How Can I Get a Loan with Bad Credit?

    Bad credit or no credit makes it tough – but not impossible – to get a loan. Credit unions, home equity and peer-to-peer loans or even debt consolidation with no loan could improve your credit rating and increase your future options.

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    What Is a Bad Credit Loan?

    A bad credit loan is a financial fix for consumers who need help paying bills, but have an unattractive credit score and weak credit history.

    It’s the choice your left with when a few missed payments or overspending with your credit cards has taken the shine off your credit score and left you with few options for financial relief.

    It is not a match made in heaven – a low credit score means you’re going to pay some serious interest to get this loan – but if you need to borrow money, this is one way.

    You probably will feel better about things if you use the other name for a “bad credit loan,” which is the much-more acceptable term “personal loan.” By either name, this is a is a viable debt-relief option, especially if you’re in an emergency financial situation.

    Bad credit loans work in exactly the same way a personal loan does. It’s money you borrow and pay back in fixed monthly installments, usually over the course of one year, but it could go three years. The loan can be used for just about anything, including consolidating credit card debt, paying off medical bills, buying a car or even making a major repair to your own car.

    Finding a bad credit loan might be a chore, but if you’re diligent, you’ll be rewarded. It could come from a bank, but more affordable interest rates and flexible qualifying requirements, probably will be found at these places:

    • Credit unions. A great option. Maximum allowable interest rate is 18%.
    • Family or friends. Easier to qualify and hopefully lower interest rates.
    • Find a co-signer. Use someone else’s high credit score to get a lower interest rate.
    • Tap home equity. Credit score not a factor. If you have equity, you can get a loan.
    • Online or P2P. Huge market of lenders who can be very flexible with terms.
    • Use a long-term relationship to convince your bank to agree to a short-term loan.
    • Cash advances. This is a really, really expensive option, but it’s available.

    You could add more options like payroll advances, loans from retirement accounts or borrowing against life insurance to the list, but those are last-ditch choices best left untouched unless everything else fails. There are better alternatives to consolidate debt with bad credit.

    What Is Considered a Bad Credit Score?

    Credit scores range from 300-850 and while there is no official start to the “bad credit score” category, it’s safe to say if you’re under 650, you are considered a high risk and pay the highest interest rates.

    People in this category are prime candidates for bad credit loans.

    The definition of a “good” and “bad” credit score does vary from lender to lender. Some won’t touch anyone with a credit score under 650, some actually market to consumers with a sub-650 score.

    So it’s hard to say what makes you “good” or “bad” on the credit scoreboard, but the accepted range looks something like this:

    • 760-850 – Excellent
    • 700-759 – Very good
    • 660-699 – Fair
    • 620-659 – Poor
    • Scores under 620 – Extremely poor

    How Bad Credit Scores Affect Borrowing

    Consumers in the good-to-excellent credit score category (700 and above) receive the lowest interest rates and best loan terms. Consumers in the poor and extremely poor categories (anything under 620) are burdened with high rates and may not be approved for a loan at all. Folks in the middle (621-699) have to weigh the cost of a bad credit loan versus the gain they hope to make by using it to pay off bills.

    In other words, the higher your credit score, the more likely you’ll get a good deal on a loan. Low credit scores are risky business and borrowers are punished for it with high interest rates.

    Many consumers get that message and that is why the average credit score for U.S. consumers has risen to an all-time high of 705 in 2020. That’s a 16-point jump over the last decade. However, the real numbers worth paying attention to are the combination of score and age, which say a lot about how our economy operates.

    According to FICO, people ages 60-and-above have an average credit score of 743, while those in the 18-29-year-old bracket average just 652. It’s one of the few places in life where being old pays off.

    Still, that’s a 91-point difference, which is very costly when you are shopping for home and auto loans as the graphic below demonstrates. Check out the payment differences in September of 2020 among credit scores for a 30-year, $200,000 home loan.

