If you’ve been late in paying your bills or piled up a mountain of debt, your credit score may be lower than you’d like it to be.
If an emergency expense crops up or you want to consolidate your debt, a personal loan may be an option. However, getting a personal loan with a low credit score may result in higher interest rates and fees.
With personal loans, you borrow a certain amount of money for a set period of time, and often you don’t need any collateral to secure the loan.
According to Experian, personal loans are the fastest-growing type of consumer debt. In fact, existing personal loan debt grew 11.4% from the second quarter of 2017 to hit $273 million in the second quarter of 2018. That growth is bigger than auto, credit cards, mortgages and student loan debt.
In addition to growth in the amount of loan debt, delinquency rate has also grown. In 2017, all but six states saw late payment rates increase over the past year. Because late payments can hurt your credit score, it’s especially important to be careful when considering personal loans if you have poor credit.
If you’re in the market for low credit score personal loans, here are five things to keep in mind.
1. Correcting errors on your credit report will help
Before you start applying for a personal loan, you should take a close look at your credit report and credit score, says Bruce McClary, Vice President of Communication for the National Foundation for Credit Counseling. Those two things play a major role in setting the rate you’ll pay.
Under federal law, Equifax, Experian and TransUnion must provide you with a free copy of your report every 12 months. You can also check your credit score online for free when you sign up with Bankrate.
With your report in hand you’ll know exactly what your credit score is before you begin applying, and you’ll be able to see what black marks are on your record.
If you find errors in your report, you can try to correct them before applying for a poor credit score personal loan. You also can address problem areas in your report, such as paying your bills on time, McClary says.
2. With your low score, a loan will cost more
If your credit is less than stellar, you should be prepared to pay more than someone with a higher credit score.
A number of lenders are using direct mail campaigns to aggressively market personal loans, with low interest rates of around 6% or 8%.
However, experts warn that these campaigns frequently advertise an introductory or “teaser” rate that will increase after the limited-time offer expires.
3. Online vendors are a great option for loans
There are a number of reputable online lenders, such as Lending Club and Avant, which offer loans to consumers with lower credit scores.
For example, Lending Club has a wide range of rates. Someone with a high credit score could pay an APR as low as 6.95%, along with an origination fee starting at 1%, while the highest risk customers could pay interest rates as high as 35.89%, plus a 6% origination fee.
At Avant, there’s no origination fee and rates vary by state.
But you need to be wary of some low credit score personal loan lenders. A report by the National Consumer Law Center found some payday lenders have begun making online installment loans and charging sky-high rates.
The report says that for a $500 loan, eight states have no cap on annual percentage rates, while 10 others cap rates between 61% and 116%.
4. Banks and credit unions offer loans, too
Armed with your credit score and credit report, you can shop around for a personal loan.
Don’t assume that your low credit score automatically will mean you’ll pay hefty interest rates or fees. While some online lenders charge 30% of more, you may get a better deal at your bank.
“So many people assume they wouldn’t qualify for a loan with a prime lender,” McClary says.
If you already have a relationship with a community bank or credit union, you might get a better rate or more favorable terms.
5. Watchdog agencies monitor complaints
When you find a lender that looks promising, be sure to spend time researching the company, McClary says.
Check to see if any complaints have been made with your state attorney general’s office or the Consumer Financial Protection Bureau.
Also check for the top interest rates allowed by law in your state and whether the company actually is licensed to do business in your state, McClary says.
Even if you need to get your hands on cash fast, don’t dismiss doing research on the loan terms and the company offering them. “You could really open yourself up to getting ripped off,” he says.
Ready to find a personal loan? View rates in our personal loans marketplace.