Bad credit loans are a relief option for consumers whose low credit scores limit their borrowing options.
Put another way: A bad credit loan, which is really just another name for a personal loan,can bail you out of a financial emergency, even if your credit score (something under 650) is a lot lower than you or most banks would like.
So if you suddenly need money to buy or repair a car; make payments on a medical bill or consolidate credit card debt, but don’t have a high enough credit score to get a loan from one of the big banks, don’t give up. There is help available.
Bad credit loans are treated the same as personal loans. They are money you borrow and pay back in fixed monthly installments. The loan could come from a bank, but if you’re looking for an affordable interest rate and flexible qualifying requirements, the better choices probably would be:
Credit unions. A great option. Maximum allowable interest rate is 18%.
Family or friends. Easier to qualify and hopefully lower interest rates.
Find a co-signer. Use someone else’s high credit score to get a lower interest rate.
Tap home equity. Credit score not a factor. If you have equity, you can get a loan.
Online or P2P. Huge market of lenders who can be very flexible with terms.
You could add more options like payroll advances, loans from retirement accounts or borrowing against life insurance to the list, but those are last-ditch choices best left untouched unless everything else fails.
What Is a Bad Credit Score?
Credit scores are an attempt to gauge the likelihood you will repay a loan. They range from 300-850. The higher your number, the more likely you will repay.
Bad credit scores start at 650 and go down from there. People in this category are considered a high risk and pay the highest interest rates. They are prime candidates for bad credit loans.
The definition of a “good” and “bad” credit score does vary from lender to lender. Some won’t touch anyone with a credit score under 650, some actually market to consumers with a sub-650 score.
So it’s hard to say what makes you “good” or “bad” on the credit scoreboard, but the accepted range looks something like this:
760-850 – Excellent
700-759 – Very good
660-699 – Fair
620-659 – Poor
Scores under 620 – Extremely poor
How Bad Credit Scores Affect Borrowing
Consumers in the good-to-excellent credit score category receive the lowest interest rates and best loan terms. Consumers in the poor and extremely poor categories are burdened with high rates and may not be approved for a loan at all.
Many consumers get that message and that is why the average credit score for U.S. consumers in 2018 is 700, an 11-point jump over the last decade. However, the real numbers worth paying attention to are the combination of score and age, which say a lot about how our economy operates.
According to FICO, people ages 60-and-above have an average credit score of 743, while those in the 18-29-year-old bracket average just 652. It’s one of the few places in life where being old pays off.
Still, that’s a 91-point difference, which is very costly when you are shopping for home and auto loans as the graphic below demonstrates.
How to Get a Loan with Bad Credit
If this is not an emergency, the first step to get a loan with a bad credit is to improve your credit score so you can comfortably afford the loan you need.
Start by making on-time payments, especially on credit cards; and reduce the balance on cards to under 30% of the credit limit allowed. Finally, don’t apply for any new credit.
The combination of those three factors – on-time payment; low credit utilization; no new credit applications – account for 75% of your credit score. It’s not unrealistic to think that making an effort on those three fronts could raise your score by 100 points in as little as 3-6 months.
If, however, this is an emergency and your application for a loan has been turned down repeatedly due to poor credit or no credit, it might help to ask a bank or credit union loan officer for an in-person interview to convince them you are creditworthy.
If you get that interview, be sure you are prepared with documents that prove you’re a good risk. Lending institutions love stability. If you can show them that you’ve lived in the same house (or city) and worked the same job (preferably for the same employer) for several years, it definitely helps your case.
Common things to bring that prove your credit worthiness include:
Tax returns, W-2s and 1099 forms from at least the last two years
Details of your job history, including salary and pay stubs
List of assets such as home, car, property and where you stand on paying them off
List of unsecured debts such as credit cards and medical bills
Whether you pay or receive alimony or child support
Bank statements for checking, savings and CDs
Not all of these documents are required, but if you have a poor credit history, anything you can produce that demonstrates you have become responsible with your money will be considered a plus. You should also expect the lender to ask questions about your credit history that may reflect negatively on you. Things like:
Have you been involved in any lawsuits?
Do you have any judgments against your or items in collection?
Have you declared bankruptcy or had a foreclosure judgment against you?
What is your ethnic background?
The last question would seem to violate anti-discrimination laws, but it is required by the government so that it can keep data on lending to minorities and make sure they aren’t routinely turned down or charged excessive fees.
The purpose of an in-person interview is to convince the lender that if you receive a loan, you can comfortably make payments. Any evidence you have that can support that fact – especially proof that you paid off loans on assets like a car, motorcycle or boat in the past – are going to work in your favor.
Pros and Cons of Bad Credit Loans
It makes sense to use caution when taking on any loan, but if you have bad credit, things aren’t good. Don’t make it worse.
Be careful who do you do business with on a bad credit loan. If the lender doesn’t require a credit check, doesn’t check your income; guarantees you’ll be approved; can’t be found for customer reviews or a Better Business Bureau ranking, it might be time to look elsewhere. Those are red-flag warnings that you might get scammed.