    How Your Credit Score Effects a 30-year, $200,000 Home Loan
    ScoreInterest RateMonthly PaymentTotal interest paid
    760-8502.727%$814$93,057
    700-7592.949%$838$101,578
    660-6993.34%$880$116,916
    640-6593.77%$929$134,261
    620-6394.316%$992$156,984
    How Your Credit Score Effects a 6-year, $25,000 Auto Loan
    ScoreInterest RateMonthly PaymentTotal interest paid
    720-8503.65%$387.16$2,875
    660-7194.68%$398.92$3,722
    620-6597.65%$434.07$6,253
    619-and lower11.92%$487.72$10,115

    How to Get a Loan with Bad Credit

    If this is not an emergency, the first step to get a loan with a bad credit is to improve your credit score so you are able to afford the loan you need.

    Start by making on-time payments, especially on credit cards; and reduce the balance on cards to under 30% of the credit limit allowed. Finally, don’t apply for any new credit.

    The combination of those three factors – on-time payment; low credit utilization; no new credit applications – account for 75% of your credit score. It’s not unrealistic to think that making an effort on those three fronts could raise your score by 100 points in as little as 3-6 months.

    If, however, this is an emergency and your application for a loan has been turned down repeatedly due to poor credit or no credit, it might help to ask a bank or credit union loan officer for an in-person interview to convince them you are creditworthy.

    If you get that interview, be sure you are prepared with documents that prove you’re a good risk. Lending institutions love stability. It definitely helps your case if you can show them that you’ve lived in the same house (or city) and worked the same job (preferably for the same employer) for several years.

    Common things to bring that prove your credit worthiness include:

    • Tax returns, W-2s and 1099 forms from at least the last two years
    • Details of your job history, including salary and pay stubs
    • List of assets such as home, car, property and where you stand on paying them off
    • List of unsecured debts such as credit cards and medical bills
    • Whether you pay or receive alimony or child support
    • Bank statements for checking, savings and CDs

    Not all of these documents are required, but if you have a poor credit history, anything you can produce that demonstrates you have become responsible with your money will be considered a plus. You should also expect the lender to ask questions about your credit history that may reflect negatively on you. Things like:

    • Have you been involved in any lawsuits?
    • Do you have any judgments against your or items in collection?
    • Have you declared bankruptcy or had a foreclosure judgment against you?
    • What is your ethnic background?

    The last question would seem to violate anti-discrimination laws, but it is required by the government so that it can keep data on lending to minorities and make sure they aren’t routinely turned down or charged excessive fees.

    The purpose of an in-person interview is to convince the lender that if you receive a loan, you can comfortably make payments. Any evidence you have that can support that fact – especially proof that you paid off loans on assets like a car, motorcycle or boat in the past – are going to work in your favor.

    Pros and Cons of Bad Credit Loans

    It makes sense to use caution when taking on any loan, but if you have bad credit, things aren’t good. Don’t make it worse.

    Be careful who do you do business with on a bad credit loan. If the lender doesn’t require a credit check, doesn’t check your income; guarantees you’ll be approved; can’t be found for customer reviews or a Better Business Bureau ranking, it might be time to look elsewhere. Those are red-flag warnings that you might have encountered a loan scam.

    Closely examine the pros and cons of the situation before making a final decision.

    Pros for a bad credit loan:

    • Loans for Bad Credit are Fast: Most loan applications are available online and only take a few hours to get a response. At some places, you can have the money in your account within a day.
    • Lower Interest Rate: If you are able to get a bad credit loan, it likely would come at a lower interest rate than you pay on your credit card debt.
    • Many Lender Options: The number of peer-to-peer lending businesses seems to double every year. If you’re patient, and make lenders compete for your business, you might find a loan with an interest rate that you can afford.
    • Repayment Term Length: Depending on who the lender is, repayment terms could stretch anywhere from one to five years.
    • Improve Your Credit Score: If you commit to making on-time payments, your credit score will improve and make you a more desirable candidate next time you need a loan.

