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When you’re looking for a personal loan, don’t let bad credit discourage you from finding the right lender.
What is a bad credit personal loan?
Bad credit personal loans are meant for borrowers who have credit scores less than 580. Because poor credit borrowers often become delinquent on their loans by making late payments or defaulting, larger banks are less likely to lend to people below this threshold.
Fortunately, there are lenders that consider more than just a credit score when it comes to borrowing. These may look at your income, current debt and ability to repay before making a final decision on your application. It may mean you pay more than a borrower with good credit, but you’ll still have options when you find yourself in need of a loan.
What types of bad credit personal loans are there?
You may be able to invest in a secured or unsecured personal loan from a nontraditional lender, but usually, you’ll have to start rebuilding your credit before you can qualify. While you work on improving your score, consider one of these options when you need a loan.
- Payday loans. Payday loans are short-term loans that you repay in two to four weeks. Lenders don’t require collateral to borrow, but beware: they aren’t available in every state because of high APRs.
- Installment loans. Installment loans require you to make equal payments over a few months. While the APR may be lower than payday loans, it is still much higher than other personal loans.
- Auto title loans. If you own a car or motorcycle, you may qualify for an auto title loan. These have lower APRs but come with extra risk. If you fail to repay your loan, you may have your vehicle repossessed.
- Cash advances. Cash advance loans for bad credit are essentially the same as payday loans. If you have a credit card, you may be able to withdraw a cash advance meet your short-term money needs.
- Credit builder loans. Some banks and credit unions offer loans to help build your credit. You can typically borrow a small amount — sometimes as low as $100 — with relatively low interest rates.
HOW CAN I TELL IF I HAVE BAD CREDIT?
Most Americans don’t know exactly what their credit score is, but you don’t have to be one of them. You’re entitled to a free copy of your credit report every twelve months from any of the three main credit bureaus: TransUnion, Equifax and Experian.You can also get an estimate of your credit score from online companies that do a soft credit pull that doesn’t affect your rating. They can only give you an estimate, however. Your actual credit score could be several points higher or lower.
Typically, people with bad credit have struggled paying off debt in the past or simply don’t have a long-enough credit history to get a good credit score. If you’ve missed payments, defaulted on previous loans or declared bankruptcy, it’s likely that you won’t have a good credit score.
Where can I find a loan if I have bad credit?
While you might not be able to walk into a multinational bank to get a bad credit loan, you still have several options to choose from.
You might be able to qualify for an online personal loan with bad credit if other aspects of your personal finances meet a lender’s eligibility criteria. Although you’ll be able to finish your application and receive your funds more quickly, your interest rates and fees may be slightly higher than what you’d get with a bank or credit union.
Be sure you meet your lender’s credit requirements before submitting an application. Look for lenders that allow you to prequalify without affecting your credit score so you don’t suffer a point drop just for applying.
SHort-term loans include payday loans, installment loans, auto title loans and cash advances. These are meant to take the pressure off during an emergency and generally need to be repaid within a few weeks or months. You’ll typically receive higher interest rates than other lenders, and you may risk of high fees if you’re unable to make your payment on time.
Credit unions often offer financing to borrowers of all credit types with much lower interest rates than you’d find at other institutions. Many even provide credit builder loans, small short-term loans designed to improve your credit score before you apply for more financing.
Credit unions are typically a better option for those who aren’t in a rush: you’ll have to become a member, and it can take a few weeks to complete the application and receive your loan.
Your local bank
See if there’s a bank in your area that’s classified as a Community Development Finance Institution. These are typically small local banks that aim to help members of underserved communities develop their credit.
They have many of the same options as credit unions — including credit builder loans — but you won’t have to join to become a member. It’ll still take some time, however, to complete an application and get your loan funds deposited into your account.
How to apply for a personal loan with bad credit
While it depends on the type of loan you’re looking to borrow, you’ll follow about the same process with each lender and need to supply much of the same information.
First, find a lender that accepts bad credit borrowers. These lenders may still look at your credit score, but they will also consider your income and ability to repay your loan when considering your application.
Depending on your lender, you may be able to complete an application either online or in-store. If you apply in-store, your lender may be able to give you your loan funds that same day. If you apply online, it may take a day or two for your funds to be deposited into your bank account.
You’ll also need to give your lender a bit of basic information about yourself, including
- Your contact information, current address and employer
- Your Social Security number and date of birth
- Your pay stubs, tax returns and bank statements
5 benefits of bad credit personal loans
- No collateral required. Loans for bad credit are typically unsecured, so you don’t have to provide collateral to qualify.
- Quick turnaround. Many personal loans only take a few minutes to apply for, and you could receive a decision the same day.
- Your rates don’t change. Bad credit personal loans usually have fixed interest rates, so you don’t have to worry about your repayments changing over time.
- Very few restrictions. You can use a personal loan for just about anything, including debt consolidation and bill payments. As long as it’s legal and approved by your lender, you won’t be limited to where you spend your loan.
- No prepayment penalties. Some lenders let you repay your loan ahead of time without charging any additional fees, reducing how much you end up paying in interest.
What to avoid when borrowing with bad credit
When you apply, make sure you have a budget in place. If you make a late payment or default on your loan, you could face lowering your credit score further.
You should also avoid applying for multiple loans at or around the same time, as prospective lenders don’t view this favorably and it could impact your credit score negatively.
Compare the interest rates and fees of different lenders carefully. Be sure you understand what fees your lender could charge you before you accept a loan offer. Many loans for bad credit can be costly, so being aware of the full cost will help you plan for your payments.
How to improve your credit score
While improving your credit score can be a slow process, it will help you find better financing and more favorable rates down the road. You can start working on your score by taking advantage of some of these tips:
- Order a copy of your credit report. To get the most accurate picture of your current financial health, request a free credit report from one of the major bureaus. Take a look at your personal information, employment data, open accounts and balances and any other financial details listed and make sure that all of the information is accurate. If you see any discrepancies, report them to the three credit bureaus and the providers that marked them.
- Pay down your credit card accounts. One of the five variables that determines your credit score is your credit utilization ratio, which is calculated by dividing your balance on existing credit cards by your available credit limits. Most lenders want to see a utilization ratio of 30% or less. This means that if you have a credit card with a $1,000 limit, you only want to keep a balance of $300 or less.
- Don’t take out new loans. Every time you apply for a credit card or personal loan, the lender does a hard credit check, which knocks your credit score down 5 points. To avoid further damage to your credit report, work on paying your outstanding debts instead of borrowing more.
- Don’t close accounts just because you’re not using them. One of the five variables that determines your credit score is your credit history. Lenders want to see a long history of credit in your report, so closing that bank account or credit card could do more harm than good.
Bad credit isn’t the end of the line when it comes to taking out a personal loan. There are multiple lenders and loan options available to you no matter your score, but be careful. You may face high interest and multiple fees when you borrow, making your loan difficult to afford. As with every big financial decision, compare your loan options before signing a loan contract.