Some people turn to personal loans when money trouble hits, but if you have bad credit, getting a loan can be difficult. If this is your case, you may be relieved to learn that some lenders are willing to work with borrowers whose credit history is less than perfect.
Here are some of the challenges and opportunities faced by borrowers who ask themselves, “How do I get a personal loan with bad credit?”
What is the minimum credit score for a personal loan?
Each lender has their own criteria, including risk tolerance, when establishing the minimum credit score for a personal loan, says Rod Griffin, senior director of public education and advocacy for the bureau. of Experian credit.
“Generally when you think about subprime borrowing, 680 is what we consider close to prime,” he says. “So you can’t qualify at that time.”
A score of around 700 should help you access a personal loan, “but probably not at the best rates,” Griffin says. “To qualify for the best terms, you’ll usually need scores of 750 or higher.”
Lenders also look beyond your credit score for other factors that can affect your ability to repay a loan, Griffin says, including your:
Overall, a lender wants to assess how well you are paying back the money you borrow before giving you a personal loan.
“If you have a history of defaulting on debts — things like lots of late payments or collection accounts — that’s going to make it harder,” he says.
What is the best loan for bad credit?
If you have a low credit score but are still hoping to get a personal loan, be aware that many lenders specialize in helping borrowers with bad credit. You can start by exploring US News’ guide to the best lenders for bad credit.
But before you apply for a personal loan, ask yourself if it’s really in your best interest, says Todd Christensen, education manager at Money Fit by DRS Inc., a national nonprofit credit counseling agency. The best loan for bad credit might be no loan at all.
“If you take out a personal loan with bad credit, you probably have accounts that are in collection or payments that you’ve already missed,” says Christensen. “Using one loan to pay off another is not a debt reduction plan. It’s debt reshuffling.”
Instead, try to get to the root of your debt and credit issues before you borrow, he says. “If you have bad credit, adding another loan is like adding fuel to the bad credit fire,” says Christensen.
As a general rule, people with poor credit should consider other options before considering a personal loan, agrees Lauren Anastasio, Certified Financial Planner at SoFi.
“If you have poor credit, a personal loan — assuming you qualify — could cost significantly more than other types of financing,” she says.
How can you get a good loan if you have bad credit?
Get an unsecured personal loan with good terms when you have bad credit can be difficult but not impossible. If you need a personal loan and your credit is weak, you must:
Look for lenders with bad credit. “For better or worse, there are lenders all over the country ready to offer personal loans to consumers with bad credit,” Christensen said.
Improve your financial health. Work on breaking bad credit habits to increase, or at least maintain, your credit score.
“Lenders find it boring to be very sexy: paying on time, every time, not having huge swings in your balances, keeping balances low,” says Griffin. “Slow and steady is very appealing.”
Show that you have a constant source of income. If your financial situation has recently improved and you are awaiting your credit score to catch up, try to show lenders that you are in a good position to borrow.
“If a personal loan is your best bet, the best thing to do is provide proof of consistent, reliable income,” says Anastasio. “A reliable stream of income gives the lender peace of mind that you will have the resources available to make your payments.”
Accept a shorter loan term. Choosing a shorter repayment period might get you a better rate. “Generally, the shorter the repayment period, the lower your interest rate,” says Anastasio.
Expect lower interest rates on personal loans with repayment terms of two to three years and higher rates on loans with terms of five or seven years, she says.
5 alternatives if your request is refused
Just because a lender has declined your application doesn’t mean you can’t get a personal loan, says Anastasio. Here’s what you can do:
Talk to the lender who rejected your application. Another arrangement might still work for the lender. “Start by talking with the lender and see if they would approve you for a different loan amount or term,” says Anastasio.
Look at other lenders. Try to find a lender that best suits your needs and situation. “You’re still able to shop,” Anastasio says. “Underwriting criteria vary from one financial institution to another.”
Consider borrowing from your 401(k). This option does not involve a credit check and should cost less than a bank loan, she says. “But there could be tax implications if you leave your employer before repaying the balance,” Anastasio adds.
Ask family members and others for help. Check local nonprofits for special purpose loans or peer-to-peer lenders such as Prosper. Seeking help from smaller banks and credit unions is another alternative, although a bad credit score can limit your options.
Try to avoid the worst alternatives. Some people with poor credit may consider payday loans and title loans. But both types of loans are expensive and can charge APRs of 300% or more, plus rollover fees if you extend the maturity date, according to the Federal Trade Commission. You could also lose your vehicle if you can’t repay a title loan, even if you make partial payments.
How to increase your credit score
Most methods to increase your credit score take time. Here’s what you can do:
Watch out for late payments. Late payments are by far the biggest cause of damaged credit scores, Griffin says. “If you have late payments, you need to catch up on those payments as soon as you can,” he says.
Reduce your credit card balances. A top credit utilization rate — the percentage of total available credit you’re using — is the second-highest reason people see their credit scores drop, Griffin says.
Lower this ratio by paying off your debts and resisting further splurges, you can improve your credit score. “As you enter the next billing cycle, you’ll likely see an improvement,” says Griffin.
Sign up for Experian Boost. This free program counts one-time cell phone, utility, or even Netflix payments toward your credit score. Griffin says that 2 out of 3 people who sign up for Experian Boost see their scores increase instantly. Even if your score only goes up a few points, it could be enough to boost your credit rating from fair to good. However, as the Experian website Remarks“Some may not see improved scores or approval ratings. Not all lenders use Experian Boost impacted credit information.”
Continue to use your accounts. Lenders want to see that you handle credit responsibly. Load something onto each card at least every two months and then pay it back, recommends Griffin.