March 16, 2020
Can you Get a Personal Loan with Bad Credit?
Personal loans aren’t as hard to get your hands on as they used to be. If you have excessive credit card debt or just need some extra cash, a personal loan can be a great option to help your finances or help you get some debt relief. Many lenders require good credit to secure a personal loan, but there are still options for those with bad credit. Knowing what you need, what to look for, and how a personal loan affects you will help you make the right decisions.
What Credit Score do you Need?
Personal loans are unsecured; in other words, you don’t need to put down any collateral. What this means, however, is lenders rely on your credit score for qualifying purposes. If you don’t have a ‘good’ credit score, you may have to look for alternate loans rather than personal loans from your local bank.
Ideally, you should have a 680 credit score if you want a standard personal loan from your local bank with the best interest rates. What if you don’t have a 680 credit score, though? Don’t worry, you still have options; you may just have to think outside the box.
What Does a Personal Loan for Bad Credit Look Like?
If you don’t have the high credit score, don’t worry, all hope isn’t lost. You may still qualify for a personal loan with bad credit. Rather than going to your local bank, you’ll need to try:
- Credit unions
- Online banks
- Peer-to-peer lenders
Each financial institution or person will have different qualifying guidelines. Make sure you understand them well and look closely at the parameters of the loan. Oftentimes personal loans for bad credit have higher APRs, more fees, and lower loan amounts.
How to Tell Which Personal Loan for Bad Credit is Right for You
We recommend that you get quotes from at least three lenders when shopping for a personal loan for credit card consolidation or for emergency funds. Check all of your resources, including online lenders and peer-to-peer lenders. As you shop for a personal loan for bad credit consider the following important factors:
This is the amount of interest you pay to borrow the money. The higher the APR, the more the loan costs you over its term. Make sure you pay attention not only to the monthly payment but the cost of the interest – is it worth it to pay that amount? If you’re consolidating debt, pay close attention to the APR. Ask yourself:
- Is it lower than the APR on all debts you are consolidating?
- Will the total amount of interest paid over the term be less than the interest you’d pay on your current debts?
The term is how long you take to repay the loan. If you have a 12-month term, for example, you must pay back the principal (plus the interest) in 12 months. The shorter the term you take, the less interest you pay, but the higher your monthly payments become. You need to find the perfect balance.
Think about what monthly payment you can afford and choose the term accordingly. Don’t choose a term that you can’t afford, but don’t’ stretch the term out so long that you overpay in interest. The longer you borrow the money, the more interest you pay.
All lenders charge fees to lend you money. Ask about all fees, including any hidden fees. Most lenders charge what they call an origination fee. This is a percentage of your loan amount. For example, if you borrow $20,000 and you have a 2% origination fee, you’ll pay $400 in closing costs. The lender will typically take the money right from your proceeds, so instead of getting $20,000, you’d get $19,600.
What if you Get Declined?
If you can’t get a personal loan for bad credit from a bank, credit union, online lender, or peer-to-peer lender, you may need to work on your credit. It takes a few months to a year to see the changes, but the work is well worth it. Are you ready to improve your credit? Try these simple tips.
1. Get Caught up on your Bills
One of the largest components of your credit score is the payment history. If you have any late payments (30 or more days late), it hurts your credit score every month until you get caught up. Figure out which bills are late and get them current again. This will have an instant and large effect on your credit score.
2. Pay Down your Debts
If you have a lot of outstanding debts, pay your balances down or off completely, if you can. Ideally, your credit lines shouldn’t have more than 30 percent of the credit limit outstanding. If you have a $5,000 credit limit, you shouldn’t have more than $1,500 outstanding at once.
Paying your debts down also helps your chances of getting approved for a personal loan too. Lenders look at your debt-to-income ratio, which is a comparison of your gross monthly income (income before taxes) to your monthly debts. Paying your balances down will decrease your monthly payments which helps your debt ratio too.
3. Correct any Errors
It’s important to look at each line of your credit report and evaluate it for accuracy. Do all of the trade lines belong to you? Are the payments reporting correctly? Are the balances right? If you notice any errors or fraudulent activity, bring it to the credit bureau’s attention right away. You’ll need to make the request in writing and they have 30 days to respond to your request. If they find the information was reported in error, they will correct it and fix your credit score.
4. Don’t Open New Credit or Close Old Credit Accounts
Your credit age is a part of your credit score too. Your credit age is the average age of all accounts you have open. The ‘older’ your credit age, the better your credit score becomes. If you open new credit, this brings the average credit age down drastically. The same is true if you close an old account, though, since you lose the ‘older’ account, the credit age becomes younger and your credit score can fall. It’s best to leave all accounts alone.
Show Compensating Factors
If you can’t improve your credit score or it doesn’t increase fast enough, you may also find a lender willing to lend you money if you have compensating factors. As the name suggests, these are factors that make up for the riskiness, in this case, a low credit score. Compensating factors include:
- Money in savings – If you have an emergency fund that can cover 3 – 6 months of your expenses, lenders view you as less risky. You have money to cover your bills even if you lose your job or fall ill and can’t work.
- Stable employment – If you’ve been at the same job for many years and have steadily increased income, this shows lenders that you are stable and responsible. This reduces your risk of default on the loan more than an applicant that constantly bounces from job to job.
- Low debt ratio – If you don’t have a lot of outstanding debts, lenders may overlook your low credit score. Lenders look at the big picture to see what you can afford. If you can afford the loan and can explain the bad credit, they may overlook the lower score.
If you still can’t get a personal loan for bad credit, consider the following options:
- Get a cosigner – If you have a friend or family member with good credit that will cosign the loan, it can increase your chances. Make sure they are aware that they are liable for the loan if you stop making your payments before making the decision.
- Get a payday loan – If you’re in a financial bind, a payday loan can bridge the gap between paydays, but you must pay the loan back on your next payday. They are often much more expensive than personal loans, so use this as a last resort.
- Borrow from friends or family – If you only need a small amount of money to get through a crisis, a personal loan from a friend or family member may help. Just make sure you can pay it back in full.
Borrowers with bad credit do have options for personal loans, it may take a little creativity and/or time, though. Think of all of your options and decide which one will suit you now (with an affordable monthly payment) and be affordable over the term of the loan (low enough interest) to give you debt relief or the cash in hand that you need.
Explore all of your options and weigh the pros and cons of each. Choose the loan that helps you out of your financial situation, but doesn’t inadvertently put you in another financial bind that ends up in a vicious cycle. The right personal loan will be affordable, have a decent term, and allow you the financial freedom you desire.