A Complete Guide: How to Secure a Personal Loan With Bad Credit

By: Kate Samano April 12, 2022

For many people, getting a personal loan with bad credit is perfectly doable. However, finding one may take more work than if you had good credit. Rates are often higher and repayment terms more stringent when you have bad credit. Some loan providers don't require good credit, but beware of lenders that don't ask for a credit check, as they might use predatory and unscrupulous practices.

In this article, we explore factors that impact credit rating, types of trustworthy bad credit score loans and steps to take to get a personal loan with bad credit. We also offer tips and advice for avoiding pitfalls and improving your credit score, as well as personal loan alternatives.

What Is Bad Credit?

If you’ve accumulated debt over the years or had trouble paying bills on time, your credit score might be lower than you’d like. Bad credit can be frustrating and put you at a significant disadvantage when it comes to getting loans, credit cards or a mortgage.

Lenders use your credit history to determine whether they can trust you to meet your repayment schedule. If you’ve struggled in the past, it makes sense that lenders might be reluctant to sell you a loan, but it’s usually not impossible. A bad credit score is defined by FICO as being under 580, with credit scores typically ranging from 300 to 850.

Experian, Equifax and TransUnion are the three credit bureaus that calculate credit scores in the United States. They compile credit files and calculate a score that indicates how much risk you carry as a borrower. The lower the score, the more of a risk you pose to lenders. Key contributing factors to a bad credit score include:

  • Short credit history
  • High debt relative to income
  • A history of late payments or defaults

Which Factors Impact Credit Score?

Unless you need to secure capital straight away, it’s often a better idea to try to improve your credit score, rather than taking out a high-interest loan. Let’s explore the factors that contribute to your credit score in-depth:

  • The biggest ranking factor is payment history, which makes up 35% of your credit score. Missing credit card payments or not paying on time makes a substantial dent in your credit rating, although car and mortgage loans also contribute to this factor.
  • Credit utilization accounts for 30% of your FICO credit score and is defined as the ratio of available credit to the amount you’re currently using. If you have multiple credit cards and personal loans, this ratio is measured across all your debts. High ratios suggest that you have issues making payments on time.  
  • The length of your credit history is an important factor for lenders to consider, making up 15% of your FICO score. A long history gives lenders confidence that you can consistently meet repayments, as evidenced by past behavior. 
  • Your credit mix makes up 10% of your credit rating. The more types of credit you have, including personal loans, cards and other loans, the better you’ll score in this category. 
  • The amount of new credit, including how many inquiries you’ve made in the last year, impacts your credit score by 10%. Applying for a lot of credit within a short space of time is a red flag to lenders and can bring down your overall score.   

Does Bad Credit Stop You From Getting a Personal Loan?

While having a poor credit score might limit your borrowing options and make getting a loan more expensive, it’s usually possible. Unsecured personal loans, such as credit cards and short-term installment loans, are usually more accessible than cheaper loan products, but this varies from lender to lender.

Lenders are in business to make money, and if your credit score makes them think you pose a risk, you might struggle to get approved. Some lenders exclusively work with people who have good credit scores, while others see people with bad credit as a good business opportunity because they can charge more for late payments and continue charging more as debt accrues.

In general, responsible lenders offset the risk of working with someone who has a poor credit score by charging a higher APR. They might also charge more in interest and origination fees. To avoid paying more money in additional fees for a personal loan, you should do plenty of research, and shop around extensively.

Types of Bad Credit Loans

If you have bad credit, there are some types of loans that are easier to secure than others, such as:

  • Credit Unions: You need to be a member to get a loan from a credit union, but it’s one of the safest options for borrowers with bad credit. APRs are capped at 18%, making them significantly cheaper than other loan products on the market for people with a bad credit history.
  • Installment loans: This includes most types of personal loans and involves getting a lump sum upfront and paying it back in installments over time. 
  • HELOCs: A home equity line of credit is often available to people with a poor credit score. However, to get one, you need to have a mortgage, and the remaining balance on your private residence has to be significantly lower than the value of your property. Like a credit card, it’s a revolving line of credit, and interest is only charged on the amount you use. 
  • Online lenders: Online-only lenders can be a good source of credit for someone with a poor credit history. They tend to be more consumer-friendly and have a wide variety of repayment terms to suit different types of people. 