    Cons for bad credit loans:

    • High Interest Rates: You’re a risk so the lender wants a reward; sometimes a huge reward.
    • Fees and Penalties: Read the fine print. Is there a loan origination fee? What is the late fee? You may have to pay a fee for making payments by check.
    • Collateral Sometimes Required: You may have to put a house or car at risk to get the loan. If you miss payments, you could lose that house or car.
    • Might Not Be Licensed: Not every online lender is licensed in every state. Be sure the company you choose is certified in your state before you start paying for their service.

    Be sure you have multiple offers before making a final decision. The competition gives you a chance to compare and research the company you eventually choose.

    Where To Get A Loan With Bad Credit

    There are some outlets for people looking for bad credit loans, but it definitely will take some shopping around to find interest rates and repayment terms you can afford.

    The big national and regional banks stick tightly to credit score ratings so don’t bother with that unless you have taken time to clean up your credit report and raise your score.

    If you don’t have time to improve your score, find a loan from the sources listed below.

    Credit Union Loans For Bad Credit

    credit union – especially one affiliated with your employer or one that is community-based – may be willing to look beyond a poor credit history and make a judgment about whether it will loan you money based on your character and your promise to repay. Think of credit unions the way you would a small community bank from years ago.

    The most promising aspect of a credit union loan is the interest rate ceiling of 18%, which applies to anyone, regardless of their credit score. A similar loan from a bank could run you as much as 36% interest.

    That can make a huge difference in the payout you make on a bad credit loan. Let’s say you have a three-year, $10,000 loan. Here is the total repayment:

    • 18% — $13,014.
    • 36% — $16,489.

    The chance to save more than $3,000 makes it worth looking into enrolling in a credit union. Almost all credit unions are actively looking for borrowers. If you can afford terms that match your credit history, you are likely to find a credit union somewhere willing to work with you.

    If you are a veteran of the armed forces, you might want to approach the Navy Federal Credit Union or PenFed Credit Union. If you are a teacher or government worker, you might check out State Employees Credit Union or Schoolsfirst Credit Union.

    Almost every consumer could qualify for some credit union. By joining, you position yourself for much more favorable loan terms, regardless of your credit score.

    Borrow from Family or Friends

    This is dangerous from a relationship standpoint, but makes a lot of sense from a financial and loan-anxiety standpoint because it should be easier to get approval and a break on terms.

    Family and friends aren’t likely to put you through a grueling qualifying process and probably would cut you some slack on the interest rate charged compared to what you would get from lending institutions that make bad credit loans.

    However, if you’re thinking about borrowing from family members or friends make sure to factor in what happens if you default. Not repaying a loan to a relative or close associate can poison relationships in ways that go far beyond a bad credit report.

    Treat any loan from someone you know just as if it were an important business transaction between you and a stranger. That means it should be formalized with clear documentation and legally recorded. To avoid future problems, create a written contract that includes the loan terms and interest rate, and what will happen if you cannot repay the debt.

    Get a Co-Signer

    If borrowing from a friend or relative is not possible, you can still approach someone you know with good credit about co-signing on for a bad credit loan.

    With a qualified co-signer, the lender will set the loan terms based on the credit score of the person with good credit, who will then be equally responsible for repayment. All payment information will be recorded on both your credit report and your co-signer’s, so if you default on the loan, or you’re late with payments, you both suffer. However, if you make timely payments, your own score will improve, making it easier to obtain future loans without a co-signer.

    Home Equity Loan with Bad Credit

    If you have equity in your home, you can apply for a home equity loan or home equity line of credit (HELOC). Your home is used as collateral, and home equity loans can be obtained regardless of your credit score. The interest rate is usually low, because the loan is secured by the home. Also, the interest you pay on a home equity loan is usually tax-deductible.

