Key takeaways

  • Borrowers with low credit are more likely to be offered higher interest rates and fees.
  • There are lenders that cater specifically to those on the lower end of the credit spectrum, but the rates and terms offered will be less favorable than if you had a good to excellent score.
  • Prequalify with at least three lenders to get a well-rounded idea of what a competitive loan offer looks like for your credit situation.

For most Americans, earning a perfect credit score isn’t an easy feat. According to Experian, the average score in the U.S. is 714, which is a far-cry from the perfect score of 850.

While most lenders prefer a good-to-excellent score for approval, having fair credit — a FICO score between 580 and 669 — doesn’t mean that securing a loan is impossible, although it may take some time and energy to find the best loan for you and your credit situation.

5 steps to qualify for a fair credit loan

Lenders — particularly online ones — still offer a competitive rate to those with credit scores of 600 and up. When beginning your journey to find a fair credit loan, consider the following steps to increase your chances of  getting the best possible loan for your credit score and history.

Pay down current debt — especially credit cards

Similar to your credit score, your debt-to-income ratio (DTI) serves as a measure of your ability to pay off a loan. This figure, expressed as a percentage, shows the lender how much of your monthly gross income is compromised by your debts.

Most lenders prefer a DTI of under 43 percent or lower. If you aren’t in a time crunch, paying down your debt prior to a loan application will make you much more appealing to lenders, especially if you have a DTI on the higher end.

Credit cards are especially important to pay down and keep down. Revolving credit, especially ones that you use heavily and carry a balance with, can hurt your ability to qualify when your credit is on the fair end of the spectrum. What’s more, these debts often carry high interest rates which can keep you stuck in a cycle of debt.

Prequalify with multiple lenders

By prequalifying, you can confirm your chances of loan approval and see your predicted loan cost without the drop that a hard credit pull would cause to your score when formally applying.

Prequalification is offered by most lenders and financial institutions, is free of charge and is completed online. You’ll fill out a short form, give some basic personal and financial information and then can proceed with the official application if you’re pleased with your offer.

Explore loans from a local bank or credit union

If you have a history with a local bank or credit union it is likely that these institutions will offer exclusive benefits and offers to preexisting customers or borrowers. For example, many lenders offer interest rate discounts or extended grace periods to members.

Plus, you may be able to use your repayment or personal history with the bank to negotiate interest rates or terms to score a more competitive offer.

Research peer-to-peer lenders

Peer-to-peer (P2P) lenders are online companies that match borrowers with individual investors who are willing to lend them money based on a specific criteria. While peer-to-peer loans may carry higher interest rates than those offered by banks and credit unions, they tend to have more flexible credit requirements.

Borrowers with low credit may benefit from the P2P lending structure; some look holistically at each applicant for approval rather than only considering credit score.

Use a co-signer

Adding a co-signer increases your likelihood of approval, as the individual’s credit score and financials are taken into account when applying for a loan. Additionally, you’re more likely to secure a better interest rate.

When looking for a co-signer, it is best to add someone with a strong credit score of 700 and over, and that has a close relationship with you. Before signing on the dotted line, make a repayment plan with your co-signer, as they’ll be responsible for making any delinquent payments and their credit will also take a hit.

Alternatives to a fair credit loan

If you are struggling to qualify for a personal loan, consider these alternatives:

  • Zero percent APR credit card. One way to consolidate debt is with a 0 percent APR credit card. In this case, you simply move your card balance to ensure that interest doesn’t add up and in turn have a period — usually 12 months — to pay down your debt.
  • Home equity loan or line of credit. Homeowners can dip into cash found in the equity of their homes with a home equity loan or a home equity line of credit (HELOC). But since you use the property as collateral, missed payments can result in home foreclosure.
  • Paycheck advance. If you have an emergency expense, an advance on your next check may be useful. Just be careful — you’ll be short that money when your next check rolls around, so you’ll need to budget accordingly.

Getting a loan with fair credit takes patience

While it can be more challenging to secure a competitive rate as a fair credit borrower, it is still doable. Consider starting your journey at a local bank or credit union or working to pay down debt ahead of your application to ensure the best rates and terms.