How to Get a Private Loan With Bad Credit

Bad Credit? Where Else can you Borrow Besides Banks?

Borrower Beware
Cargo / Getty Images

Borrowing is harder with bad credit: loans are more expensive, and it’s more difficult to get approved. If you’ve heard that private loans offer more options, there’s some truth to that – but it’s easy to get into trouble.

When people refer to private loans, they often mean one of two things:

  1. Loans from somebody other than a traditional bank or credit union, or
  2. Student loans that don’t come through the Department of Education

    We’ll cover both of those topics so you can safely get the money you need from the right lender.

    Finding a Lender

    There are numerous ways to borrow money these days. Banks and credit unions are sometimes less willing to lend to borrowers with less-than-perfect credit (although that’s not always the case). As a result, new competitors have moved in.

    Unfortunately, seeking out lenders is somewhat risky – especially when you move away from the stodgy world of traditional lenders. It’s easy to get your identity stolen online, and lenders promising to work with borrowers who have bad credit are often expensive (which can make things worse than they already are). Before you fill out an application, sign an agreement, or take any money, make sure you’re working with a reputable lender.

    Don’t ignore small, local lenders: you’re probably ready to borrow from anywhere except a bank, but don’t rule out community banks and local credit unions.

    These small institutions are often more willing to lend when you have bad credit. Instead of facing a rigid set of rules, you’ve got a chance to possibly sit down with a lender to discuss your options. A standard personal loan from a bank or credit union is infinitely better than going with a predatory lender or getting a payday loan.

    Online lenders: ever since peer-to-peer lending hit the scene, it’s been much easier to borrow, even with some blemishes in your credit reports. Individual lenders might be more flexible than large banks, and getting matched up with them is easy. Since then, other types of online lenders have made it possible to borrow from non-bank lenders. Investors with extra money provide funding for loans, and rates are often competitive.

    Borrowing from people you know: if friends or family members have extra cash, they might be willing to lend to you. But it’s best for everybody to do it with a formal loan, which includes a loan agreement, specific repayment terms, and even reporting to credit bureaus (which helps you rebuild your credit so you’ve got more options in the future). Start with a detailed and honest discussion about everybody’s needs and expectations, and only move forward if it’s a good fit. For more details on keeping everybody happy, read about the keys to a successful family loan (treat loans with friends and acquaintances the same way).

    Real estate loans: if you’re a real estate investor, you probably need money often, and applying for loans is a pain. Some private individuals (and other organizations) specialize in making repeated loans to real estate investors, and it’s worth getting familiar with these lenders.

    Sometimes known as hard money loans, these loans can be closed quickly, and you don’t need the traditional proof of income and assets that other lenders require.

    Student Loans

    If you’re borrowing for education, there are two basic types of loans: federal loans and private loans.

    Start with federal loans: loans offered through the Department of Education are often your best deal, and it’s often wise to borrow what you can through those programs before you turn to private student loans. For most people, federal student loans are more flexible and forgiving (especially if you fall on hard times). What’s more, your credit is less important with government loan programs.

    Private student loans: if you can’t borrow as much as you need with federal loans, that’s fine – you can get more with private loans. However, it’s much easier to get private student loans with good credit. Most students have little or no income, which makes it hard to show that you have the ability to repay. To get approved with a  private lender, you might need to use a cosigner (who takes on all of the risk of borrowing with you).

    It’s always worth mentioning that student loans are easy to get and hard to repay. Borrow as little as possible, and consider how you’ll be able to repay those loans after graduation.