    It is important to remember that tapping your home equity puts your property in jeopardy if you don’t repay the debt. But if you are disciplined and have a reliable income, it is an inexpensive way to borrow from a reputable lender when you have bad credit.

    Peer-to-Peer Lending

    Peer-to-peer lending, also known as P2P lending, has been around since 2005. It’s an online platform that allows you to get a bad credit loan directly from another individual or group of individuals rather than from an institution. Potential borrowers post a loan listing on various peer-to-peer websites, indicating the amount needed and what it’s for. Investors review the loan listings and choose borrowers they wish to fund.

    Your credit score is still a factor, but since an individual investor has much greater leeway in how factors are weighted, these loans are often more readily available for people with bad credit. Lending standards are significantly more lenient and interest rates are usually lower than those offered by traditional lenders. In addition, peer-to-peer websites help evaluate risk for the lender, while verifying the lender’s credentials for the borrower.

    Here are some examples of peer-to-peer lending institutions:

    Peer-to-Peer Lender Examples
    Lender NameBorrowing LevelsLoan TermsMinimum Credit ScoreInterest RangesOrigination FeeTime to Receive Funds
    Lending Club$1,000 to $35,0003 years or 5 years60010.68% to 35.89%1% to 6% of loan amountOne week
    Peerform$4,000 to $35,0003 years or 5 years6005.99% to 29.99%1% to 6% of loan amountUp to two weeks
    Prosper Marketplace$2,000 to $35,0003 years or 5 years6407.95% to 35.99%1% to 5% of loan amountOne to three business days
    SoFi$5,000 to $100,0003 years to 7 years6605.99% to 18.83%NoneOne week
    Upstart$1,000 to $50,0003 years to 5 years6207.35% to 29.99%1% to 8% of loan amountOne day

    Online Personal Loans

    Technology and a wide gap in the marketplace have opened the door for Personal Loan Lenders, a new industry that has created an option for people with low credit scores.

    These lenders are essentially banks that don’t have offices. They do their work online and offer bad credit loans for things like debt consolidation and home repairs. Their primary appeal is they work fast. They can make decisions in minutes and deposit funds in an account in a few hours or days. Many have no application fee or pre-payment penalty.

    Online personal loan applications are simple and easy to fill out. Credit scores are only a part of the decision-making process so this could be an appealing option if you have bad credit or no credit. In fact, some personal loan lenders have their own credit-score model and don’t use FICO scores. Other factors considered include whether you have a college degree, the school your degree came from and your employment history.

    Online Personal Loan Lender Examples
    Lender NameBorrowing LevelsLoan TermsMinimum Credit ScoreInterest RangesOrigination FeeTime to Receive Funds
    Avant$2,000 to $35,0002 years to 5 years5809.95% to 35.99%4.75% of loan amountTwo days
    Best Egg$2,000 to $35,0003 years or 5 years6405.99% to 29.99%0.99% to 5.99% of loan amountNext day
    Earnest$2,000 to $50,0001 years to 3 years7206.99% to 19.99%NoneOne week
    One Main$1,500 to $25,0001 years to 5 yearsNone17.59% to 35.99%Varies by stateSame day

    Secured vs. Unsecured Bad Credit Loans

    If your credit score does not impress banks, credit unions or online lenders, the best chance to get money you need is through a secured loan.

    A secured loan is one in which you borrow against an asset you own, such as a home, car, boat, property, savings or even stocks.

    The lender will hold the asset as collateral against you defaulting on the loan. Secured loans offer lower interest rates, better terms and access to larger amounts of money than unsecured loans.

    An unsecured loan has nothing more than a promise that you will repay behind it and could be very difficult to get from most banks. Banks are willing to make unsecured loans to their best customers – people who have the income and credit history to prove they will repay the loan – but are very cautious about lending money otherwise.

    An unsecured loan is no risk for the borrower, but high risk for the bank so you can expect considerably higher interest rate charges and little flexibility on qualifying or terms of the loans.

