How to compare personal loans for bad credit
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If you have bad credit, you might have a hard time qualifying for a personal loan without a cosigner since a lot of lenders only approve borrowers who have good to excellent credit. And even if you do qualify for one, you’ll most likely pay a high-interest rate and fees.
Luckily, some lenders offer personal loans designed for bad credit. Before choosing a lender, compare multiple lenders’ eligibility requirements, borrowing costs, loan terms and what type of features are offered.
What is a bad credit score?
In general, a bad credit score is considered to be anything below 670. Scores that fall between 580 and 669 are considered to be “fair” credit scores, according to FICO or the Fair Isaac Corporation, which is one of the major credit scoring companies. A fair credit score is below the average score of consumers and it indicates that you could be a potential risk for lenders. One step below fair on the FICO credit scoring model is a “poor” score, which is any score less than 580.
Yet another well known credit scoring company is VantageScore. According to the VantageScore model, scores between 300 and 660 are considered bad, while scores less than 500 are categorized as very bad.
No matter which credit scoring model is being used, scores in the fair to bad or very bad range are often referred to as “subprime” and individuals with scores at this level generally have more difficulty obtaining loans or lines of credit. In cases when loans are made available to those with such low scores, it is typically with less than favorable terms including steep interest rates.
Check your other qualifications
When you fill out a personal loan application, your credit isn’t the only factor a lender considers. Lenders usually consider your income and debt-to-income (DTI) ratio as well.
Your DTI compares your monthly gross income against your monthly debt load. For instance, if your monthly gross income is $5,000 and your monthly debt is $2,500, your DTI is 50%
Minimum income and DTI requirements vary by lender. You can find out what they are by reviewing a lender’s website or contacting its customer support team.
Look for lenders that consider factors besides credit score
Most lenders will review your credit and income when you apply for a personal loan, but some consider non-traditional factors. For example, Upstart considers your education and experience. If you find a lender that considers more than just your credit score, you may find it easier to get approved.
Determine loan costs
When comparing personal loans for bad credit, the most important factor to consider is borrowing costs. Your borrowing costs can be broken down into two categories: interest rate and fees. Interest is what you pay the lender each month.
Lenders sometimes charge an origination fee for processing your application, which is often deducted from your loan amount. In addition, if you fail to repay your loan on time or have insufficient funds in your account to cover your monthly payment, you may have to pay late or returned check fees.
While reviewing your options, pay special attention to a lender’s advertised annual percentage rate (APR) range — it considers interest and any fees a lender charges. Some lenders will allow you to pre-qualify for a personal loan to view estimated rates and terms without impacting your credit score.
To estimate your loan costs, consider using a personal loan calculator. By inputting your loan term, loan amount and estimated interest rate, you can get an idea of what your monthly payment might look like and estimate how much you’ll pay in interest.
Evaluate any extra features the lender has
Some lenders offer additional perks to borrowers, such as the ability to delay one monthly payment without paying interest, free FICO scores and free credit reports. When comparing your options, it can make sense to consider the value of these additional features.
Consider loan term and the effect on monthly payments
Loan terms vary by lender. Generally speaking, choosing a shorter loan term can help you save money on interest but your monthly payments will be higher. By contrast, choosing a longer loan term can lower your monthly payments, but you may pay more in interest over the life of the loan.
For example, say you took out a $10,000 personal loan with a three-year term at 8%. In that case, your estimated monthly payment would be $313 and you’d pay $1,281 in interest over the life of the loan.
By contrast, if you took out a loan for the same amount with a five-year term at 8%, your estimated monthly payment would be lower — $175. However, you’d pay $2,624 in interest over the life of the loan — a $1,343 difference.
See if you can get a secured loan
Most personal loans are unsecured. This means it doesn’t require collateral, such as a car title or bank account, a lender can take if you fail to repay the loan. But unsecured personal loans usually come with stringent credit requirements; as a result, it can be difficult to qualify for one with bad credit.
That said, some lenders do offer secured personal loan options. Secured personal loans require collateral, but they may have less stringent credit requirements and offer lower rates to consumers with bad credit.
Even if you have bad credit, you can get a personal loan. Compare rates, terms and fees from multiple lenders to get the best deal for your unique situation. While shopping, pay special attention to key factors, such as eligibility requirements, loan terms and APR range.