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How to get a personal loan with bad credit

It’s still possible to get the funds you need with a low credit score

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Unfortunately, if you have a lower credit score, you may have more difficulty obtaining a personal loan or getting favorable terms. The good news, however, is there are personal loan options available even with bad credit, especially if you have a solid income and a good debt-to-income (DTI) ratio.

Key insights

  • Having bad credit can make it more challenging to get approval or favorable terms for a personal loan, but it’s not impossible.
  • There are numerous lending options available, such as secured personal loans or adding a co-signer.
  • Consider lending terms such as collateral, repayment length and interest rates and fees to determine if a personal loan is right for your financial situation.

What bad credit means

Credit scores range from 300 to 850, with 850 considered a perfect score. There are two main credit scoring models, FICO and VantageScore, and each uses its own methodology for calculating a score and its own benchmarks for what’s considered a bad credit score.

For FICO, anything under 580 falls under the “poor” classification, while VantageScore considers anything 600 or under to be “poor” (with 300 to 499 being “very poor”).

“For those that have a bad credit score, they are likely going to have a few challenges when looking to get a personal loan,” said Sebastian Jania, the owner and founder of Ontario Property Buyers, a real estate solutions and investment company.

“When someone has a bad credit score the lender is taking on much more risk so the lender is typically going to be demanding higher interest rates and potentially fees to get out of or get into any kind of personal loan.”

» MORE: How to check your credit score

Personal loan options for bad credit

A personal loan is money borrowed and paid back in monthly installments. You can use the funds for almost anything, and this flexibility is one reason why these loans are so popular.

For someone with bad credit, there are a few suitable options.

A secured personal loan is a personal loan requiring collateral, or an asset the lender can repossess, if the borrower defaults on the loan. While mortgages and auto loans are well-known examples of this, you can also find secured personal loans.

Since the collateral offers the lender an extra layer of protection, it typically means a higher chance of approval. It may also mean lower interest rates and greater borrowing limits compared to an unsecured loan.

In addition to the collateral, the lender also uses the borrower’s creditworthiness as a factor in approval and for setting interest rates and borrowing limits.

» COMPARE: Best secured personal loans of 2023

There are some lenders that consider other factors besides credit scores; these alternative credit scoring loans may offer another option for someone with bad credit.

Lenders such as Upstart consider additional applicant information like education and employment, in addition to your credit score.

Another option for getting a personal loan with bad credit is by adding a co-signer or co-borrower to the loan:
  • A co-signer doesn’t have access to the funds, but they share in the repayment responsibility.
  • A co-borrower shares in the funds and is also responsible for repayment.

In either circumstance, it can boost your chances of approval and a better interest rate if the co-signer/co-borrower has excellent credit. But keep in mind that if you default, the other person’s credit is on the line, too.

» COMPARE: Best personal loans with a co-signer in 2023

If you’re a member of a credit union, or open to becoming one, you may have access to a payday alternative loan (PAL).

A PAL is a short-term personal loan, and the National Credit Union Administration (NCUA) caps both the borrowing amount and the interest rate. There are two PAL options available, which include:

  • PAL I: This short-term, small-dollar loan offers loans from $200 to $1,000 and repayment options range from one to six months. You must have a credit union membership for at least a month before borrowing.
  • PAL II: This option offers loans up to $2,000 and repayment terms up to 12 months. You’re eligible for these loans as soon as you join a credit union.

» COMPARE: Best credit unions for personal loans

While you don’t actually borrow money with a credit-builder loan, it is a valuable option for someone looking to build or repair their credit.

Instead of a lender extending credit to a borrower like a traditional loan, with a credit-builder loan, you make payments to a savings account or certificate of deposit (CD) during a specified loan term. When the loan term ends, you get back the money you paid minus interest charges and fees.

The result: you build a payment history, which is essential for establishing credit. On-time payments can significantly improve your credit score and establish positive money habits.

» COMPARE: Best credit-builder loans

There are lenders offering no credit-check loans, and as the name implies, your credit score isn’t factored into approval. However, they typically require a guarantee of repayment by your next paycheck (or within 30 days), which is why they’re commonly known as payday loans.

Payday loans are extremely risky because the interest rates are typically substantially higher than other personal loans. Plus, if you default on the loan, you face debt collections and even possible wage garnishment. If you do choose a no credit-check loan, find a reputable lender that doesn’t charge astronomical fees.

» MORE: 11 payday loan alternatives

How to get approved for a loan with bad credit

You can improve your chances of getting approved for a personal loan ahead of time. One way is to find out your credit score prior to filling out any applications. Once you know your credit score, you can shop for lenders that work with borrowers in your score range.

You can also go through the pre-qualification process, which is a basic review of your creditworthiness by the lender and gives you an idea of the interest rates you likely qualify for and terms, all without impacting your credit score.

If you have time to work on improving your credit score before applying for a personal loan, it’s usually worth it. Whether or not you qualify now, taking a few extra steps to improve your score may help you get better loan terms in the long run.

