How to get a personal loan with bad credit & special considerations

If you have a lower credit score, it may be a bit harder to get a personal loan, but it’s not impossible. It just may take some extra time and research to find the best loan for your credit score.

Shopping around and comparing offers is the best way to get a personal loan, especially if you have a credit score that’s on the lower end.

How to get a loan with bad credit

Credit scores range from 300 to 850. Under the FICO credit score model anything under 670 is considered bad. If you have a low credit score it could make it harder to get a personal loan, but it doesn’t make it impossible.

Knowing what to expect when you apply for a personal loan will help you prepare for the process.

1. Check your credit score and credit reports

Before you apply for a personal loan, take a close look at your credit report and credit score.

Federal law entitles you to a free copy of your credit report every 12 months from the major credit-reporting bureaus: Equifax, Experian and TransUnion. Visit AnnualCreditReport.com to request your free credit reports. It won’t display your credit scores, but you can visit Equifax and Experian’s websites to view them for free, or for a nominal fee from TransUnion.

With your report in hand, you’ll know exactly what your credit score is and you’ll be able to identify any negative marks on your record. If you find that errors or old debt are dragging your score, make sure you request corrections before applying for a personal loan.

2. Compare bad credit loans from different institutions and get prequalified

If you have an existing relationship with a community bank or credit union, look into its loan options before turning to another lender.

If the bank knows you and your spending habits, your low credit score may be mitigated by a history of paying on time and keeping a balance in your accounts.

However, online lenders are still a good option when it comes to getting a bad credit loan. Unlike most traditional banks, some of these companies use alternative criteria in addition to credit to gauge approval. The requirements will differ by lender, but most consider factors like your job, income and education history.

Once you have those numbers down, prequalify with at least three lenders. Prequalifying allows you to see your eligibility odds and predicted rates without impacting your credit score. It’s a free tool offered by most lenders and can give you an idea of what a competitive rate could look like for you.

3. Add a co-signer if necessary

A co-signer is someone — typically a creditworthy friend or family member — who agrees to take equal responsibility for the loan.

Applying with a co-signer can help improve your eligibility odds and may score you a lower interest rate.

Taking out a loan with a co-signer can sour personal relationships should you have trouble paying off the loan. When a co-signer takes out a loan with you, they’re assuming legal responsibility for the balance. That being said, missed or late payments will also negatively impact their credit and will then become their responsibility.

Before signing on the dotted line, make a repayment plan with your co-signer and practice clear communication when it comes to making the payments.

4. Gather financial documents

When you apply for any loan, the lender will request several financial documents to complete your application.

To expedite the process, have the following documents on-hand before applying.

• Personal contact info, including Social Security number, full name, and address.
• Your driver’s license or another form of government-issued personal identification.
• Personal loan details, like why you need the loan, how much you need and how long of a term you want.
• W-2 forms from the last two years.
• Your federal tax return from the last two years.
• Two most recent bank statements for all bank accounts.
• Recent pay stubs.
• Utility bills or mortgage statements (to verify your address).

Your lender can always request additional documents, so be prepared to provide any extra requests quickly.

5. Be prepared for a hard credit check

When you are ready to officially apply for a personal loan, know that the lender will likely perform a hard credit check, also called a hard pull.

In the short term, a hard pull will knock down your credit score a few points.

A few months of on-time payments can offset the light hit to your score caused by a hard check. However, too many hard checks in a short time can cause longer-term damage to your credit report. Lenders can interpret this as a potential risk, as it may look like you’re applying for multiple loans or products that you can’t necessarily afford.

If you need to undergo multiple hard credit inquiries, make sure to do so within 45 days to minimize credit damage. According to the latest FICO scoring model, if you apply for the same type of product multiple times within the 45 day period, then multiple hard checks will register as one inquiry on your credit report.

What to consider before getting a loan with bad credit

While weighing the various risks associated with a personal loan, there are additional factors to consider when looking at a bad credit loan.

A loan costs more with a low credit score

The unfortunate reality of applying for a loan with low credit is that you’ll be paying more in interest than you would if you had a higher credit score. Lenders look at your credit score to determine your creditworthiness and the likelihood of you repaying the loan, and will balance against perceived risk with higher costs.

Predatory lenders prey on people with low credit scores

Individuals with poor credit scores may also be targets of predatory or illegal lending tactics. This often looks like aggressive communication, promises of guaranteed approval and loans that come with rates well into the hundreds.

Borrowers with low credit and those with large amounts of high-interest debt are among those most susceptible to predatory lending. To mitigate your risk of getting scammed, check if the lender is licensed in your state by reaching out to your state attorney general’s office.

Add-on costs may be hidden in the fine print

Before applying, comb through the terms and conditions to be aware of every single cent you’ll be paying with the loan. Add-on costs or hidden fees can increase the cost of your loan exponentially, so be on the lookout for those specifically.

Before taking out the loan, read through the entire loan agreement. Pay specific attention to your interest rate and how it’s structured, making sure that the rate is charged annually.

Also make sure that your rate is similar to what you expected it to be before applying. A common predatory lending practice is to cause confusion around — or even blatantly mislead —  consumers on what their actual APR is.