Good loans for bad credit

From covering emergency costs to paying for a big move or consolidating credit card debt, a personal loan can help you get your hands on cash when you need it most.

Typically, you don’t need collateral (like a house or car) to get a personal loan, because personal loans are generally unsecured. They’re also usually structured as installment loans, meaning you have to repay the amount you borrow, plus interest, over a set amount of time, with an agreed-upon number of scheduled payments.

Unfortunately, if you have bad credit, your choice of loans may be limited and you may pay higher interest rates. So even if you do qualify for a loan, it may be expensive to repay it.

  1. Is your credit good enough to qualify you for a personal loan?
  2. Where can you look for a personal loan with bad credit?
  3. How can you compare loan terms?
  4. Should you take out a personal loan if you have bad credit?
  5. Think twice about a payday loan
  6. What can you do if you’re denied a personal loan?

s your credit good enough to qualify you for a personal loan?

When you apply for a loan, most reputable lenders check your credit scores. You’re likely to have multiple scores that may vary for several reasons, including …

  • Different companies, such as FICO and VantageScore Solutions, use different scoring models.
  • Credit-reporting companies may not all have the exact same data about you.
  • Different companies may generate your scores at different times, which could mean different information is available.

Scores typically range from 300 to 850. Scores midrange or lower could make it difficult for you to qualify for personal loans from big banks and other traditional lenders.

If you have little to no credit history, you may not have any scores. Or if your credit reports contain negative information, your scores may be too low to qualify. Paying your bills late, having civil judgments against you, and maxing out your credit cards can all reduce your credit scores.

This doesn’t mean you can’t get a personal loan. In fact, there’s an entire industry of personal loan lenders catering to borrowers with bad credit, though these loans can have very high interest. But it does mean you’ll need to be much more careful about what lender you borrow from if you don’t want to get a loan that compounds your financial problems.

Where can you look for a personal loan with bad credit?

Personal loans are traditionally available from a variety of financial institutions, including …

  • National banks and community banks
  • Credit unions
  • Online lenders

Both national and community banks often have strict lending standards. For example, Wells Fargo explains that borrowers could have difficulty obtaining an unsecured personal loan with credit scores of 620 or below.

Credit unions (nonprofit financial cooperatives owned by members) may have less-strict eligibility requirements. Some credit unions may be willing to lend to you despite low credit scores. In fact, some credit unions offer special programs for borrowers with poor credit history. A credit union can be one of the best places to find a personal loan if you have bad credit because these loans can have more-favorable terms.

You may also be able to get a personal loan through an online lender. Some online lenders have loan-qualification requirements and terms similar to traditional banks. Others offer high-interest loans that often do not require your credit scores to be as good. These lenders will likely have other requirements and may review your bank account or employment history.

Unfortunately, some online personal loan lenders advertising personal loans for borrowers with poor credit charge very high interest rates, which could make it more difficult to pay back a loan. This doesn’t mean you should stay away from all online lenders — just make sure you understand the loan you’re applying for.

How can you compare loan terms?

If you’ve got bad credit, the loan you’re approved for will typically cost you more, because lenders may see you as a greater credit risk. Since personal loans for people with bad credit can be so much more expensive, it’s especially important to compare loan terms to find the best deal. To compare loan offers, there are a few basic terms to pay attention to.

  • Annual Percentage Rate (APR): APR is the total cost you pay each year to borrow the money, including interest and fees. A lower APR means the loan will cost you less. A personal loan for someone with bad credit will likely have a higher APR.
  • Loan repayment period: Loan repayment period is the time frame in which you’ll have to repay the loan. Most personal loans require you to make fixed monthly payments for a set period of time. The longer the repayment period, the more interest you’ll likely pay, and the more the loan is likely to cost you.
  • Monthly payments: Monthly payments are largely determined by the amount you borrow, your interest rate and your loan term. Make sure the payments are affordable.
  • Loan minimum and maximum: Lenders usually establish a minimum amount and maximum amount they’re willing to lend. A lender may not be a good fit for you if it won’t loan you enough money or if it will require you to borrow more than you want.

