If you’ve been late in paying your bills or rang up a mountain of debt, it may have put a ding in your credit score.
Now if an emergency expense crops up or you want to consolidate your debt, a personal loan may be an option, but your low credit score is likely to impact the interest rate you pay.
With personal loans, you borrow a certain amount of money for a set period of time, and often you don’t need any collateral to secure the loan.
In fact, more than 13.7 million consumers had unsecured personal loans in the 3rd quarter of 2015, a study by the credit reporting agency TransUnion found.
Of those consumers, 3.5 million were classified as subprime, with a credit score of 601 or lower using the VantageScore 3.0 model. VantageScore was founded by the 3 main credit reporting agencies — TransUnion, Experian and Equifax — and scores range from 300 to 850.
If you’re in the market for a personal loan and have a low credit score, here are 6 things to keep in mind.
The Bankrate Daily
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Correct errors on your credit report
Before you start applying for a personal loan, you should take a close look at your credit report and credit score, says Bruce McClary, spokesman for the National Foundation for Credit Counseling. Those 2 things play a major role in setting the rate you’ll pay.
Under federal law, Equifax, Experian and TransUnion must provide you with a free copy of your report every 12 months.
Whether you receive a solicitation in the mail or find a local credit union or bank that offers personal loans, be sure to read all the details.
A recent mailing from the Personal Lending Group shows rates “starting at” 5.99%, but the fine print shows rates can go much higher.
Even Alliant Credit Union, a Chicago credit union that anyone can join, shows unsecured personal loan rates as low as 11.9%.
Some lenders also charge origination fees, which may range from 1% to 6% of the value of the loan.
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Online vendors are an alternative source
There are a number of reputable online lenders, such as the Lending Club and Avant, which offer loans to consumers with lower credit scores.
For example, The Lending Club has a wide range of rates. Someone with top-notch credit could pay from 5.32% to 7.89%, along with an origination fee of 1% to 5%, while the highest risk customers could pay interest rates of 28.18% to 31.89%, plus a 6% origination fee.
At Avant, there’s no origination fee and rates vary by state.
But you need to be wary of some companies that offer personal loans online. A report by the National Consumer Law Center found some payday lenders have begun making online installment loans and charging sky-high rates.
The report says that for a $500 loan, 8 states have no cap on annual percentage rates, while 10 others cap rates between 61% and 116%.