Closely examine the pros and cons of the situation before making a final decision.
The pros for a bad credit loan are obvious:
Most loan applications are available online and only take a few hours to get a response. At some places, you can have the money in your account within a day.
If you are able to get a bad credit loan, it likely would come at a lower interest rate than you pay on your credit card debt.
The number of peer-to-peer lending businesses seems to double every year. If you’re patient, and make lenders compete for your business, you might find a loan with an interest rate that you can afford.
Depending on who the lender is, repayment terms could stretch anywhere from one to five years.
If you commit to making on-time payments, your credit score will improve and make you a more desirable candidate next time you need a loan.
The cons for bad credit loans are just as obvious:
High interest rates. You’re a risk so the lender wants a reward; sometimes a huge reward.
Fees and penalties. Read the fine print. Is there a loan origination fee? What is the late fee? You may have to pay a fee for making payments by check.
Collateral sometimes required. You may have to put a house or car at risk to get the loan. If you miss payments, you could lose that house or car.
Not every online lender is licensed in every state. Be sure the company you choose is certified in your state before you start paying for their service.
Be sure you have multiple offers before making a final decision. The competition gives you a chance to compare and research the company you eventually choose.
Places to Find Bad Credit Loans
There are some outlets for people looking for bad credit loans, but it definitely will take some shopping around to find interest rates and repayment terms you can afford.
The big national and regional banks stick tightly to credit score ratings so don’t bother with that unless you have taken time to clean up your credit report and raise your score.
If you don’t have time to improve your score, find a loan from the sources listed below.
Visit a Credit Union
A credit union – especially one affiliated with your employer or one that is community-based – may be willing to look beyond a poor credit history and make a judgment about whether it will loan you money based on your character and your promise to repay. Think of credit unions the way you would a small community bank from years ago.
The most promising aspect of a credit union loan is the interest rate ceiling of 18%, which applies to anyone, regardless of their credit score. A similar loan from a bank could run you as much as 36% interest.
That can make a huge difference in the payout you make on a bad credit loan. Let’s say you have a three-year, $10,000 loan. Here is the total repayment:
18% — $13,014.
36% — $16,489.
The chance to save more than $3,000 makes it worth looking into enrolling in a credit union. Almost all credit unions are actively looking for borrowers. If you can afford terms that match your credit history, you are likely to find a credit union somewhere willing to work with you.
If you are a veteran of the armed forces, you might want to approach the Navy Federal Credit Union or PenFed Credit Union. If you are a teacher or government worker, you might check out State Employees Credit Union or Schoolsfirst Credit Union.
Almost every consumer could qualify for some credit union. By joining, you could position yourself for much more favorable loan terms, regardless of your credit score.
Borrow from Family or Friends
This is dangerous from a relationship standpoint, but makes a lot of sense from a financial and loan-anxiety standpoint because it should be easier to get approval and a break on terms.
Family and friends aren’t likely to put you through a grueling qualifying process and probably would cut you some slack on the interest rate charged compared to what you would get from lending institutions that make bad credit loans.
However, if you’re thinking about borrowing from family members or friends make sure to factor in what happens if you default. Not repaying a loan to a relative or close associate can poison relationships in ways that go far beyond a bad credit report.
Treat any loan from someone you know just as if it were an important business transaction between you and a stranger. That means it should be formalized with clear documentation and legally recorded. To avoid future problems, create a written contract that includes the loan terms and interest rate, and what will happen if you cannot repay the debt.
Get a Co-Signer
If borrowing from a friend or relative is not possible, you can still approach someone you know with good credit about co-signing on for a bad credit loan.
With a qualified co-signer, the lender will set the loan terms based on the credit score of the person with good credit, who will then be equally responsible for repayment. All payment information will be recorded on both your credit report and your co-signer’s, so if you default on the loan, or you’re late with payments, you both suffer. However, if you make timely payments, your own score will improve, making it easier to obtain future loans without a co-signer.
Tap Your Home Equity
If you have equity in your home, you can apply for a home equity loan or home equity line of credit (HELOC). Your home is used as collateral, and home equity loans can be obtained regardless of your credit score. The interest rate is usually low, because the loan is secured by the home. Also, the interest you pay on a home equity loan is usually tax-deductible.
It is important to remember that tapping your home equity puts your property in jeopardy if you don’t repay the debt. But if you are disciplined and have a reliable source of income, it is an inexpensive way to borrow from a reputable lender when you have bad credit.
Peer-to-peer lending, also known as P2P lending, has only been around since 2005. It’s an online platform that allows you to get a bad credit loan directly from another individual or group of individuals rather than from an institution. Potential borrowers post a loan listing on various peer-to-peer websites, indicating the amount needed and what it’s for. Investors review the loan listings and choose borrowers they wish to fund.
Your credit score is still a factor, but since an individual investor has much greater leeway in how factors are weighted, these loans are often more readily available for people with bad credit. Lending standards are significantly more lenient and interest rates are usually lower than those offered by traditional lenders. In addition, peer-to-peer websites help evaluate risk for the lender, while verifying the lender’s credentials for the borrower.