Getting a Loan With Bad Credit – Struggling with bad credit but need a loan? Learn how to check your credit score, compare specialized lending options like payday and peer-to-peer loans, and take steps to improve your credit over time. With diligence, those with poor credit can still find financing while rebuilding for better rates in the future.
Getting a Loan With Bad Credit
Having bad credit can make getting approved for a loan more challenging, but it is still possible with some strategic planning. By thoroughly understanding your credit score, exploring specialized lending options, and taking proactive steps to rebuild your credit, you can find a loan that meets your needs even with less-than-ideal credit.
Understanding Your Credit Score In-Depth
Before even thinking about applying for a loan, it is essential to fully understand the current state of your credit standing. This includes knowing what a credit score is, why it is so important for lending, and how to check yours.
What is a Credit Score and Why Does it Matter?
Your credit score is a three-digit number ranging from 300 to 850 that indicates your “creditworthiness” or ability to responsibly manage debt. It is calculated based on the information in your credit report, a record of your credit history maintained by the three major credit bureaus – Equifax, Experian, and TransUnion.
Several factors determine your score, including:
- Payment history – Whether you pay your bills on time. This is the most important factor, accounting for 35% of your score. Even one late payment can hurt your score.
- Credit utilization – How much of your available credit you are using. Using over 30% of your total available credit limits can negatively impact your score.
- Credit history length – How long you’ve had credit. Having a longer established credit history improves your score.
- Credit mix – Whether you have experience managing different types of credit such as credit cards, installment loans, mortgages, etc. A healthy mix helps your score.
- New credit – How many new accounts you have opened recently and how many hard inquiries from lenders are on your report. Too many new accounts and inquiries can lower your score.
In general, the higher your credit score, the lower the risk you pose to lenders. As a result, if you have a high score, you are more likely to be approved for new credit and qualify for better terms like lower interest rates and higher borrowing limits.
With a low credit score, not only will you have difficulty getting approved for loans, but when you are approved, you will pay more. Low credit scores signify high risk, so lenders will protect themselves by charging you higher interest rates and fees.
Checking Your Credit Score
Since your credit score has such a direct impact on your ability to qualify for loans and other credit, it is important to check your score regularly so you know where you stand. Here are some ways to check your score for free:
- Credit Karma – This free site lets you check your score based on data from TransUnion and Equifax. They also provide analysis of what factors are impacting your score.
- Your credit card issuer – Many credit card companies like Discover and American Express now offer free access to your FICO credit score on your monthly billing statements or online account portal.
- Your bank – Some banks provide access to your credit score for free as an account-holder benefit. Log into your bank account online or visit a local branch to inquire.
- AnnualCreditReport.com – You can obtain a free copy of your credit report from each bureau once per year. The report itself does not include your numeric score but is useful for checking your full history.
Checking your credit score frequently allows you to catch errors on your credit report, monitor changes from new accounts or loan inquiries, and track your progress as you work to improve your credit standing over time.
Loan Options to Consider with Bad Credit
When your credit score is under 640 or so, qualifying for traditional bank loans and credit cards becomes challenging. But there are alternative lending products geared specifically toward those with less-than-stellar credit:
Payday loans are one of the easiest types of loans to obtain with bad credit. These small, short-term loans are given in anticipation of the borrower’s next paycheck. Payday lenders often do not even pull your credit score; they are more concerned with employment verification.
While easy to obtain, payday loans come with very high fees and interest rates. Rates of 400% or more are not uncommon. Defaults also trigger aggressive collection practices. Borrowers often end up taking out additional payday loans to pay off previous ones, trapping them in an endless debt cycle.
Payday loans make sense only as an absolute last resort during financial emergencies when other options are unavailable. Even then, borrow only what you absolutely need and have a concrete plan to pay back in full with your next paycheck.
Peer-to-peer lending connects borrowers to individual investors willing to provide loans rather than going through a bank. Popular P2P lending platforms include LendingClub and Prosper. Investors can view loan listings, choose which to fund, and earn interest on the repayments.
The minimum credit score required by P2P lenders ranges from 600 to 640, making it possible to qualify with fair credit. Loan amounts up to $40,000 are possible depending on your income and debt-to-income ratio. Interest rates are lower than credit cards, often between 6% to 36%.
P2P lending opens up an alternative source of financing for those unable to qualify for traditional loans. Just be cautious borrowing more than your budget allows, as defaults can still damage your credit further.
