How to get a personal loan with bad credit

Getting a personal loan with bad credit may require you to take extra steps to prove you can repay the loan, but it’s not impossible. Lenders consider a low credit score a sign that you’ve had trouble managing credit. Because of this, bad credit loan interest rates and fees can be higher and loan amounts may need to be lower than fair or good credit loans.

Knowing what you need for approval and then comparing lenders is the best way to get a bad credit personal loan if you have a low credit score.

How to get a loan with bad credit

Most lenders consider a bad credit score anything below 580. However, others may set their bad credit minimum below 670, so make sure you check the lender’s requirements. Whether consolidating high-interest rate credit cards or funding an emergency cost, knowing what you need to get a personal loan will help you prepare for the process.

1. Conduct a financial wellness check

Before taking on a bad credit loan, look over your finances to be sure it is the best choice for you. Adjusting your budget or picking up a side hustle could help you pay bills without taking on new debt, for example. While a bad credit loan may help you consolidate debts and improve your credit score, you may also want to seek credit counseling to help you build better money habits and avoid future trouble.

2. Check your credit score, income and other debts

Your credit score is the most important factor in the personal loan rate you’ll be offered. Personal loan rates typically range between about 6 and 36 percent. However, the lower your credit score, the more likely you’ll be offered a rate of 30 percent or higher.

If you haven’t checked your score lately, check with your credit card company or bank — it may offer a free look at one or all three of your credit scores. If they’re lower than expected, visit AnnualCreditReport.com to request your free credit reports.

Bad credit lenders also pay extra attention to whether you have enough stable income to make payments on a new personal loan. Lenders will measure the percentage of your monthly income used to pay debts. In lender terms, this is called your debt-to-income (DTI) ratio and the maximum varies from lender to lender.

A word of warning: If the lender advertises approval for DTI ratios up to 50 percent, read the fine print. That maximum may only apply to borrowers with higher credit scores, which means you’ll be limited to a lower DTI ratio based on your score. Alternatively, the lender may offer you a lower loan amount if your DTI ratio is above its limit when you apply.

3. Compare bad credit lenders

The terms for bad credit loans may vary widely between lenders. You should apply to at least three lenders and compare their rates and fees to get the best idea of what’s available. If you have a relationship with a community bank or credit union, see if it offers any rate discounts or fee reductions for existing customers.

Online personal loan lenders may offer the most options for bad credit borrowers. Some companies use more lenient criteria than traditional banks for approval, such as your job and education history. When you’re comparing lenders, check each one’s website or ask for information about:

• Minimum credit scores: The minimum may be as low as 500 or as high as 670, depending on the lender.

• Loan amount ranges: Some lenders offer competitive options for smaller loan amounts below $2,500. While several personal loan lenders offer loan amounts as high as $100,000, bad credit lenders tend to limit you to $50,000 or less.

• Repayment terms: Bad credit loan terms usually range between one and five years. Choose a longer term for the lowest possible payment. You’ll probably be capped at five years, although some lenders may offer a longer term for a smaller loan amount.

4. Get prequalified

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. Prequalify with at least three lenders once you finish your lender comparison shopping.

This process should only involve a soft credit pull, which doesn’t affect your credit scores. But if you decide to formally apply with the lender, a hard credit inquiry will be generated that could ding your score by a few points.

If you can’t get prequalified for the amount you need, check to see if the lender allows you to add a cosigner or co-borrower to boost your loan amount. A cosigner is usually a creditworthy friend or family member who agrees to take equal responsibility for the loan but doesn’t have access to the funds.

5. Be prepared for a hard credit check

When you choose the lender you want to borrow from, you’ll officially apply for a personal loan. As mentioned, the lender will perform a hard credit check called a hard pull. A hard pull will temporarily 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 you can’t afford.

If you need to undergo multiple hard credit inquiries, 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.

6. Get your bad credit personal loan funds

Once you’ve provided your paperwork, the lender can fund your loan within a business day. Funds are generally directly deposited into your bank account. If you choose a debt consolidation loan, some lenders may give you the option of paying your creditors off directly.

Most lenders offer an autopay option that withdraws your monthly payment from your bank account on the due date. An added bonus: You may be offered a lower rate or reduced fees for setting up an automatic payment.

Tips for improving your chances of getting a loan with bad credit

Getting approved for a personal loan with bad credit can be difficult, but there are ways to increase your odds. Some take longer than others, but all are worth considering.

• Apply with a cosigner or co-borrower.

• Opt for a smaller loan amount.

• Consider secured options that require collateral.

• Disclose all income sources when applying.

• Shop around until you find the right lender.

Pros and cons of bad credit loans

Bad credit loans may be appealing if traditional lenders turn you away and you need cash for an emergency expense, home improvement project or big purchase. Although bad credit loan interest rates and fees are higher than good credit loans, consider the advantages and disadvantages.

What to consider before getting a loan with bad credit

A personal loan for bad credit may be a great tool to simplify your finances and improve your credit scores over time. That said, you should weigh the drawbacks of adding a fixed monthly payment to your budget before you make a final decision.

You’ll pay higher interest rates

The unfortunate reality of applying for a loan with a low credit score is that you’ll pay more in interest than you would with a higher credit score. However, the rates may be lower than you pay on maxed-out credit cards. Most bad credit loans can be used to pay off credit card balances, which can positively impact your credit scores.

Paying off revolving credit card debt directly affects your credit utilization ratio, which measures how much of your available credit you’re using. You could see a significant increase in your credit scores, which could allow you to replace a bad credit loan at a high rate with a good credit loan rate.

Loan costs are more expensive

You may pay origination fees as high as 12 percent of your loan amount. These fees typically come from your loan funds, meaning you have less cash for debt consolidation, home improvement or emergency costs.

Watch out for predatory lenders that ask you to pay upfront fees for approval. All fees should be deducted from your loan proceeds. You should run, not walk away from a company that pressures you to pay advance fees for any bad credit loan.

Your loan amount may be lower

Lenders that offer personal loans for bad credit borrowers will usually cap amounts at $50,000. The amount may be significantly lower if you have very low credit scores — anything below 580 — or a high DTI ratio.

Terms are generally shorter

In a lender’s eyes, a low credit score tells a lender you may have had difficulty managing your credit in the past. As a result, it may want you to commit to paying your loan of three to five years versus the six or seven years offered to a good or excellent credit borrower.

The good news is if your credit score improves over time, you can refinance to a longer-term personal loan and use the savings to pay your loan balance off faster.

Alternatives to bad credit personal loans

There are a number of alternatives to choose from if a bad credit personal loan isn’t the right fit for you. These are three common options, but you aren’t limited to them if you are able to borrow a HELOC or borrow money from friends and family.

• Credit cards: Credit cards have higher interest rates, but they can be useful if you manage payments responsibly. Not only will on-time payments improve your credit score, but you will have flexible access to funds as you need them.

• Peer-to-peer loans: A peer-to-peer loan is a type of personal loan funded by a group of people or businesses. This makes them easier to qualify for than traditional loans — but they often come with higher fees than other loan types.

• BNPL loans: A buy-now, pay-later (BNPL) loan lets you split a large payment into monthly chunks. They are typically offered by online retailers for bigger purchases, and many don’t require a credit check.

Bottom line

Having bad credit doesn’t mean you aren’t able to get a personal loan. However, you need to be prepared for higher interest rates, more fees and bigger monthly payments.

Compare lenders to see which will offer you the best deal. While you may not qualify for the most competitive rates, you can still see what options will fit your budget.