It can seem very difficult to get the loan you need with reasonable terms if you have bad credit. It may feel like the whole world is working against you. Thankfully, all hope is not lost. There may be a way you can borrow money even with bad credit.
Tips to get a loan with bad credit
While you might not be able to get the ideal loan by yourself, you may be able to get the loan you need with a co-signer who has healthy credit. Alternatively, you can work to improve your credit to increase your chances of getting a loan in the future. You can also consider nontraditional sources to borrow the money you need. Below, we share tips to get a loan with bad credit.
Check your credit reports and credit scores
Improve your credit health
Shop around with multiple lenders to compare options
Know the different types of loans you can consider
Understand the types of loans to avoid
1. Check your credit reports and credit scores
“If you don’t know where your finances stand, it’s best to do some personal digging to figure out what’s in your accounts,” says Cody Green, co-founder of USA Drives.
One way to find out what you owe on your current credit cards is by checking your credit reports (if your credit card issuer reports to the consumer credit bureaus). Checking your credit reports is important because some of the information contained in them is used to calculate your credit scores.
You’ll want to make sure there are no incorrect derogatory marks on your reports before applying for a loan. The three major consumer credit bureaus — Equifax, Experian and TransUnion — aren’t perfect, so it’s important to read your credit reports carefully. If there are false negative marks, you should contact the specific credit reporting company generating the report along with the information provider to get the error removed.
You can see what’s on your TransUnion® and Equifax® credit reports, as well as your credit scores from the two bureaus, by signing up for a free Credit Karma account.
Knowing your credit scores is important, too. Your credit scores, along with other factors, such as your debt-to-income ratio, can affect your approval odds for a loan and the terms you qualify for. Don’t be discouraged if your scores are not what you’d like. A little bit of work could help put your scores in better shape.
2. Improve your credit health
Once you have a better idea of your credit, it’s time to start improving your credit health. Your credit scores are calculated using different credit factors and scoring models. Try to focus on the factors with the most impact, like payment history, but do your best to improve your credit health overall. Factors that can impact your credit scores include …
Payment history: While you can’t change the past, making all of your current payments for at least the minimum amount and on time is key for this portion of your scores.
Credit usage: Do your best to keep the amount of debt you owe low compared to your total credit limit, ideally less than 30%. Maxed-out or over-the-limit lines of credit can be particularly harmful.
Length of credit history: Keeping old accounts open instead of closing accounts after they are paid off can help increase your credit history length.
Credit mix and types: While you shouldn’t apply for a new type of credit to influence this portion of your scores, it can naturally grow over time as you experience major financial events, such as buying a home.
Recent credit: Opening or applying for several new credit accounts in a short period of time can make you seem risky to lenders. Opening new credit accounts only when necessary and when you know you can handle them responsibly is usually the best bet.
Learn more about the factors affecting your credit scores
3. Shop around with multiple lenders to compare options
Once you’ve worked on improving your credit health as much as possible ahead of applying for a loan, it’s time to start shopping around for the best loan for you. While some people may simply choose the first loan they’re approved for, that could be a major mistake.
Different lenders may offer varying interest rates and loan terms depending on their assessment of your creditworthiness and risk. Lenders have their own methods for evaluating these factors.
“While there is a selection of lenders and loan facilitators who can help low-credit applicants obtain affordable and reputable financing, not all loan features are created equally,” says Green.
For example, one lender may offer you a loan with a 20.99% annual percentage rate while another can offer you a loan with a 16.99% APR. If you don’t shop around and accept the first offer of 20.99% APR, you would be overpaying by 4 percentage points.
What is an APR?
APR stands for “annual percentage rate” and is a numeric representation of your interest rate. For loans, the APR can include fees you may be charged, such as loan-origination fees.
Shopping around for loans is easier than ever today thanks to the internet. While you should still check into your local options, such as banks and credit unions in your area, you can easily view the estimated loan terms of various online lenders in one place using Credit Karma.
Low credit scores? You can still shop around for a loan
Low credit scores? You can still shop around for a loan
Low scores shouldn’t stop you from considering a personal loan when you need one. Credit Karma can connect you with lenders willing to consider loaning money to people with credit scores of 639 or less.
4. Know the different types of loans you can consider
The types of loans you want to consider will vary based on your goals, but there are two major classes of loan products.
Unsecured loans, such as personal loans, can be used to refinance high-interest-rate debt, finance an unforeseen expense, or cover most other expenses you may want to finance. However, unsecured bad-credit loans usually have higher interest rates than secured loans and can be more difficult to obtain.
Secured loans, such as a home equity line of credit, are secured by collateral and may provide you with an alternative to an unsecured loan at a lower interest rate. However, secured loans put your collateral at risk of being repossessed if you don’t repay the loan as agreed. These loans can be easier to get than unsecured loans.
Whether you decide to apply for a secured or unsecured loan, you may want to consider loans that allow a co-signer. If you’re able to find someone with healthy credit to co-sign a loan, you may be able to secure a lower interest rate than by simply applying for the loan in your name alone.
5. Understand the types of loans to avoid
If you’re in the market for a loan, you should evaluate your finances to see how much you can afford to borrow responsibly. But even if you desperately need access to money, there are some types of loans you should do your best to avoid. For instance, payday loans and auto title loans often have short terms, high interest rates and high fees that can harm your finances.
When evaluating a loan, try to avoid loans that have high origination fees, steep fees or interest rates, and extremely short loan terms. These types of loans may aim to take advantage of people who desperately need money and have few other options.
Getting access to the money you need with bad credit may seem difficult, but it isn’t impossible.
You’ll want to become familiar with your credit scores and credit reports, and work to improve both to the best of your ability before applying for a loan. When you’re ready to apply, make sure you shop around to find the best possible loan for your situation. Finally, if all else fails, don’t forget about nontraditional lending options, such as borrowing from friends and family.
Now that you have the tips to get a loan with bad credit, you can start working toward the loan you need and managing debt responsibly so that you can help improve your credit health.