If you’ve been late paying your bills in the past or have a mountain of debt, your credit score may be lower than you’d like it to be. Bad credit can be a frustrating disadvantage, particularly when getting lenders to trust your ability to pay them back over time.

A personal loan can be a good way to pay for emergency expenses or consolidate debt. While having a lower credit score will mean paying higher interest rates, obtaining a personal loan with bad credit is still possible by taking some simple steps to improve your score and shopping around with multiple lenders.

What does it mean to have bad credit?

Almost every American has a credit file compiled by one or more credit bureaus: TransUnion, Equifax and Experian. Your credit files are used to compile a credit score, a number that tries to define how risky you would be as a borrower.

Credit scores range from 300 to 850. Generally, anything under 580 is considered “bad.” If you have bad credit, you typically have a short credit history, a history of late payments, lots of debt relative to your income or any combination of those factors.

Credit Excellent
FICO credit scores

Here’s a breakdown of FICO credit scores that are used by 90 percent of lenders and creditors to make lending decisions:

  • 300 to 579: Poor
  • 580 to 669: Fair
  • 670 to 739: Good
  • 740 to 799: Very good
  • 800 to 850: Exceptional

How credit score is determined

If you’re not in a hurry to obtain the money, it can ultimately make more sense to spend time trying to improve your credit score rather than proceed with an extremely high-interest loan. A few areas to focus on if you’re looking to improve your credit picture are:

  • Payment history (35 percent of your FICO score). Your score takes a hit if you have a pattern of missing or late credit card payments (known as delinquency). Payment history also incorporates the on-time payment of other debt sources, such as car and mortgage loans.
  • Credit utilization (30 percent of your FICO score). This is a ratio of how much available credit you have versus how much you’re currently using. Your ratio is measured across all these debt sources if you have multiple cards or loans. A higher ratio typically signals to lenders that offering you a loan may be risky because you may have trouble making on-time payments.
  • Length of credit history (15 percent of your FICO score). Generally, the longer you’ve been building credit, the more beneficial it is for your score. A longer history of borrowing and making payments on time gives lenders confidence that you will repay your debts within the specified time frame.
  • Types of credit (10 percent of your FICO score). Your score will incorporate how many different forms of credit you’ve used, including credit cards and loans — also known as your credit mix. The more diverse your mix (assuming you’ve been making payments on time), the more beneficial it is to your score.
  • New credit (10 percent of your FICO score). Your score considers the new credit on your account and how many credit inquiries you’ve initiated in the past 12 months. Try to pace yourself when opening new accounts or applying for new loans, especially if you don’t have a long credit history. Applying for too many cards or loans within a short time frame can be detrimental to your score.

Ways to get a personal loan with bad credit

Knowing what to expect when you apply for a personal loan will help you prepare for the process. If you’re in the market for a personal loan and you have imperfect credit, here are eight steps to keep in mind.

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. They won’t display your credit scores, but you can visit each credit reporting agency’s websites to view them for free (with Equifax or Experian) or for a nominal fee (with 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 errors or old debt on your report, you can try to correct them before applying for a personal loan.

2. Ensure that you can repay the loan

If you have bad credit, the last thing you want to do is take out a loan you can’t repay. This will only make your credit score worse. As you shop for loans, ensure you know the monthly payments and when they will be due. Use Bankrate’s personal loan calculator to estimate monthly payments and review your budget to make a repayment plan.

If you will have trouble paying, consider other options for getting cash. You don’t want to take out a personal loan you can’t afford.

3. Compare bad credit loans

While a bad credit score will not qualify you for the best rates and terms, don’t assume that only the worst rates and terms will be available. You may get a better deal at your bank or credit union.

It can be advantageous if you have a relationship with a community bank or credit union. If the bank knows you and your spending habits, your low credit score can be mitigated by your history of paying on time and keeping a balance in your accounts.

Some reputable online lenders offer loans to consumers with poor to average credit scores. Some of Bankrate’s recommended bad-credit personal loan lenders offer rates starting as low as 7.99 percent.

4. Get prequalified

Prequalification, sometimes used interchangeably with pre-approval, allows you to find out if you will likely qualify for a loan. You can give the lender your information to find out if you are preapproved using a soft credit inquiry.

Why does this matter? Typically, a lending institution will do a hard credit check when you apply for a loan. A hard credit check can lower your credit score temporarily. This may be frustrating if you apply for a loan, get a hard credit check and are denied the loan. Then, you must apply for other loans with a possibly lower credit score than when you started.

Talk to potential lenders to see if you can get prequalified for a personal loan. Then, you can evaluate several loan options without multiple hard credit inquiries. Some lenders may even allow you to complete this process online in just a few minutes.

Consider the interest rates and loan terms offered when comparing your loan options. It’s equally important to assess any fees, like origination fees and prepayment penalties, the lender may charge. In some instances, a loan with a lower interest rate may not be the best deal if the fees the lender charges are on the higher end.

5. Look into secured loans

A secured loan is a loan backed by assets such as a home or a car. Because secured loans use collateral to back your loan, they typically have better rates than unsecured loans. If you have collateral to back your loan, this may be your best option with bad credit

Consider shopping around with lenders offering secured loans if you decide it’s a suitable option. Keep in mind that secured loans risk losing your asset, so they should only be considered if you can afford to make timely loan payments.

6. Add a co-signer if necessary

A co-signer is someone who agrees to sign on to the loan with you. They are agreeing to pay back the loan if you can’t. If you are having trouble qualifying for a loan, a co-signer can help you qualify if they have a better credit score and credit history. But you want to confirm with the lender that co-signers are permitted as they’re not always allowed.

