How To Get a Personal Loan With Bad Credit

Getting a personal loan with bad credit requires a steady income and employment history, and may entail a few extra steps. The basic application process is the same, but you’ll need to pay extra attention to the terms you’re offered to be sure they make sense.

In addition to higher rates and fees, you may be limited to shorter terms and lower loan amounts. You may need to do a little more shopping to find legit bad credit lenders and weed out the predatory ones.

Knowing the common approval requirements and how to use a personal loan calculator will also help you to compare offers from different bad credit lenders when you’re ready to finalize your loan.

How to get a loan with bad credit in 7 steps

Most personal loan lenders consider a bad credit score to be anything below 580, while others only lend to borrowers with scores above 670. Whether consolidating high-interest debt or funding an emergency cost, you’ll want to know the extra steps involved in getting a personal loan with bad credit before you start applying.

1. Determine whether a bad credit loan is the best option

Bad credit loans are expensive, but they can be a fast way to get cash with a predictable payment and definite payoff. Before you dive into the lender pool, define the “why” behind your bad credit borrowing needs.

• Do you need the funds immediately? Some lenders can deliver funds on the same day you apply, though this may be trickier with bad credit. If you need an emergency loan for a major home or car repair, the funds could get you back on the road or pay for the contractor for that home repair.
• Are you tired of maxed-out credit cards? Bad credit debt consolidation loans can give your sanity some relief from tracking all those credit card due dates if you use the funds to pay them all off. Depending on your rate and repayment term, you may also save money on interest charges.
• Are your credit scores low because of credit cards? Your credit utilization ratio measures how much available credit you’re using, and when it’s high, your scores can drop. But installment loans (like personal loans) don’t directly impact your credit utilization ratio. Using a bad credit loan to bring those credit card balances to zero could give your credit score a big boost if you use the cards sparingly — if at all — in the future.
• Do you have someone who could cosign the loan? You may qualify for a higher loan amount or better interest rate by adding a cosigner. Just remember, their credit could be damaged if you have trouble making payments on the loan.

2. Check your credit score, income and other debts

Your credit score is one of the most important factors that a lender considers when reviewing your application. Although average personal loan rates typically range from 6% to 36%, a bad credit score makes it more likely you’ll be offered a rate above 30%.

If you haven’t checked your credit scores lately, see if your credit card company or bank offers it as a free service. If they’re lower than expected, visit AnnualCreditReport.com to request your free credit reports and dispute any errors.

Bad credit lenders also pay extra attention to how much you earn, how long you’ve been employed and how much debt you already have. Because a lender will want to confirm you have the cash flow to make loan payments, it may ask for additional financial documents for approval, including pay stubs, W-2s, and tax returns to verify your income.

3. Compare bad credit lenders

The terms for bad credit loans vary widely among lenders. Apply with at least three lenders and compare their rates and fees to get the best idea of what’s available. If you’re in a rush to get funding, you can compare bad credit lenders on a marketplace lending site like Bankrate.

If you have a relationship with a community bank or credit union, see if it offers rate discounts or fee reductions for existing customers — you may have an easier time qualifying with a lender you already have a financial relationship with.

When you’re comparing options, check each lender’s website or ask for information about:

• Minimum credit scores: The minimum may be as low as 500 or as high as 670, depending on the lender.
• Loan amount ranges: While loan amounts vary by lender, most offer between $1,000 and $50,000. With bad credit, a lender may limit the loan amount you are eligible for.
• Repayment terms: Personal loan terms are usually from one to seven years, but bad credit borrowers may be restricted to shorter terms.
• Fees: A personal loan for bad credit will likely have an origination fee. These are deducted from your loan proceeds and may be as high as 12% of the loan amount.
• Collateral: If you opt for a secured personal loan, you must provide an asset as collateral — usually a car or your home. This may reduce your interest rate, but the lender can seize your collateral if you fall behind on the loan.

4. Apply for prequalification

Prequalifying for a personal loan allows you to gauge your eligibility odds and estimated rates with no commitment. This process should only involve a soft credit pull, which doesn’t affect your credit score.

It’s a free tool offered by most lenders and can give you an idea of the rates you can expect based on your credit history. A prequalified offer is not a firm guarantee — your rate may change after the lender reviews your full application. Get prequalified with at least three lenders — or receive offers by applying on a marketplace site like Bankrate — to narrow your search.

If you can’t get prequalified for the amount you need, check to see if the lender allows you to add a cosigner or co-borrower to improve your eligibility.

5. Be prepared for a hard credit check

When you make your final lender choice, you’ll officially apply for a personal loan. This is when the lender performs a hard credit check. A hard pull will temporarily knock your credit score down a few points, but the impact is usually offset by making timely loan payments (and leaving those zero-balance credit cards alone if you consolidated).

But too many hard checks in a short time can cause longer-term damage to your credit score. That’s why choosing lenders that offer prequalification or using a marketplace lending site like Bankrate is so important when you’re getting a bad credit personal loan.