Here are some tips:

  • Pay down your existing debt as much as you can. Reducing your credit usage will have a positive effect on your score and improve your chances of approval and your likelihood of qualifying for a lower rate.
  • Don’t make late payments. Late payments on bills, credit cards and other financial obligations can significantly hurt your credit score.
  • Look for credit cards for first-time borrowers. Secured credit cards are a great option for those with bad credit who want to build it back up.
  • Don’t apply for other types of loans after applying for a personal loan. Avoid any new hard credit inquiries on your report while waiting for an approval decision.

“I recommend if someone is having trouble getting a personal loan that they explore the option of having a co-signer or see if there is a way where they can put up some kind of collateral such as by getting a home equity line of credit instead of an unsecured line of credit as the rates can be significantly lower on them,” said Jania. 

» MORE: How to fix your credit

What to look for in a personal loan for bad credit

Shopping around and comparing personal loan options is one of the most effective ways to ensure you’re getting the best loan for your finances, no matter what type of credit score you have.

As you compare, consider the following information for each loan.

  • Collateral: If you’re applying for a secured personal loan, confirm what type of collateral you need to secure it. Ask yourself if the required collateral is worth risking if you default on the loan for any reason.
  • Loan amount: This is the total amount you’re approved for borrowing. Not only does each provider have its own range, but your credit score also influences the amount approved.
  • Interest rate: The interest rate is the cost of borrowing money. Someone with a bad credit rating will likely receive a higher interest rate. The Federal Reserve reported an average of 11.48% for 24-month personal loans as of May 2023, and most personal loan interest rates range between 6% to 36%. If you see interest rates much higher than this, it could be a sign of predatory lending.
  • Repayment term: The term length greatly impacts your monthly payments. Shorter terms mean higher monthly payments; however, even though a longer term length may give you a lower payment, you’ll end up paying more in interest over time.
  • Lender’s fees: Lenders often include multiple types of fees in a loan, such as origination fees, administrative fees, prepayment penalties and potential late fee charges.
  • Credit score and other requirements: Ensure you’ll qualify for the minimum credit score the lender will consider for a loan, plus any other income or credit requirements.

What to do if you’re denied a personal loan

If you’re denied a personal loan, you still have alternative options available. By law, a lender must tell you why your application was rejected within 60 days of the decision, which can help you understand what areas in your financial situation need improving.

In the meantime, you can also explore alternative funding. If you have time, you can look into hardship programs (such as rent or food assistance) through your local community or government for temporary assistance.

If you need money more urgently, you can also try cash advance apps, such as Dave or Chime, that let you borrow money against your paycheck without a credit inquiry or interest. Note that these apps typically only lend small amounts and do charge additional fees, which is an important consideration before committing.

Borrowing from friends and family is another alternative and can help avoid high interest on charges and fees. Before going down this path, though, put the details of your agreement, including the loan amount, interest charges and repayment plans, in writing so there is clear understanding from both parties to avoid potential conflict.

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    Will getting a personal loan impact my credit score?

    Taking out a personal loan does impact your credit score in a few ways. For starters, when you apply for the loan, the lender pulls your credit report, which gets reported as a hard inquiry.

    The loan becomes part of your credit profile and shows as open until you pay off the amount, which impacts your credit utilization. Your payment activity gets reported each month too, which stays on your credit profile for seven years and can either positively or negatively impact your credit score.

    What type of loan is the easiest to get with bad credit?

    Applicants may find it easier to get approval for a secured loan, where the borrower uses collateral as another form of guarantee. Collateral is an asset the lender can repossess if the borrower fails to make payments, but it lessens the risk for the lender since it can recoup some of its loan costs.

    How long does it take to fix bad credit?

    Fixing bad credit can take as little as a few months or several years, depending on what caused the lower credit score. Some entries, such as a bankruptcy, stay on your credit report for seven years, while other negative marks, such as a hard credit inquiry, fall away after two years. Additionally, creditors report your payment activity each month, which can help improve your credit score slightly if you’re making on-time payments.

    Can I get a credit card with bad credit?

    Yes, there are credit card options for those who have bad credit, such as secured credit cards. If approved, your credit line is equal to the amount you put down for a security deposit. Using wisely can help you rebuild your credit with on-time payments or establish a credit history.

    Bottom line

    Typically, personal loans with bad credit are more costly — and they should always be carefully considered. However, if you use the funds to help pay down other debt or consolidate, this could help you get caught up on your finances.

    Before applying for a personal loan, consider how much you can comfortably afford to pay back each month. If there’s a chance you could default on the loan, it’s probably better to consider an alternative or take steps to build your credit first.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Experian, “What Is a Good Credit Score?” Accessed July 18, 2023.
    2. MyCreditUnion.Gov, “Payday Loan Alternatives.” Accessed July 17, 2023.
    3. National Credit Union Administration, “Payday Alternative Loans.” Accessed July 17, 2023.
    4. Consumer Financial Protection Bureau, “Can a payday lender garnish my bank account or my wages?” Accessed July 17, 2023.
    5. Federal Reserve, “Consumer Credit - G.19.” Accessed July 17, 2023.
    6. Consumer Financial Protection Bureau, “My credit application was denied because of my credit report. What can I do?” Accessed July 17, 2023.
    7. USA.gov, “Facing financial hardship.” Accessed July 17, 2023.
    8. Experian, “How Long Does it Take to Repair Your Credit?” Accessed July 17, 2023.
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