    Some banks will make secured loans based on the amount you have in a savings account or the value of any stocks you own. The value of getting a secured loan against savings or stocks is that you will not need to liquidate the asset so when you have paid off the loan, you still own the savings or stocks.

    However, if you plan to use savings or stocks as collateral, most financial advisors suggest you liquidate them and use the money to pay whatever debt you are trying to settle rather than take out a loan.

    The good news for everyone involved is that paying off the loan, whether it’s secured or unsecured, will improve your credit score.

    Negotiate an Agreement with Your Bank

    If you happen to be a long-time customer at your bank and had a good record until some recent mishaps, it’s possible you could talk them into an agreement that would provide you a bad credit loan on a short-term basis.

    The loan limit probably won’t be very high and it would really be a good-faith gesture on the part of your bank because there likely is no policy regarding this.

    But the bottom line is that it’s only possible if you ask. It doesn’t cost anything to try.

    Ge a Cash Advance

    A cash advance is a loan using your credit card line. This is a really risky solution for a financial problem. Cash advances carry heavy interest charges, higher than those on purchases and there usually is a fee (3%-5%) charged for receiving one.

    If you’re in a hole, this just digs you deeper, but it may be your only one to get a loan.

    What Is the Best Bad Credit Loan Company for Me?

    Like every business, some company’s get a reputation as the place to go for a specific product and that is the case with bad loans.

    Credit unions, because they are nonprofit, owner-operated institutions, have earned a reputation as a good place to find bad credit loans. Since you’re already a member, the feeling is they’ll push a little harder to help one of their own.

    Online lenders like Upstart, Prosper, Lending Club, OneMain and Peerform are good examples of companies that have stretched the boundaries that allow someone with bad credit to get a personal loan.

    In each case, however, you should be prepared for some sticker shock when it comes to interest rate charges.

    If you have a credit score under 670 or no credit history, you likely will be paying 18% or more to get a bad credit loan.  If your credit score is under 620, the rate is going to jump to 22% and if you are under 600, the best you can hope for is 27%-30%.

    What that reminds you is that it’s costly to have a bad credit score and you should spend time improving it before borrowing any more money.

    How to Avoid Bad Credit Loan Scams

    When you are in financial distress, you can easily be tempted by company’s that promise an easy way out. There is no easy way out. If you come across any of these loan scams, politely turn your back on the lender … and run!

    • Companies that ask for fees upfront. They might call them “application fees” or “document fees” but they’re essentially asking to get paid before they do anything. Bad sign. Very bad sign.
    • Companies that request personal information, including social security number, bank account number or credit card without first providing you a loan agreement in writing.
    • Companies that request a wire transfer of money. Verify the company’s address and maybe even check with the state attorney’s office in that city to see if there have been any complaints.
    • Companies with no state registration. If they’re lending money, they’re required to register with the state. Ask to see the registration and the verify it.
    • Website reviews. You should be suspicious if every single review gives five stars and says wonderful things. That doesn’t mean it can’t happen, it just means you need to verify that the reviews are authentic before believing everything you see or hear.

    Frequently Asked Questions about Bad Credit Loans

    What is the difference between payday loans and bad credit loans?

    Are bad credit loans safe?

    What type of loans can I consolidate?

    Are bad credit loans good for emergency situations?

    Do I need collateral to get a bad credit loan?

    Can you get a loan if you’re unemployed?

    Can you get a small personal loan with bad or no credit?

    How will applying for the loan affect my credit score?

    How does COVID-19 (coronavirus) affect bad credit loans?

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    Author

    Staff Writer

    Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at bfay@debt.org.

    Sources

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    6. DeNicola, L. (2020, July 23) Where Can I Get a Small Loan With Bad Credit? Retrieved from https://www.experian.com/blogs/ask-experian/where-can-i-get-a-small-loan-with-bad-credit/
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