How to Get a Loan with a 500 Credit Score
Although getting a loan using a credit score of 500 will likely be tougher, there are some ways that you might be able to do so. Lenders who provide loans at a 500 credit score could potentially lend less money, have stricter loan term requirements (i.e., lower time to pay off), charge you more in fees, and/or have an even higher interest rate compared to someone with a better credit history.
Common FICO credit scores usually range from 300 to 850. myFICO defines a poor credit score as one below 580. In this article, we will discuss how to get a loan when your credit score is 500, how to review your personal credit report, how to compare bad credit loan choices, and how to avoid high cost lenders.
Understanding a 500 Credit Score and Bad Credit
Some loan options are designed for borrowers with lower than normal credit scores or limited credit history. In general, you can expect to be limited in your loan options and pay higher costs of borrowing if you have a 500 credit score.
Common causes for low credit scores include:
- Late payments, missed payments, collection accounts, charge-offs or default on a loan.
- High level of credit use such as when you keep your credit card balances close to their limits.
- Short length of time that your credit has been established with few active credit reported accounts.
- Recent hard credit checks from new applications.
Lenders will view a 500 credit score as a greater risk. This does not always mean that your request will be denied. It does mean that Lenders may look more closely at other factors such as your income, debt, collateral, bank account activity, etc.
What Makes Getting a Loan with a 500 Credit Score Harder?
You’ll likely find it harder to get approved for loans with a 500 credit score because most financial institutions use your credit score as one of several methods they use to evaluate how much risk you are to lend to. As such, some financial institutions will have a required credit score to apply for a loan. Those that do allow applications from borrowers who have scores less than their requirements might consider lending, but could charge higher interest rates and fees.
Some potential issues when you borrow money at lower credit scores include:
- Lower loan limits
- Higher APRs and fees
- Shorter repayment periods
- Higher monthly payments
- Collateral (such as property) or a cosigner may be requested
- Fewer options for where to borrow
When receiving a loan offer from a lender, you need to thoroughly assess the entire cost of borrowing for the duration of the loan.
Step 1: Check Your Credit Report and Current Score
Before you apply for a loan, make sure to check your credit reports from Experian, Equifax, and TransUnion. Find errors in your report that could be hurting your score. If there are wrong balances, duplicate collections, or accounts that do not belong to you, it will affect how lenders look at your request.
Do this first:
- Check each account, balance, payment, and collection entry.
- Dispute any of these accounts that may be incorrect, outdated, or listed more than once.
- Use the free score tool provided by your bank card issuer when available.
- Use a soft credit pre-qualification check when possible.
- Avoid a hard credit check until you plan on making a formal application.
Hard credit checks made through the process of a formal loan application can lower your score temporarily. If your current score is already low, then it would be best to wait until the loan appears as a good fit before submitting a formal application.
Step 2: Decide What Type of Loan You Actually Need
The type of loan that will best fit your needs depends on several factors, including the amount of money you need, why you need the money, and the time frame you have to pay back the loan.
Some common types of loans include:
- Personal Loans (for large purchases, home repairs, debt consolidations)
- Auto Loans (the vehicle being financed is often used as collateral)
- Secured Personal Loans (you use some type of asset as collateral)
- Credit-Building Loans (your primary purpose for taking out this type of loan is to build or repair credit)
- Credit Union Loans (these tend to be less expensive for those who belong to a Credit Union)
- Peer-To-Peer Loans (investors lend to individuals using an online lending platform)
When looking at these different options, always try to keep the size of the loan as low as possible. At a credit score of 500, many lenders will be hesitant to lend you a lot of money. Keeping the amount you borrow as low as possible will help with repayment and also increase your chances of getting approved.
Loan Types to Review When You Have a 500 Credit Score
Finding the best options when you have a credit score of 500 requires finding lenders that have experience working with lower credit customers. Once you find those, compare the total cost of the loan prior to approving any offer. The goal is not just to get approved. But you need to be looking for a loan that will allow you to make your monthly payments, so you don’t add any additional stress to your life.
Secured Personal Loans
A secured personal loan utilizes an asset as collateral in order to lower the amount of risk associated with lending money. Lenders can accept a variety of assets as collateral, such as a savings account, CD (Certificate of Deposit), paid off vehicle, etc.
Having collateral on a loan can make it easier to qualify when your credit history does not show good credit. However, the risk is very real. If you are unable to pay back this type of loan, the lender could potentially take control of the collateral. Look into local credit unions, community banks, and online lenders who specialize in offering secured personal loans to individuals with bad credit.
What Online Lenders May Review Besides Credit Score
Online lenders may examine a number of things in addition to credit scores, such as income, job status, bank account information, historical payments made, and existing obligations. On the one hand, because of this, many online lending processes are much quicker. However, on the other hand, many online lenders have been known to charge larger origination fees and have APRs and or late charges associated with their loans.
Credit Union Loans and Payday Alternative Loans
Credit unions may have more flexible lending policies than many banks. Federal credit unions also offer a product called Payday Alternative Loans (PALs), which is regulated by NCUA in terms of loan amount, repayment terms, interest rate, and application fees. PAL interest rates may be as high as 28% and federal credit unions may also charge a reasonable application fee, up to $20.
These loans may be less risky than traditional payday loans because NCUA rules set limits on interest, fees, loan amounts, and repayment timing. Before making an application for such a loan, it would be beneficial to find out about the credit union’s membership rules, wait time to apply for a loan, available loan amount, fee structure and repayment options.
