Man looking at laptop
Hero Images/Getty Images

How to get a loan if you have bad credit

If you have bad credit and need money for a critical expense, don’t despair: There are personal loans available for people with less-than-stellar credit ratings due to things like making late payments on your credit card, piling up too much debt or defaulting on a loan.

There’s also an upside to getting approved for a bad credit loan: if you pay it back on time you can repair your finances and establish a good credit profile.

Having bad credit doesn’t always mean that someone was irresponsible. Unexpected medical bills, job loss, a natural disaster or some other emergency like a costly car repair bill can swiftly wipe out your savings and make it tough to pay your bills, especially if you are living paycheck to paycheck.

Having a low credit score can also be due to the fact that you’re just starting out and have yet to build a solid credit history. Bottom line: Many people have a low credit score through no fault of their own.

Many Americans have bad or so-so credit

Over one-third of Americans have what’s considered to be a “fair” to “very poor” FICO credit score, a three-digit number that lenders use to size you up as a borrower. The FICO score ranges from a high of 850 to a low of 300. A score of 580 to 669 is considered “fair” and a score of 300 to 579 is “very poor.” Two-thirds of Americans have a “good” FICO score of 700 or better, according to the most recent data from Experian.

How bad credit affects your life

Much of the stress that comes with having poor credit can be relieved once you have a clear understanding of its impact on your life, what your options are, and how to start mending your credit.

Regardless of what causes a sharp decline in your credit score, there are common drawbacks of having poor credit.

  • Higher interest rates. A low credit rating tells lenders that you could be a higher risk for default. As a result , lenders charge higher interest rates to higher-risk borrowers to protect their investment. Borrowing a large sum of money with lousy credit could mean paying a huge amount of interest over time.
  • Difficulty getting loan approval. If your credit score is below 670, fewer lenders will be willing to take a chance on approving you for a loan or credit card. This is a common predicament for people with bad credit or no credit history. A student who applies for a loan, for example, may have to get a co-signer on a loan if he or she has no credit history.

Having poor credit could also make it more difficult to rent an apartment or get a smart phone contract, as landlords and phone companies also check your credit rating before doing business with you. Even if you agree to pay the bills in cash, it may not nullify the credit risk for the landlord or phone company. You might be asked to pay a higher security deposit. Since you don’t pay interest on utilities, the one-time upfront fee is like insurance for the provider.

Risks of bad credit loans

People with bad credit in desperate need of loans are also prime targets for fraudulent and deceptive lenders. Being aware that scam artists are out there can save you from becoming a victim. Some clues that you are dealing with a predatory lender:

  1. The lender guarantees you a loan with no credit check and no consideration of your ability to repay.
  2. You are given a very short repayment schedule that is difficult, if not impossible, for you to meet.
  3. You are asked during the loan process to pay an entity or individual who is not a registered lender in your state.

“Stay away from predatory loans,” warns Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report. “It’s so important to read the fine print before you sign anything. You really have to read every line of the disclosure statement to know what you are getting into.”

What are bad credit loans?

Bad credit loans are typically small loans of less than a few thousand dollars that come with much higher interest rates than loans for borrowers with good credit. The worse your credit is and the more you want to borrow, the more it will cost you.

Bad credit loans are typically short-term loans that are either secured, meaning they require the borrower to put up collateral, or unsecured, with no collateral required.

If you fail to repay a bad credit loan and don’t abide by all the terms, you will worsen your financial predicament. You’ll damage your credit score even more. What’s more, you could lose all your collateral if your loan is secured, and you can fall into even deeper debt by extending a short-term loan.

People who take out bad credit personal loans typically are living paycheck to paycheck and need the money to pay an unexpected expense, such as a car repair, high utility bill or  medical bill.

Using these high-cost loans for anything less than an emergency is foolish. Borrowing money, for example, to pay the electric bill so the utility company won’t turn off your power is understandable. Taking out a bad credit loan to buy a new big-screen TV is not.

Here are some examples of bad credit personal loans

Installment loans

These loans require you to pay equal monthly installments over a predetermined loan term. They may or may not require collateral. Expect interest rates to be higher on unsecured loans. Auto loans and mortgages are examples of secured installment loans. The lender can take the car or the house if the borrower defaults on the loan.

Payday loans

These are short-term loans that are to be repaid by the borrower’s next payday. They are notorious for sucking borrowers into cycles of debt because many payday loan borrowers roll over or extend these loans if they are not paid back on time. The annual percentage rate, or APR, on these loans is usually 390 percent or more! The Federal Trade Commission has taken action against many payday lenders for deceptive or unfair billing and advertising.