Also consider the lender’s reputation, especially if you’ll be borrowing from a lender specifically marketing personal loans to people with bad credit.

The Better Business Bureau has information about lenders, and you can check the consumer complaint database maintained by the Consumer Financial Protection Bureau to find out if borrowers have filed complaints against a lender you’re considering applying with.

Should you take out a personal loan if you have bad credit?

While qualifying for a personal loan can be challenging and expensive for someone with poor credit, borrowing could make sense in certain situations.

A key question is whether the loan option will help you financially in the long term. This can depend upon the loan terms and the loan amount, as well as what you’ll use the loan for. For example, a personal loan for someone with bad credit could be helpful …

  • If you have high-interest credit card debt. You could use a personal loan to pay it off. If the personal loan can help you reduce the amount of interest you’ll pay on the debt, it could save you money in the long run. Plus it could consolidate multiple payments from different credit card issuers into a simpler single payment to one lender.
  • If you have unforeseen expenses, a personal loan could be a less expensive way to borrow compared to a credit card or payday loan.

In each case, the cost of borrowing can determine whether a personal loan makes sense. If you can only qualify for a high-interest personal loan, consolidating may not be worth it if the high-interest loan doesn’t actually provide any savings.

Other loan terms can also affect your decision. For example, since many lenders have loan minimums, you may not be able to find a loan if you only need to borrow a small amount.

Think twice about a payday loan

If you need money right away, need an amount less than what a traditional lender might be willing to give, or have been denied a personal loan because of poor credit, you may be tempted to try a payday loan.

A payday loan is a short-term loan for a small amount — usually $100 to $500 — that you secure by giving the lender a post-dated check or electronic access to automatically withdraw your bank account. The loan is usually due on your next pay date, along with fees. Depending on the state, payday lenders can charge from $10 to $30 per $100 you borrow. For example, if a payday lender charges you $15 for every $100 you borrow per two weeks, it amounts to an APR of 391%, according to research by The Pew Charitable Trusts. The Pew research found that fees from online lenders can be even higher, averaging an APR of 652% as of April 2012.

A payday lender may not check your credit in order to approve you for a loan; many only require you to be an adult (over 18) with an active bank, credit union or prepaid card account; proof of income; and valid identification. While it may be easy to get a payday loan when you have bad credit, the high cost could make it difficult to repay. In fact, a 2009 study from the Center for Responsible Lending found that many payday loan borrowers can’t repay their loan and also make it to the next payday without taking out another payday loan.

High-cost payday lending is prohibited in 18 states and the District of Columbia. Other states set limits on how much payday lenders can loan, maximum loan terms and finance charges.

Before taking a payday loan, explore all other alternatives first, such as borrowing from a credit union, signing up for overdraft protection on your bank account, or working with a consumer credit counseling service to work out a payment plan with creditors.

What can you do if you’re denied a personal loan?

If you’re denied a personal loan with bad credit, here are two options.

  1. Look for other borrowing alternatives. If a national bank has denied you, an online lender or credit union may be willing to offer you financing. If you can qualify for a credit card, look for a card with low promotional rates.
  2. Improve your credit. Your scores can go up over time if you pay at least the minimum on your monthly bills on time, establishing a positive payment history, and pay down your debts so that your credit utilization rate improves. You should also check your credit reports for errors. A mistake on your credit reports could affect your scores. You can request that errors be corrected by contacting the consumer credit-reporting bureaus.

By researching options carefully, you can make a wise financial choice — either finding the best loan available or waiting to borrow until your credit has improved and you can get a loan with better terms.

Bottom line

Building good credit to qualify for favorable loan terms takes time. If your credit scores are low and you need a loan right away, finding a credit union or online lender offering personal loans for borrowers with bad credit could be your best option. Just be sure to carefully compare the rates and terms of each loan to find the most affordable lender willing to work with you. And remember, if you can’t find an affordable option that you can easily repay, it may be better to wait and work on your credit.