Can You Secure a Personal Loan with Bad Credit?

When you need a personal loan but have bad credit, it might feel like your options are limited. Fortunately, there are lenders who specialize in offering loans to individuals with less-than-ideal credit scores. While you might face higher interest rates than those with good credit, it’s still possible to secure the financial assistance you need. In this post, we’ll explore how to get a personal loan with bad credit, what to expect, and some tips for improving your chances of approval.

What is Considered Bad Credit?

Before you apply for a personal loan, it’s important to understand where you stand in terms of your credit score. A “bad” credit score typically refers to a FICO score below 580. For the VantageScore model, a bad credit score is considered to be 600 or below.

Most lenders don’t have a strict threshold for what constitutes “bad” credit, but they will generally look for applicants with at least fair credit. For FICO scores, fair credit falls between 580 and 669. The better your credit, the more favorable terms and rates you are likely to receive.

Where Can You Get a Loan with Bad Credit?

Even with bad credit, there are several lenders who can offer personal loans. Some of the best options for individuals with poor credit include:

• Prosper: Prosper offers personal loans from $2,000 to $40,000. They charge an origination fee of up to 5%, but their fixed-rate loans can be a great option for those with bad credit.
• Payoff: Payoff specializes in helping borrowers consolidate high-interest credit card debt. They offer loans up to $35,000 and charge origination fees up to 5%. These loans come with terms between 2 and 5 years.
• Avant: Avant offers personal loans up to $35,000 for a variety of financial needs. They charge an administration fee up to 4.75%, along with other potential fees. Loan terms range from 24 to 60 months.

How Does Your Credit Affect the Interest Rate?

Your credit score plays a significant role in the interest rate you’ll be offered. Lenders use your credit score to assess your likelihood of repaying the loan on time. Those with bad credit are seen as a higher risk, meaning they’re often charged higher interest rates to offset that risk.

While you might qualify for a loan with bad credit, the interest rates can be considerably higher, meaning you’ll pay more over the life of the loan. This is why it’s crucial to shop around and compare rates to ensure you’re getting the best deal possible.

Steps to Take Before Applying for a Loan with Bad Credit

Here are some steps to take before you apply for a personal loan with bad credit:

1. Check Your Credit: Review your credit report from the three major credit bureaus (Equifax, Experian, and TransUnion) to understand your credit standing. Many banks and credit card companies offer free access to your credit score, so check those accounts as well.
2. Compare Lenders: Take time to compare rates, fees, loan terms, and other conditions from different lenders. Look for those who offer a soft credit check, which won’t affect your credit score when you check your loan options.
3. Consider a Cosigner: If you’re struggling to get approved on your own, you may want to consider applying with a cosigner. A cosigner with better credit can help you qualify for a better loan offer and lower interest rates.
4. Avoid Scams: Be cautious of any lender asking for an upfront payment or offering guarantees of approval without evaluating your credit. Legitimate lenders will always review your financial history and provide clear information about fees and loan terms.

Avoid Payday Loans

While payday loans may seem like an easy solution, they are dangerous for anyone, especially those with bad credit. These loans offer quick access to cash, but they come with exorbitant interest rates (sometimes up to 400% APR). Borrowers often find themselves in a cycle of debt, unable to repay on time, leading to more loans and even higher fees.

Many states have laws that either prohibit payday loans or limit the fees and interest rates they can charge. It’s best to avoid payday loans and explore other options to improve your financial situation.

Final Thoughts

Having bad credit doesn’t mean you can’t get a personal loan, but it does come with challenges. Higher interest rates and smaller loan amounts may be the norm, but with careful research and planning, it’s possible to find a loan that meets your needs.

If you can manage to make timely payments, a personal loan could help improve your credit over time. However, if the loan terms are unfavorable, you might want to work on improving your credit before applying for a loan in the future. Always consider the total cost of borrowing before committing to any loan.