How to Get a Personal Loan With Bad Credit in Six Steps

There are many people who don’t have an impressive credit score but still need to borrow money. However, options are available to individuals with a poor credit history. Following these six steps could help if you find yourself in this position.

1. Take Steps to Build Your Credit Rating

Unless you need cash fast, it’s best to take steps to improve your credit score if you want an affordable loan. We provide more advice about how to do this later on in this article. 

2. Find a Cosigner

If you have bad credit but know someone who will cosign for you, there’s a good chance you’ll get a better deal on a loan than if you apply without one. A close family member or friend who knows you well enough to put their credit rating on the line for you could help you get a better deal on a loan.

3. Speak to Lenders You Already Work With

One of your best bets for getting a personal loan from a traditional bank is through a lender you currently do business with. A lender you’re already working with is more likely to overlook a less-than-perfect credit score and offer you a loan. 

4. Look Into Bad Credit Personal Loans

Interest rates are likely to be higher, but it’s still possible to get a bad credit loan with affordable terms. Be sure to conduct thorough research and compare APR, origination fees and interest rates, so you get the best deal.

5. Prequalify

Prequalification is a great way to determine whether you’ll get accepted for a personal loan without putting a mark on your credit score. When comparing loan offers, always try to prequalify first to avoid hard searches and potentially impact borrowing in the future. 

6. Research Repayment Terms

Once you’re approved for a personal loan, always read through the repayment terms carefully to ensure the fees and rates aren’t extortionate. There’s the potential to find tricky rates hidden in the small print, so make sure you know exactly what you’re walking into.

Tips for People With a Bad Credit Rating and Loan Alternatives

Below are some more tips to help you understand how to get a personal loan with bad credit:

  • Beware of add-on costs in the fine print: People who have a poor credit history are considered higher risk, so lenders might find ways to draw you in to purchase the loan, and then hit you with charges hidden in the fine print. When applying for any loan, you should carefully read the fine print in the loan agreement to understand the pricing and pricing structure of the loan.
  • A loan costs more for high-risk borrowers: Higher rates and charges are one of the biggest drawbacks to applying for a loan with a bad credit history. Credit scoring models use a range of data, including payment history and loan balances, to determine how likely you are to make repayments on time. If lenders worry that you’ll pay late or default on your payments, they try to make up for the risk elsewhere.
  • Beware of aggressive lenders: Some lenders make it their business to prey on people with a bad credit history. They’ll use invasive marketing tactics, such as SMS messaging, direct mail and email, to sell you loans with extortionate rates. They might offer teaser interest rates as low as 6% that increase drastically after the introductory period. This is why it’s so important to read loan agreement terms, and never rush the loan application process.    

How to Improve Your Credit Score

For most people with bad credit, building it up takes time and dedication. Here are some things you can do to help repair your credit:

  • The leading causes of poor credit are poor repayment history and missed payments. If you take care of them and pay your debts on time, you’ll improve your credit score significantly.
  • Bring down the balances on your credit card, as high credit utilization ratios are the second-highest ranking factor for your credit score. Resist spending more than you earn, and aim to pay credit card balances in full each month. 
  • Consider Experian Boost, which counts payments, such as Netflix, utility bills and cell phone bills, toward your credit score. 
  • Check your credit report regularly, and take note of any inaccuracies or incomplete data. Making a dispute is free and could improve your credit score if something isn’t right.
  • Use your credit regularly and responsibly. Lenders want to see that you use various types of credit and always make repayments on time. Charge something to your credit cards at least once every couple of months and pay it off quickly for an optimal score. 

Get Help From a Team of Dedicated Financial Advisors

Getting a personal loan can be a minefield. Let the team here at Lendzi help you navigate the market for bad credit personal loans and find the best deal.

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