and credit unions all offer loans for bad credit and accommodate borrowers across the credit spectrum.
Best places to get a loan with bad credit
Loans for those with the worst credit are available from online lenders, community banks, and local credit unions. As you begin your research process, look into the following institutions to avoid scams, predatory loans (such as payday loans), or misleading lending practices.
Online Lenders
Best for: People who want to get a loan without going to a brick-and-mortar store.
Many online lenders offer personal loans to applicants with poor credit. The application process is generally quick, with approval status available within minutes of submitting your application. If approved, funds can be disbursed as soon as the same day, but typically take one to three business days.
With a seemingly endless number of lenders, it’s easy to become overwhelmed, and online lending networks can help cut through the noise.
These networks are online marketplaces that list reputable lenders who offer the best loans for people with bad credit. In some cases, they can help you pre-qualify based on your needs. They also highlight the most important details, like APR ranges and loan terms. Pre-qualification allows you to see your chances of qualification and projected APRs without affecting your credit.
Bank or credit union
Best for: People who want to use a local bank, get credit union membership, or take out a payday alternative loan.
Some local community banks are willing to lend to people with bad credit and offer competitive personal loan rates. Still, it can be hard to get approved, since lending decisions are almost always based on credit score and income alone. If you can’t get a loan from your local bank, you’ll likely be able to get one from a local credit union, as long as you meet all of the membership requirements.
A personal loan from a credit union may be easier to qualify for than a local bank, but you will need membership requirements. Most credit unions have fairly simple membership requirements based on your occupation, organization, and area of residence.
Each credit union serves a different group and may operate at a local, state, or national level. Some federal credit unions offer payday alternative loans (PALs) for borrowers with poor credit. The annual percentage rate (APR) on these PALs is capped at 18%, while the APR on payday loans can be as high as 400%.
Prepaid Apps
Best for: People who have a steady paycheck and need a quick boost to their bank account.
Paycheck advance apps are designed to help you receive your paycheck sooner than the scheduled deposit date. By the nature of this method, you need a steady source of income. The more predictable your paycheck is, the more likely you are to qualify for a pay advance, regardless of your credit score.
Paycheck advances aren’t loans, so they don’t charge interest. However, these apps may charge subscription fees, instant loan fees, or require an optional tip. While the fees may seem small, remember that a $15 fee on a $500 cash advance equates to an APR of almost 36 percent.
In addition to the potential fees, keep in mind that when you use a paycheck advance app, you’re drawing from your future income, which means you’ll get less money on your next payday.
Bad Credit Loans to Avoid
Some bad credit loans are bad with unreasonably high interest rates and extremely strict repayment deadlines, so use these options only as a last resort.
Payday Loan Providers
Payday lenders offer small, short-term loans, usually up to $500. It’s easy to get approved for these products, even if you have bad credit, but they have big drawbacks: You’ll pay a high APR (annual percentage rate), which can exceed 400 percent in some cases, and you have a short period of time to pay off the debt.
One of the challenges that payday loan borrowers may face is paying back the loan by the due date, which is usually your next payday. Unfortunately, this can result in even more fees and trap you in a perpetual high-interest debt cycle that can be very difficult to end. Payday loans are convenient, but they should only be used if you are sure you can pay them back in full by the due date.
Title Lenders
Title lenders also work with borrowers with low credit scores. A car title loan is an installment loan that’s relatively easy to obtain because your car is used as collateral. To qualify for financing, you must own the car outright, which means you must not have taken out a car loan.
In most cases, you’ll make equal monthly payments over a set period of time (usually up to six months), and you may also be eligible for a slightly lower APR than payday loans.
Still, this type of loan is risky because your car is used as collateral: If you fall behind on your payments, the lender could repossess your car, and while the APR may be lower than a payday loan, it’s still much higher than other loans for people with bad credit.
How to get a loan with bad credit
Traditional personal loans can be hard to qualify for, but it’s possible to get a personal loan even if you have bad credit. To put yourself in a better position, check the lender’s requirements and consider waiting if possible.
- Check your credit score: Check your credit score before you apply for anything. The lower your score, the harder it will be to get a loan. If possible, try to improve your credit before applying. This will increase your chances of getting a loan and getting a better interest rate.
- Check your income and debts. When applying for a loan with bad credit, lenders want to see if the borrower has enough cash flow to cover the monthly payments. Lenders check this by assessing what’s called your debt-to-income ratio (DTI).
- Apply Co-signer or co-borrower: Asking a creditworthy co-signer or co-borrower to apply with you can help you qualify, but mismanaging the loan can negatively impact their credit.
- Get prequalified first: Applying for a loan requires a hard credit check, which will temporarily lower your score by about 10 points. Pre-qualification doesn’t guarantee approval, but it lets you see projected interest rates without affecting your credit. Most lenders offer pre-qualification, so it’s wise to take advantage of this tool to avoid damaging your credit until you’re ready to borrow.
- Shop nearby: To ensure you get the best possible rate and terms, take the time to compare at least three different lenders, as offers from one lender to the next can vary greatly.
- Be aware of the risks: Lenders who provide loans to individuals with poor credit may charge higher fees and interest rates. It is important to fully understand the costs associated with the loan and ensure you can repay it on time.
Conclusion
Bad credit loans can help you get out of a financial pinch, but be careful when borrowing from them as they often cost more than personal loans.
Familiarize yourself with each option and the pros and cons of bad credit loans, get quotes from at least three lenders, and find the most competitive loan offer. Depending on the terms of your loan, you may be better off cutting expenses to free up funds, applying for a credit card, or looking for bad credit loan alternatives.
