You can get a loan with bad credit, but it’s more difficult to get a good deal. You have fewer options available, and loans typically are more expensive. Low credit scores make it easy to fall into expensive traps, but a bit of preparation can help you avoid the worst problems.
Understanding Bad Credit
Bad credit typically is defined as a credit history that contains multiple problems—including late payments, bankruptcy records, or collection accounts, among other negative marks. It’s difficult to assign a particular credit score to the bad category because different lenders analyze credit in different ways, and they’re willing to lend to different borrowers. Still, it’s safe to say that negative items in your credit history can result in bad credit. A lack of credit or a thin credit history with one or two problems also can lead to low credit scores.
Your credit may not be as bad as you think. If anyone says your credit score is ruining your chances of getting a loan, verify for yourself by checking your credit report. It’s free for U.S. consumers to receive an annual copy of their credit report from each of the three major credit bureaus.
It’s possible that legitimate problems exist, but there also might be errors in your credit report. If you find them, you can report them directly to the credit bureaus, and they must investigate the claim and correct any inaccuracies that can be confirmed. By fixing errors, your credit may improve substantially.
Use your current credit score in our personal loan calculator to estimate your potential monthly loan payments.
Visit Credit Unions
Shop around for loans, and include credit unions in your search. Such institutions may be willing to work with you even if you have bad credit. Credit unions often are smaller than corporate banks, and they have a community focus. Because of that, they may review your application personally and discuss it with you as opposed to just looking at a credit score and other numbers on the loan application. You might be better off if you can sit across the desk from a human being who can better understand what you need and why.
Small, local banks also are a good option. Like credit unions, they may have a community focus and reasonable rates.
Try Online Lenders
In addition to local brick-and-mortar options, find out what online lenders have to offer:
- Peer-to-peer (P2P) lending services: Instead of borrowing from banks, you can borrow from individuals who fund your loan. They may be more willing than local banks to take the risk, but they’re not looking to lose their money. Most do report to credit bureaus as well.
- Marketplace lenders: These non-bank lenders have different appetites for risk and use creative ways to evaluate your creditworthiness. As a result, they may be willing to approve you with lower credit scores. They source funds from P2P lenders, among others.
Tap Friends and Family
Most P2P lending sites allow you to borrow from strangers. However, if your credit is really bad, your friends and family may be your only option. They know you and can be willing to fund your needs. If you go this route, be sure to still do it properly so everybody’s protected: Document the loan terms on paper and consider using a third party to process payments.
If friends and family can’t or won’t provide funding, they might still be able to help. If they have good credit, they can help you qualify for a loan as co-signers. Doing so is risky for them, however, and limits their borrowing power until the loan is paid off. If you default on the loan, they are responsible to pay it and the loan also will appear in their credit history.
If you’re having trouble getting approved, you may need to put up collateral. By pledging something of value, your lender knows you’re serious. Plus, lenders have a better chance of collecting on the loan because they can take your collateral and sell it. Cash-secured loans and home equity loans are two types of loans that involve collateral.
Be careful when pledging collateral. If you have equity in your home, you probably can borrow against it, but the risks are significant. If you can't make all of your payments, you might be forced out of your home in foreclosure, making a bad situation even worse.
Some lenders take advantage of you when you're down. They specifically target people who are desperate to borrow, knowing they have few options available. These lenders charge astronomical fees and make it nearly impossible to dig yourself out of debt. If you borrow at high rates using payday loans, car title loans, or any lender who will "approve everybody," you risk making things worse, not to mention losing your vehicle to repossession if you use your car as collateral.
Sometimes, you won't even deal with a real lender: Scam artists advertise loans but charge steep upfront application fees. Ultimately, you don't get approved, and you don't get your money back in what is known as an advance-fee scam. Avoid paying upfront fees to get a personal loan—any processing fees should come out of your loan proceeds.
Don’t Drag it Out
Applying for loans, especially if done the wrong way, can further damage your credit. As you shop around, submit all your applications within a short period of time. This shows lenders (and credit scoring models) that you’re just shopping around—not trying to get a new loan every month.
For most loans, try to submit applications within 30 days at most. Credit scoring models are designed to account for the fact it takes time to apply for loans, and that wise consumers shop around. Those models should consider multiple applications within a short timeframe to be a single application.
If you wait a month or two to apply with various lenders, several problems arise. For starters, offers may no longer be valid, and interest rates may change. What’s more, you’ll rack up inquiries in your credit reports, which may make it look like you’re struggling financially.
After a period of borrowing wisely and repaying on time, you can rebuild your credit so it’s easier to borrow next time.