Co-Signed or Joint Loans
You could have a co-signer who has stronger credit than you to assist with qualifying for loans or getting better loan rates. In addition to evaluating your own credit and income, the lender will evaluate that of the co-signers.
Be cautious when using this method. If you fail to make payments, the co-signer’s credit rating may suffer as well. Additionally, the co-signer is at risk of being held legally liable for the debt if you are unable to repay it. Before applying together, discuss your repayment plan in writing. Consider making all payments automatically, and determine how things would work out (i.e., who pays what) if either of your incomes changes.
Credit Builder Loans and Secured Credit Cards
Credit builder loans aren’t designed as emergency loans. They typically involve your lender holding the borrowed funds until after you’ve been making your scheduled monthly payments. Since these are typically reported to the major credit reporting agencies, your regular on time payments can eventually add positive payment history to your report.
Secured credit cards operate under a different model. Once you make a cash deposit into the account associated with your secured credit card, you can begin using it to make smaller purchases that you will pay off at the end of each month.
Step 3: Strengthen Your Application Before You Apply
Small things you do can be helpful if your credit score is near a lender’s cut-off. Waiting 30 to 60 days before submitting an application gives you time to strengthen your application.
Show Stable Income and Lower Debt
Collect recent pay stubs, bank statements, taxes and other records that document housing expenses. The documentation will assist in showing lenders that you are capable of making the payments. Lenders compare your monthly debt payments to your income. Lowering some or all of your current credit card balances (even $300) may also lower your debt utilization ratio, thus helping to improve your chances of being approved for the loan.
Limit New Credit Inquiries
When possible, use prequalification. The soft credit check may allow you to view potential offers while not negatively affecting your credit score. In general, do not open a store card, buy-now pay-later option, or another loan prior to making an application for credit. Too many hard credit inquiries will hurt your chances of getting approved on any of these low FICO credit applications.
Step 4: Compare Lenders, APRs, and Loan Terms
With a 500 credit score, one loan offer could be significantly cheaper in terms of APR or origination fees than the next. Although a lower payment will always have less overall expense when comparing loans based solely on the monthly payment amount, a low payment can also mean that you’ll end up paying back your loan for an extended period of time, and ultimately pay back a lot more money over the life of the loan.
Compare the following:
- The Origination fee and late fees charged by each lender
- Your total repayment amount
- Your Monthly payment amount
- Length of term for the loan
- If payments will be reported to credit bureaus
- Pre-payment penalties
You should try to get pre-qualified from at least 3 lenders. For example, you could qualify through one credit union, one internet lender, and one secured loan provider if you have collateral. Look first at the APR, as that will give you a better view of what it costs each year for this type of loan. Then check with the lender to make sure their fees are included in your agreement prior to signing.
Step 5: Watch Out for High Cost or Unsafe Loan Offers
Some types of loans seem like they will be easy to qualify for, but may have difficulty repaying. For instance, payday loans are normally provided on a short term basis and include high costs. The borrower could find themselves repeatedly borrowing if the payback date comes too quickly.
You need to watch out for lending companies that:
- Say there is an approval without giving you terms that make sense.
- Apply pressure on you to sign immediately.
- Will not provide you with written loan information.
- Require any unusual up-front charges before making the loan.
- Do not tell you about the cost of the fee, what day your payments are due, or how you can cancel the agreement.
- Request access to your bank account without providing clear permission terms.
The safest loan option will allow you sufficient time to review the contract agreement, understand all of the costs involved, and know exactly when each installment payment is due.
How to Improve Your 500 Credit Score for Better Future Loans
If you don’t need money immediately, it may be possible to improve your credit score enough that you’ll get access to better loans in the future. The most effective method of improving your credit scores is by paying bills or debts when they come due. This is easy: Create a budget so you can afford to pay all your regular monthly expenses.
Build Positive Payment History
Payment history is also one of the largest categories in common credit scoring models. Paying your bills on time helps to show others that you are managing your debt responsibly. Set up automated payments, calendar reminders and backup alerts. If you think there’s a chance you may miss a bill due date, call the creditor before they post it as overdue. A hardship plan could help you prevent another negative mark.
Lower Your Credit Use
The amount of credit being used is referred to as credit utilization. Using $900 out of a $1000 credit limit may be viewed as high risk for lending. Lowering this amount will likely positively impact your credit profile. When possible, minimize your outstanding balance on credit cards. Closing accounts with long standing payment histories (unless they have annual fees) could negatively impact your overall credit history.
Putting It All Together: A Practical Plan for a 500 Credit Score
Here is an easy to follow path:
- Week One: Get copies of your three credit reports, review them for accuracy, and check your credit score. Also, contact the credit bureaus to dispute any errors in your credit report that may be lowering your credit score.
- Week Two: Collect all of your income information (paystubs) as well as all of your banking information, including bank accounts, savings accounts, money market accounts, etc. Also, collect all of your tax returns from the last year. Lastly, collect all of the information regarding how much you owe on each of your debts.
- Week Three: Determine if a secured loan, a credit union loan, an online lender, or if you need someone to co-sign with you, will work best for your financial situation.
- Week Four: Find out what interest rates are available from these sources; pre-qualify at least 3 sources. Compare all of their offers so you can find the best deal for yourself and select the safest and most affordable repayment option.
Your 500 credit score can make borrowing difficult, but it doesn’t have to shut every door. The right lender, the appropriate loan amount, and a repayment plan will help. Start with your credit report, protect your credit score, carefully compare offers, and only borrow what you know you’ll be able to pay back.