6. Receive your loan funds

If you’re approved and agree to the loan terms, the lender may fund your loan as soon as the same business day, though some lenders may take up to a week. Funds are generally deposited directly into your bank account. If you choose a debt consolidation loan, some lenders will use the loan funds to repay your creditors on your behalf.

Most lenders offer an autopay option that withdraws your monthly payment from your bank account on the due date. Not only can this help you avoid missing a due date, but you may receive a rate discount for enrolling.

7. Conduct a financial wellness check

During repayment, review your budget and financial goals to avoid future bad credit loans. If you make your loan payments on time and in full each month, your credit score should slowly creep up. Once you’re out of bad-credit territory, you may qualify for a lower APR through a personal loan refinance — the difference between bad credit and fair credit could shave 7 to 10 percentage points off your rate.

Watch your budget, avoid running up large credit card balances or pick up a side hustle to add money to your emergency savings so you can avoid debt in the future.

While a bad credit loan may help you consolidate debts and improve your credit score, you may also want to seek credit counseling to help you build better money habits and avoid future financial trouble.

Tips for improving your chances of getting a loan with bad credit

Getting approved for a personal loan with bad credit can be difficult, but there are ways to increase your odds. Some take longer than others, but all are worth considering.

• Apply with a cosigner or co-borrower
• Opt for a smaller loan amount
• Consider secured options that require collateral
• Pay down your debt before applying
• Take steps to improve your credit score
• Shop around until you find the right lender
• Consider enrolling in Experian Boost to build credit from on-time utility payments

What to consider before getting a loan with bad credit

A personal loan for bad credit may be a great tool to simplify your finances and improve your credit scores over time. That said, you should weigh the drawbacks of adding a fixed monthly payment to your budget before you make a final decision.

Loan costs are more expensive

You may pay origination fees as high as 12 percent of your loan amount. These fees typically come out of your loan funds before you receive them, meaning you have less cash for debt consolidation, home improvement or emergency costs.

Never pay out-of-pocket fees for approval. All fees should be deducted from your loan proceeds. Run away from a company that pressures you to pay advance fees for any bad credit loan.

Your loan amount may be lower

Lenders that offer personal loans for bad credit borrowers usually cap amounts at $50,000. The amount may be significantly lower if you have a very low credit score — anything below 580 — or a high DTI ratio.

Terms are generally shorter

A low credit score tells lenders that you may have had difficulty managing your credit in the past. As a result, you may only be offered a shorter repayment term — three to five years, versus the six or seven year terms offered to good- or excellent-credit borrowers.

The good news is that if your credit score improves over time, you can refinance your personal loan to a longer term and use the savings to pay your loan balance off faster.

Alternatives to bad credit personal loans

There are a number of alternatives to choose from if a bad-credit personal loan isn’t the right fit for you. These are three common options, but taking out a HELOC or borrowing money from friends and family could also meet your needs.

• Credit cards: Although they have high (and variable) interest rates, credit cards can be a useful tool if you manage payments responsibly. Not only will on-time payments improve your credit score, but you’ll have flexible access to funds as you need them. However, if you can’t pay the balance off each month, they can tank your credit scores quickly.
• BNPL loans: A buy-now, pay-later (BNPL) loan lets you split a large purchase into a few smaller chunks. They are typically offered by online retailers for bigger purchases, and many don’t require a credit check.
• Payday Alternative Loan (PAL): Check to see if your local credit union offers Payday Alternative Loans — while you will have to undergo a credit check, eligibility requirements are must less stringent than on personal loans. PALs offer repayment terms of up to 12 months and amounts up to $2,000, and rates are capped at 28 percent — compare this to the 400 percent APR and two-week repayment cycle of a payday loan.

Bottom line

Getting a personal loan with bad credit should be part of a financial plan focused on improving your credit in the future. However, if you’re in an urgent cash crunch, they may provide much-needed money to pay for an unexpected expense.

Compare lenders to find the one that offers you the best deal. While you may not qualify for the most competitive rates, you can still explore options that fit your budget.

Frequently asked questions

• Can I get a $2,000 loan with bad credit?
  

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  Yes, some of the best lenders for bad credit loans include Upgrade, Avant, Upstart, Best Egg, OneMain Financial and LendingPoint, all of which offer loans of $2,000 or below. A small personal loan will be easier to qualify for with bad credit than a large loan amount.

• Can I apply for a loan with a 500 credit score?
  

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  You can apply for a loan with a 500 credit score, but your borrowing options are limited. Most lenders (even those that work with bad credit borrowers) require a minimum score closer to 580.

• What is the lowest credit score for getting a personal loan?
  

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  The minimum credit score requirement varies by lender. Some require a score of at least 600, while others will lend to someone with a 300 credit score. However, most require a score of 580 or better. You can find personal loan options with bad credit, but be prepared to do more research and receive higher rates.

• What’s the easiest loan to get with bad credit?
  

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  Payday loans are among the easiest loans to get approved for with bad credit — but should only be considered as a last resort. This form of financing can be predatory, with rates over 400 percent and full repayment due in just two weeks. Although personal loans for borrowers with bad credit have a few more hoops to jump through, they are a safer option when compared to payday loans.