Taking out a loan with a co-signer can make personal relationships go bad if you have trouble paying off the loan. Make sure you both know what you are signing up for if you decide to take out a loan with a co-signer.

7. Gather financial documents

When you apply for any loan, the lender will request several financial documents to complete your application. Gather these documents and pieces of information before you start applying for loans, as you may need some or all of them to complete your application:

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

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

8. 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 lower your credit score. Too many hard credit checks in a short time can make it look like you applying for loans that you can’t afford.

Be careful with how many loans you apply for, and be prepared to see your credit score drop temporarily with a loan application. As you make timely payments on your loan, you should be able to get your credit score back up in a few months.

9. Look for a lender without credit score requirements

Some lenders don’t have credit score requirements. Working with one that doesn’t have a credit score requirement is an easy way to find a personal loan, regardless of how low your credit score is.

Keep in mind that these lenders are ones specializing in high-risk loans. They’ll charge a very high interest rate to help cover their risk, so make sure whatever you’re taking out a personal loan for is worth the significant extra cost you’ll be paying in interest.

Types of bad credit loans

Several types of loans may be good for people with bad credit. A personal loan is not your only option. Consider these loan options as you shop around:

  • Bank agreement: If you already have a relationship with your bank, they may be willing to offer you a short-term loan agreement until you get your credit score back up. It never hurts to ask.
  • Cash advance: A cash advance on your credit card is a way to withdraw cash using your credit card. Most credit cards have limits on how much cash you can take out. It’s important to remember that you will be charged interest on any cash advance you take, and rates for cash advances are often higher than other credit card purchases.
  • Home equity loan: A home equity loan is a loan that allows you to access your home equity and use it as collateral for a loan. Your loan is disbursed in one lump sum and must be paid back in monthly payments.
  • Home equity line of credit (HELOC): A HELOC will only be an option if the mortgage balance on your primary residence is significantly less than your home is worth. As the name implies, a HELOC is a revolving line of credit analogous to a credit card. You will have a limit based on the amount of equity you have in your home, and you’ll be charged interest only on the purchases you make on the line.
  • Installment loan: An installment loan — an umbrella term that includes personal loans — is a type of loan that lets you borrow a specific amount of money and pay it off over time. Unlike a credit card, where you have access to a revolving credit line and are charged interest based on the amount you use, an installment loan gives you a lump sum upfront. You’ll then pay a fixed amount for a specified number of months.
  • Payday loan: A payday loan is a loan for a small amount that has a short-term repayment period — usually by your next paycheck. These loans typically have high interest and must be repaid in one lump sum payment. A payday loan is costly and often isn’t the best option available.
  • Peer-to-peer (P2P) loan: Peer-to-peer lending is another alternative to a traditional loan that may be an option for someone with bad credit. Most peer-to-peer lending occurs with online personal loan lenders, like Prosper or LendingClub. With peer-to-peer lending, you’ll apply for a loan as usual, but the loan is funded by individual investors rather than the lender itself.
  • Secured personal loan: A secured personal loan uses something you own as collateral, such as a house or a car. If you cannot pay the loan, the lender has the right to take ownership of the possession you use as collateral for your loan. A secured personal loan typically comes with better rates and terms than an unsecured loan.
  • Student loan: You can apply for both federal and private student loans. Both are options if you need money to pay for college. Federal student loans generally have better terms and rates than private student loans.
  • Unsecured personal loan: An unsecured personal loan does not require collateral from the borrower. Rates and terms aren’t as favorable as secured loans, but unsecured loans offer an option if you don’t have a possession you can use as collateral.

What to consider before getting a loan with bad credit

While weighing the various costs and risks associated with a personal loan, there are a few additional things to remember for bad credit loans.

A loan costs more with a low credit score

The unfortunate reality of applying for a loan with a less-than-ideal credit score is that you will be paying more than someone with a higher credit score. Lenders look at your credit score to determine your creditworthiness and the likelihood of you repaying the loan. If you look riskier, you’ll pay a higher interest rate.

Predatory lenders prey on people with low credit scores

Individuals with poor credit scores may also be targets of aggressive direct mail campaigns that market personal loans with low interest rates of around 6 percent or 8 percent.

However, these campaigns frequently advertise an introductory or “teaser” rate that will increase after the limited-time offer expires. If you don’t have a plan for a rapid payoff, the rates can skyrocket to the 20 percent to 30 percent range, which is likely much higher than the rate you can qualify for with a reputable lender.

Add-on costs may be hidden in the fine print

Because those with bad credit scores are considered a higher risk, be sure you’re clear on exactly what you’ll be paying to get the loan. When applying for a bad-credit loan, read the loan agreement and fully understand how your interest will be charged and structured. Make sure that the interest loan advertised is the annual rate, not the monthly one.

In addition, beware of any add-on loan costs. Again, this goes back to reading the agreement closely and fully to ensure there aren’t any fees or add-on services your loan officer may have glossed over.

The bottom line

Getting a personal loan while you have bad credit is harder and more expensive than getting a personal loan with excellent credit. It’s important to do a bit of extra research and comparison shop to make sure that you’re getting the best rate possible.

Pre-qualification can help you understand what rates are possible without dinging your credit further with a hard credit inquiry. If you can easily put down collateral or get a co-signer, doing so can help you get approved for a personal loan with better interest rates.