At a Glance
A bad credit score doesn’t mean you can’t secure a personal loan. Here are tips to navigate getting a personal loan, regardless of your credit score.Important steps to follow (more info below):
- Check your credit score
- Confirm you can repay the loan
- Compare bad credit personal loans
- See if you pre-qualify online
- Apply for a loan
What interest rate should I expect on a personal loan?
Interest rates vary based on the type of loan, the lender, and your credit history. Generally speaking, the better your credit score, the lower your interest rate will be. The worse your credit score, the higher your interest rate will be.
Types of bad credit loans
There are generally two types of bad credit loans: secured and unsecured.
Secured loans, also known as collateral loans, allow you to borrow money against the value of an asset. The most common types of secured loans include mortgages, auto loans, and home equity loans. Secured loans tend to offer more favorable terms, rates, and loan limits because the collateral incentivizes you to repay on time. A secured loan may be easier to get than an unsecured loan for those with bad credit.
But secured loans come with risks. Defaulting on the loan can lead to losing whatever you put up for collateral, including your house or car. Be sure to make timely payments if you go this route.
Most personal loans are unsecured, meaning they’re based mostly on your creditworthiness. If you have a fair or poor credit score, it may be more difficult to get an unsecured loan. Though you’ll have a higher interest rate and lower loan limit, you won’t risk losing an asset with a missed payment.
Loans to avoid if possible
People with bad credit may find their loan options limited, but there are a few options to avoid at all costs.
Payday loans are short-term loans, usually $500 or less, and are generally due on your next payday. Payday lenders don’t check your credit reports, so this might seem like a good solution. But these loans typically carry very high interest rates that can lead to a vicious cycle of payday loan debt.
Sixteen states and the District of Columbia prohibit extremely high-cost payday loans.1
Title loans require you to pledge the title of your car and can come attached with very high interest rates.
The risk: you can lose your car if you don’t repay the loan on time. One-in-five auto title loan borrowers have their vehicles repossessed after they’re unable to repay the loan in full.2
Pawn shop loans
With a pawn shop loan, you bring an item of value to a pawn shop in exchange for a small loan that’s of equal or lesser value than the item itself. To get the item back, you have to repay the loan before the end of the term. Term lengths can vary state by state.3
But there can still be expensive fees and interest involved. In a worst-case scenario, the shop can keep and sell the item if you don’t repay the loan.
Alternative types of loans for people with bad credit
If you’re having trouble qualifying for a traditional loan, these non-traditional loans can work.
Personal loans from online lenders
Online lenders, some of which are peer-to-peer, can provide personal loans for people with bad credit. Instead of a traditional financial institution funding the loan, individual investors do. This option is generally much less expensive than a payday loan. Interest rates still will vary based on your credit history: better credit will get you a better interest rate.
Find personal loans for people with bad credit
Check out lenders and solutions that fit your needs.
Depending on who your employer is, you may be able to ask them for a short-term advance on your paycheck.
Or, you can go right to your credit card company for a cash advance. Instead of making a purchase with your card, this option lets you withdraw some of your available credit as cash. This option generally comes with interest rates higher than your card’s standard purchase annual percentage rate (APR).
Visit a credit union
Credit unions may be able to offer a lower rate than other institutions, not to mention they offer more personalized service. The maximum APR a credit union can charge is 18% for loans. The exceptions are loans made under the National Credit Union Association’s Short-Term Loan program, which allows them to charge up to 28% APR.4
Your bank may allow you to take out a short-term loan or make a minimal overdraft agreement. This is contingent upon your account being in good standing and your ability to keep the account open.
Home equity loans
Home equity loans are a type of second mortgage where you receive a lump sum of cash upfront. These loans have a fixed interest rate and fixed monthly payments. Because you’re borrowing against the value of your property, a home equity loan can be easier to get for those with bad credit.
Home owners also have the option to take out a home equity line of credit, or HELOC. Instead of receiving a lump sum like a home equity loan, HELOCs function more like credit cards. HELOCs provide you with a line of credit based on the value of your home, so you can borrow what you need when you need it and repay the funds over time.
How to get a bad credit loan
Getting a personal loan with bad credit takes a bit more effort than it would with better credit. But it’s still doable. Here’s what you need to do to secure a loan despite having bad credit.
- Check your credit report/score: The Fair Credit Reporting Act (FCRA) requires the three major credit reporting agencies (Equifax, Experian, and TransUnion) to provide you with a free copy of your credit report once a year if you request it. Before you even apply for a loan, see if there are ways to improve your credit score. This will not only increase your chances of securing a loan but also get yourself a lower interest rate.
- Make sure you can repay the loan: This may seem obvious, but make sure that your income and budget can bear another monthly payment.
- Compare bad credit personal loans: See which option makes the most sense for you. If you have a pre-existing relationship with a credit union or bank, that may be the best place to start—and always make sure to read the fine print.
- Look into pre-qualification online: Pre-qualification is the easiest way to compare many online lenders. Many lenders let you do this without running a hard credit check. This gives you the luxury of shopping around without further hurting your credit score.
- Apply for a loan: This can take anywhere from a business day to a week and will trigger a hard credit inquiry, which can temporarily drop your credit score. Over time, with consistent payments, your score will recover.
How to manage your personal loan
To avoid digging a deeper hole, it’s important to have a repayment plan for a personal loan, as you would with any other loan.
- Keep your budget up-to-date: Add any additional debt to your existing budget. If you don’t have one, create one by breaking down your income into costs that make sense for you.
- Set up autopay: Automatic payments ensure that you won’t miss a payment. An added benefit: your lender may offer a discount for setting up autopay.
- Stay in contact with the lender: If you suffer an unexpected life event, let your lender know immediately if you expect to fall behind on payments. In the interim, you may be able to work out an agreement to defer payments, waive late fees, etc.
Avoiding bad credit loan scams
These are all red flags that a lender is running a scam:
- Guarantees without approval
- Not registered in your state
- Uses poor advertising methods
- Pre-payment upfront
- Unsecured website
- No physical address