December 15, 2022
Personal loans can be a great way to consolidate debt or cover an emergency expense. Though it’s easier when you have good credit, having poor credit doesn’t mean you can’t qualify for a personal loan.
Most lenders consider a FICO score of 630 to 689 to be fair credit and a score of 629 or lower to be bad credit. Even with fair or bad credit, there are ways you can get approved for a personal loan.
Can You Get a Personal Loan With Bad Credit?
You can get a personal loan with bad credit, but it may limit the amount you can borrow and increase the interest you pay on your loan. You may also have to pay more fees. A low credit score suggests to lenders may have struggled with repaying loans or credit cards before, so lending to you is risky. If your credit score is 629 or lower, then you’ll need to find other ways to assure lenders you’ll repay your loan.
Tips for Getting a Personal Loan With Bad Credit
It might feel discouraging to apply for a personal loan with bad credit, but there are many things you can do to get approved for your loan. Here are some of the ways you can take control and improve your odds.
Find a Cosigner
If you can’t wait for a loan, another option is to find a cosigner. A cosigner is a friend or family member with good credit who agrees to repay your loan if you cannot repay it. Adding a cosigner to a loan reduces risk for the lender and may help you get approved, get a larger loan, and get a lower interest rate on what you borrow.
Collateral is tangible property a lender can collect if you fail to repay a loan. Most personal loans are unsecured meaning you don’t provide collateral to get approved. However, some lenders offer secured personal loans.
Offering a lender collateral reduces the lender’s risk. That means you may increase your chance of approval, get approved for a higher borrowing amount, or get approved for a lower interest rate.
Getting pre-qualified means having a lender do a basic financial review to determine how much money you’ll be able to borrow and at what interest rate. It’s a similar process to getting pre-qualified for an auto loan.
Unlike actually applying for a loan, pre-qualifying requires a low level of commitment from you. You can walk away from the offer if you don’t like it, and it doesn’t require a hard credit check that can hurt your credit score.
It might feel like your credit score is the only thing that matters, but lenders will also consider other information for pre-qualification, such as your:
- Annual income
- Debt-to-income ratio
- Monthly expenses (such as rent, mortgage, or car payments)
- Employment history
Shop Around and Compare Lenders
Every lender decides their standards for lending and sets their own rates. Some lenders even specialize in certain kinds of lending (including lending to borrowers with poor credit). You’ll find better terms and save money if you shop around and compare options. Here are some of the things you should compare when choosing a lender:
- Compare the interest rates you qualify for. Most loans advertise their best rate to grab borrowers’ attention — but that’s not the rate you’re going to get with bad credit. Figure out the rates lenders will offer you so you get an accurate understanding of what each loan will really cost. For reference, the average rate on personal loans for someone with fair credit (601-660) is around 25%.
- Ask for a list of fees. All lenders charge fees, but some charge more or higher fees. Some lenders even add extra fees for borrowers with low credit scores to offset the risk of lending to them. Comparing interest rates is important, but comparing fees is also part of understanding the true cost of a loan. You can find a list of common personal loan fees here.
- Investigate customer support options. You want to know you’ll be able to get your questions answered and problems fixed without too much hassle. A good lender should have multiple ways you can reach them — and positive reviews indicating their customer support is effective.
Where to Get a Personal Loan With Bad Credit
Some lenders are better than others at working with borrowers with bad credit. Your financial situation is unique, and you’ll need to consider your options to find the right lender for you.
Credit unions are one of the best places to get a loan. Their loans usually have lower interest rates and lower fees than other lenders, and they’re known for working with members who have weaker credit scores.
Most credit unions do require you to become a member to take out a loan, but credit union membership comes with a lot of great perks. Your loan will also be regulated by the National Credit Union Administration, so you’ll know your credit union is using fair lending practices.
Online lenders can offer great loan rates because they keep their overhead costs low and pass some of their savings to customers. You can find them through online lending networks that let you fill out one application and then direct you to lenders who are most likely to work with you.
The downside is it may be harder for you get customer support through an online lender. Some online lenders also add extra (or more expensive) fees to loans. They may even take these fees off the top of your loan, leaving you with less money than you planned to borrow. There’s also a greater chance of encountering scams so evaluate online lenders carefully.
Getting a personal loan from your bank may be a great option if you’ve been using your bank for a while. You know the kind of customer support it offers, and your financial information is already on file. You also know the loan is regulated by the Consumer Financial Protection Bureau.
However, qualifying for your loan may be harder at a bank and you’re likely going to pay more interest and higher fees than you would with a credit union or online lender.
Payday loans may seem appealing because they’re fast and approval is easy. But payday loans are very different from personal loans. Their terms are shorter, you can’t borrow as much, and their cost is much, much higher. Payday lenders also don’t report your payments to credit bureaus, so you won’t build credit like you would with a personal loan.
Worst of all, 80% of payday loans get rolled over to another term instead of being paid off. Additional finance charges can add up to half the amount you borrowed or more! It’s easier for borrowers to get trapped in a cycle of debt with payday loans.
Some lenders claim they can approve a personal loan without checking your credit score. The problem is these lenders aren’t considering whether you can afford to repay the amount you borrow. Additionally, their high interest rates and fees make them similar to payday loans. They can be difficult to pay off and usually cost much more than they’re worth.
What to Do if You're Denied for a Loan
Being turned down for a personal loan can be disheartening, but it doesn’t mean you’ll never qualify or that you don’t have other options.
Improve Your Credit Score
If you’re struggling to pay your bills on time, consider making a personal budget. This can help you identify bad spending habits and find ways to save money so you don’t rely on credit or fall behind further.
Ask for a Secured Personal Loan
Most personal loans are unsecured, meaning you don’t need to offer collateral to borrow them. However, you can offer a lender collateral to try to get a better rate or increase the amount you can borrow. In some cases, this can help offset bad credit.
Find a Co-borrower or Cosigner
A co-borrower and a cosigner are not the same thing. In short, a co-borrower is responsible for helping repay a loan while a cosigner is only responsible if the primary borrower doesn’t repay their loan.
Either way, having a second person with stronger credit on your loan can help you qualify and get better terms for your loan.
Find a Different Lender
Some lenders are more forgiving than others, and some types of lenders are friendlier for borrowers with bad credit. If you’ve been turned down by your bank, consider a credit union or online lender.
Consider Personal Loan Alternatives
While personal loans are a great financial tool, they’re not the only tool in the toolbox.
Balance Transfer Credit Cards
If you’re applying for a personal loan to consolidate debt, you might consider a balance transfer credit card instead. A balance transfer allows you to use one credit card to pay off existing debt. Then you repay the credit card.
Balance transfer credit cards often offer an introductory 0% APR that allows you to pay down the principal of your debt. The approval process is often easier than with personal loans. But be aware that the interest rate on these cards can be high once the introductory period ends, so you should have a repayment plan in place and stick to it or you may end up in more debt.
Debt Management Plan
Another alternative to using a personal loan to consolidate debt is to set up a debt management plan. This involves working with a debt management company or credit counseling agency. They’ll work with your creditors to lower your interest rates so you can put more toward the principal of your debt.
Evaluate debt management companies and credit counseling agencies carefully before you sign anything. While some are reputable organizations designed to help people get out of debt, there are also many scammers in the industry. Know the signs of a debt management scam.
Qualifying for a personal loan with bad credit isn’t easy — but it’s also not impossible. And getting that personal loan can be a big step toward repairing your credit and building a brighter future.