If you have bad credit, you may think that getting loan approval is out of reach. However, some lending companies can still approve loans, including personal or emergency loans, even with poor credit. You don’t have to let financial mistakes in your past affect your ability to borrow today, but you should understand more about what goes into approving a borrower with bad credit.
Today, we’re taking the mystery out of bad credit loans and giving insight into the approval process. We include essential things for borrowers to know before signing on the dotted line.
What Is Bad Credit?
Your credit score is a numerical representation of how likely you will repay a loan and how likely you will pay your installments on time. For example, FICO defines “bad credit” as a score of 350-579, and while you may not get the best rates or have as many lenders to choose from when applying for a loan, that doesn’t mean there aren’t any lenders willing to make the loan.
Don’t expect to have the highest loan amount or the best interest rates if you have bad credit. The lender willing to make the loan based on your credit score is often the best for your financial situation. However, if you are fortunate enough to have a few interested lenders, evaluate them before agreeing to the terms.
What is a Bad Credit Loan?
Technically, bad credit loans are ones made to borrowers with credit scores lower than 580. However, not all bad credit loans are created equally. For example, if you have a low credit score because you’re just starting, then lenders may be more willing to extend more favorable terms than if you have poor credit due to late payments or default.
Minimum credit scores can vary by lender, and some consider borrowers with scores between 580-600 to be less favorable, as well. As a result, bad credit applicants typically are offered lower loan limits and higher interest rates than their better-qualified counterparts.
How Can I Get a Loan With Bad Credit?
Getting a personal loan with bad credit typically requires extra steps from you, the borrower:
- Check your credit score. You’re entitled to one free credit report per year from each of the three leading reporting companies.
- Analyze your score for inaccuracies. Inaccuracies such as debt that doesn’t belong to you. Petition them for removal without fail.
- Take steps to improve your score before applying for a loan. This includes reducing the amount of credit you use and paying off small debts. If your score is close to 580, you may wish to improve it before applying for a loan.
- Look at your budget to see how much you’re able to repay comfortably. Overborrowing and struggling to make loan payments can damage your credit further.
- Pre-qualify for loans with multiple lenders first to see how much you’d qualify for and the terms (including interest rates).
- Add a cosigner to your loan application. Adding someone responsible for repaying the loan should you fail places you in a more favorable position for lenders.
- Ensure you have all pertinent information for the loan, such as SSN, income information, including pay stubs, and even a tax return, if necessary.
Bad Credit Loans Comparison Tips
While you may not get as many lenders to choose from, there are a few things to know when comparing loans and rates:
- Compare the top-end of interest rates from the lenders. As someone with bad credit, your interest rates are likely to be reasonably close to those numbers. Use this information when determining how much you’re able to repay each month.
- Prequalifying often means a “soft” credit check, which means that it won’t hurt your credit score. If you submit pre-qualification applications with multiple lenders, you can look at what you’re eligible for before submitting your final application.
- Read the terms of each loan carefully and check for hidden fees. Some lenders may charge an origination fee or late payment fees. Some may also charge prepayment fees if you repay the loan before the due date.
- Review the customer support options to ensure that (1) it’s easily accessible and (2) it’s a good fit. Should something happen, such as illness or financial hardship due to an emergency, you should be able to contact someone for assistance.
What Are the Risks With Bad Credit Loans?
Applying for and receiving a loan when you have bad credit often means taking on some form of risk. For example, you’ll have higher interest rates, making the loan more expensive to pay back.
Personal loans aren’t typically secured with collateral, which means that you won’t lose your house or vehicle should you fail to repay it. However, if you don’t make these payments on time or default on a loan, your credit score will drop, making it harder for you to secure a loan in the future.
Another risk that many people overlook is the effect having a cosigner can have. While having someone else help secure the loan may get you a higher loan amount and more favorable terms, should you fail to repay the loan on time or in full, that person is on the hook, too. In addition, you risk damaging a friendship or familiar relationship if you cause someone else financial hardship because of your late payment.
Frequently Asked Questions (FAQs)
Can I get a personal loan with a 550 credit score?
Few lenders approve loan applications from people with credit scores of 550 or below. However, if you have a co-signor for the loan, someone who agrees to repay the loan if you can’t, then you may be able to qualify for the loan. However, if your credit score is close to 550, take steps to improve your credit first.
How much money can I borrow with bad credit?
Every borrower is different, and lenders base your creditworthiness on your credit score, income, and debt-to-income ratio. So if you have poor credit, you’ll likely only be approved for close to the minimum loan amount that a lender offers.
How can I fix my credit to get a personal loan?
The first step to fixing your credit is knowing where you stand. Pull your credit report and go over it carefully. A credit counselor may be able to help you remove items that aren’t yours or are incorrect. Then, see which debts you can quickly pay off. If you have a small amount on a credit card, for instance, you can pay that off first. However, items like student loans, car loans, and mortgages may not be paid off completely. You can, however, ensure that they’re current if you’re past due for making payments.
Can I get a loan without having my credit checked?
There are some no-credit-check loans available. For example, payday loan stores, online lenders, pawnshops, and car title lenders offer loans based on collateral. Such loan lenders will not check your credit history. However, interest rates for these loans are typically high, and you risk losing the collateral item should you default.
If you have bad credit, there are options for a loan. Demonstrating that you can repay a bad credit loan on time and in full can help to boost your credit score. However, if you need more capital than lenders are offering, or if you can’t afford the higher interest rates of a bad credit loan, then you may wish to take steps to improve your credit score. Bad credit doesn’t have to mean that you’re ineligible for a loan, but it does limit your options.