Cash advances

These are similar to payday loans. You give the lender a check for the amount you want to borrow, plus a fee. The lender keeps the check and gives you cash. On your next payday, you repay the lender in cash. A cash advance using a credit card is better – but still expensive because you’ll pay a cash advance fee, interest on what you borrowed, as well as ATM or bank fees.

Bank agreement

Your bank may approve you for a short-term loan or minimal overdraft agreement, depending on its policy and your banking history.

Getting a loan with bad credit

Getting a bad credit loan can help you establish a consistent payment history, but be prepared for lenders to see you as high-risk. If you can find an affordable loan and repay it, you can begin to get your credit score back on solid ground.

Because the risks to banks and other lenders are higher with bad credit personal loans, you will need to be a little more strategic — and cautious — when shopping for one.

Bad credit loans are available through short-term lenders, online lenders, banks and credit unions. You have options to choose from and convenient ways of searching for them. But if you decide to do a little more digging on your own, it helps to know where to start.

Of course, you must shop for the best interest rates and compare costs. Is there an origination fee? An early payoff penalty? What is the loan term? What is the overall cost of the loan?

Make sure the lender reports your repayments to the credit bureaus. If you are trying to improve your credit rating, it’s important that the lender lets Experian, TransUnion and Equifax — the nation’s three major credit reporting bureaus — know that you are paying on time.

Your goal is also to identify resources that can help you chip away at debt and ultimately get back to building your credit score. Here are a few things to think about when considering your options:

What to look for in a lender Questions to ask
Customer service/assistance Do they have a full online/mobile service?

Is there a comprehensive preapproval process?

Are there service agents available to speak with me whenever needed?

Service reach Are they licensed in all 50 states, and where are the branch locations?

What’s the minimum credit score to receive service?

How is underwriting handled, and will underwriters consider other credit data besides what the three major credit bureaus report?

Flexibility Are there a variety of secured and co-signed loan options?

Do they offer zero and low down-payment options?

Are they willing to waive lender fees?

How to fix your credit to get a better loan

If you are in a situation where you need a bad credit personal loan, repairing your credit rating should be a priority. Even if you filed for bankruptcy, there’s hope. Once the bankruptcy is discharged after seven to 10 years, depending on the type of bankruptcy you filed, you essentially have a clean slate to rebuild your credit score.

Developing good habits of spending and using credit can put you on the road to financial recovery. Consider these tips for rebuilding your financial life.

Make a budget

Track your expenses and create a budget around your monthly income. When you can, establish an emergency fund and save enough to pay your bills for six months.

Pay all bills on time

Most credit unions and banks want to see a solid payment history of at least 12 to 24 months before they will approve you for credit. One thing to know: It’s not just the mortgage and auto lenders that track and report payment histories. Utility companies, landlords, medical providers – even storage facilities – are being tapped by some lenders for information on your financial behavior.

Beware of scams

Stay away from anyone offering to repair your credit for a fee. Only you can rebuild your credit, and it’s free. “If you’re hurting and your credit is really bad,” says Harzog of U.S. News & World Report, “you might want to talk to a credit counselor.” She recommends the not-for-profit National Foundation for Credit Counseling.

Keep an eye on your credit report and accounts

You are entitled to a free copy of your credit report from each of the three major credit bureaus every 12 months. Check the reports for errors and make sure your on-time payments are being reported. Check your credit score and credit card accounts regularly. This will help you maintain an ownership mentality and keep annual fees from sneaking up on you.

Make automated payments

Set up automatic payments for your bills through your bank. This will get you into a consistent rhythm of repayment and prevent late payments because of forgotten due dates.

Pay with cash

Your budget shouldn’t allow you to spend more than what you earn. Using cash will help keep you on track.

Get a secured credit card

Some financial advisers suggest opening a secured credit card account to help you build credit quickly. Secured credit cards require a cash collateral deposit that becomes the credit line for the account. If you put up $500, for example, that become your credit line.

Consider a credit-builder loan

“This is a good choice for someone who is not good with a credit card,” says Harzog. “Many banks have them, and credit unions are good about it. One-thousand dollars is a common amount. You give a bank $1,000, then pay it back. When it’s paid off you get that money back and you have something nice on your credit report.”

Consider debt consolidation

Also known as “credit consolidation,” this loan merges multiple debts into one debt. This most likely will be an installment loan that will charge a lower interest rate than paying off five maxed-out credit cards at over 17 percent interest.

Be diligent and stay positive

Responsible management of loan repayments means everything when it comes to rebuilding your credit.. The key is to keep chipping away at debt and raising your credit score until you have a good foundation.