Some people look to personal loans when financial problems arise, but if you have bad credit, getting a loan can be difficult. If this is you, you may be relieved to know that some lenders are willing to work with borrowers whose credit history is less than perfect.
Here are some of the challenges and opportunities for borrowers who are wondering “How can I get a personal loan with bad credit?”
What is the minimum credit score for a personal loan?
Each lender has its own criteria, including tolerance for risk, when determining the minimum credit score for a personal loan, says Rod Griffin, senior director of public education and advocacy for Experian credit bureau.
“In general, when you think about mortgage borrowing, the 680 is what we think is close to capital,” he says. “So you may not qualify at this point.”
A score of around 700 should help you get access to a personal loan, “but maybe not at the best rates,” says Griffin. “To qualify for the best terms, you will generally need scores of 750 or more.”
Lenders also look beyond your credit score to other factors that may affect your ability to repay the loan, says Griffin, including:
Generally, a lender wants to gauge how well you’re paying off the money you’re borrowing before giving you a personal loan.
“If you have a history of debt failures — things like a lot of late payments or collection accounts — that will make it more difficult,” he says.
What is the best loan for bad credit?
If you have a low credit score but are still hoping to get a personal loan, know that many lenders specialize in helping borrowers with bad credit. You can start by exploring US News Directory of Best Bad Credit Lenders.
But before you apply for a personal loan, ask yourself if it’s really in your best interest, says Todd Christensen, director of education for Money Fit of DRS Inc. , a nationwide non-profit credit advisory agency. The best loan for bad credit can be no loan at all.
“If you’re taking out a personal loan because of bad credit, you likely have accounts under collection or with payments you’ve already missed,” Christensen says. “Using one loan to pay off another is not a debt reduction plan. It is a debt switch.”
Instead, try to get to the root of your debt and credit problems before you borrow, he says. “If you have bad credit, adding another loan is like adding fuel to bad credit,” Christensen says.
In general, people with poor credit should consider other options before considering a personal loan, agrees Lauren Anastasio, certified financial planner at SoFi.
“If you have poor credit, a personal loan – assuming you qualify – may cost a lot more than other types of financing,” she says.
How can you get a good loan if you have bad credit?
Getting an unsecured personal loan with good terms when you have bad credit can be difficult but not impossible. If you need a personal loan and your credit is shaky, you should:
Look at bad credit lenders. “For better or for worse, there are lenders across the country willing to offer personal loans to consumers with poor credit ratings,” Christensen says.
Improve your financial health. Work to break bad credit habits to raise or at least maintain your credit score.
“Lenders find boring to be very exciting: Paying on time, every time, not having big swings in your balances, and keeping balances low,” Griffin says. “Slow and steady is very attractive.”
Show that you have a stable source of income. If your financial situation has improved recently and you are waiting for your credit score to catch up, try showing lenders that you are in a good position to borrow.
“If a personal loan is your best option, the best thing you can do is provide evidence of stable and reliable income,” Anastasio says. “A reliable income stream gives the lender peace of mind that you have the resources available to make your payments.”
Agree on a shorter loan term. Choosing a shorter repayment period may result in a better rate. “Usually, the shorter the repayment period, the lower your interest rate,” Anastasio says.
Expect lower interest rates on personal loans with repayment terms of two to three years and higher rates on loans for five or seven years, she says.
5 alternatives if your application is rejected
Anastasio says that just because a lender rejects your application doesn’t mean you can’t get a personal loan. Here’s what you can do:
Talk to the lender who declined your application. Another arrangement may still work for the lender. “Start by talking to the lender and see if they would agree to a different loan amount or term for you,” Anastasio says.
Look at other lenders. Try to find the lender best suited to your needs and circumstances. “You can always shop,” says Anastasio. “The underwriting criteria will vary from one financial institution to another.”
Consider borrowing your 401(k). This option does not include a credit check and should cost less than taking out a bank loan, she says. “But there may be tax implications if you leave your employer before the balance is paid off,” adds Anastasio.
Seek help from family members and others. Check with local nonprofits for special purpose loans or peer-to-peer lenders like Prosper. Seeking help from smaller banks and credit unions is another alternative, although a bad credit score may limit your options.
Try to avoid the worst alternatives. Some people with poor credit may consider getting payday loans and property loans. But both types of loans are expensive and can charge an APR of 300% or more, plus an overnight fee if you extend the due date, according to the Federal Trade Commission. You could also lose your car if you can’t pay off a property loan, even if you make partial payments.
How to increase your credit score
Most ways to raise your credit score take time. Here’s what you can do:
Take care of late payments. Late payments are the main reason behind damaged credit scores, Griffin says. “If you have late payments, you need to make up those payments as quickly as possible,” he says.
Reduce your credit card balances. High credit utilization — the percentage of total available credit you use — is the second biggest reason people see their credit scores drop, Griffin says.
Lowering this ratio by paying down debt and resisting new profligacy can improve your credit score. “As you enter your next billing cycle, you’re likely to see an improvement,” Griffin says.
Subscribe to Experian Boost. This free, on-time program counts mobile, utility, or even Netflix payments into your credit score. Griffin says 2 out of 3 people who sign up for Experian Boost see their scores go up right away. Even if your score increases by just a few points, this may be enough to take your credit rating from fair to good. However, as the Experian website notes, “Some may not see improvement in results or odds of approval. Not all lenders use credit information affected by Experian Boost.”
Keep using your accounts. Lenders want to see that you handle credit responsibly. Griffin recommends charging something on each card at least every two months and then paying it off.