Secured loans require you to provide collateral – typically a valuable asset like a car or savings account – which the lender can seize if you fail to repay the loan. Because the lender has this security, they are more willing to lend to those with lower credit scores.
Two common types of secured loans are auto title loans and deposit account loans. Auto title loans use your car as collateral while allowing you to drive it, but charge up to 25% interest per month. Deposit account loans put a hold on money in your savings account equal to the loan amount. Interest rates are lower at 18% on average.
The security gives lenders confidence, but losing your collateral is a major risk with secured bad credit loans. Make sure to consider if the potential benefits outweigh the risks.
Credit Builder Loans
Credit builder loans aim to help those with poor credit actively improve their score. They are offered by some credit unions and community banks. Here’s how they work:
- You deposit a lump sum to fund the loan in a savings account, usually equal to the loan amount. This serves as collateral.
- You make fixed monthly payments on the loan over a set repayment term (typically 1-2 years).
- As you make on-time payments, the lender reports your positive payment history to the credit bureaus, helping build your score.
- Once the loan is paid off, you get back the collateral funds from the savings account plus any interest earned.
A credit builder loan provides an opportunity to add positive entries to your credit report and demonstrate responsible payment behavior. Just be sure to only borrow an amount you can confidently afford to repay on schedule each month.
Improving Your Credit Score Over Time
While dealing with credit issues, don’t just resign yourself to bad credit forever. In addition to finding the right lending products now, also focus on slowly improving your score. Here are some tips:
Pay All Bills On Time
One of the best things you can do to boost your score is develop a track record of on-time payments. Set up automatic payments or payment reminders. Being even just a few days late can result in penalty fees and a credit score ding.
Avoid missed payments by carefully budgeting for all monthly bills, including minimum credit card payments. Get accounts current and continue paying on time going forward to establish a positive payment history.
Lower Your Credit Utilization
Keep credit card balances well below your overall credit limits. High credit utilization (using over 30% of your total available credit) drags down credit scores.
Aim for a utilization of no more than 10% to 15% of your total credit limit across all cards. Pay off cards aggressively each month. You can also ask issuers for higher limits to lower utilization. Just don’t spend more as a result!
Don’t Close Old Credit Accounts
While closing unused cards may seem beneficial, it can actually hurt your score. Length of credit history accounts for 15% of your score, so closing old, established accounts means you have less experience managing credit.
Unless there is an annual fee, keep old accounts open even if you don’t use them. Just charge a small recurring purchase monthly so they remain active. This maintains your history.
Avoid Applying for Too Many New Accounts
Opening a lot of new credit accounts in a short period can signal risk and hurt your credit score. Each application triggers a hard inquiry on your report, and if approved, lowers your average account age.
Be selective in only applying for the credit accounts you truly need right now. Space out applications by 6 months or more. Seek credit limit increases on existing accounts instead of opening new card accounts.
Correct Any Credit Report Errors
Errors on your credit report like accounts that aren’t yours or incorrect balances can negatively impact your score. Dispute the information with the credit bureaus by filing a report online or
Provide documentation like account statements or receipts to support your dispute. The agencies must investigate within 30 days. Continue disputing until the errors are corrected, then monitor your reports to ensure the mistakes do not reappear.
Correcting reporting errors can give your credit score an immediate boost by optimizing your payment history, utilization, account age, and other factors lenders evaluate.
Become an Authorized User
If you have a family member or friend with excellent longstanding credit, ask if they are willing to add you as an authorized user on one of their credit card accounts. As an authorized user, the account history will be added to your credit reports, helping establish length of history and improve your score.
Just be certain the card owner you are paired with has strong credit habits. Irresponsible usage that results in high balances or late payments on their account could negatively impact your score instead.
Limit New Hard Inquiries
Hard credit inquiries occur when you apply for loans or credit. Having too many in a short timeframe can signal high risk and hurt your scores. Limit inquiries by only applying for credit you have a high chance of receiving based on your credit standing and debt-to-income ratio. Comparison shop for loans within a focused period of 14-45 days so inquiries are grouped and count as one inquiry.
Enroll in Credit Monitoring
Sign up for a service like Credit Karma or Experian to monitor your credit scores and reports. The services alert you any time new accounts or inquiries occur, so you can watch for signs of fraudulent activity and identity theft. Monitoring also lets you track your progress improving your credit by keeping tabs on factor changes.
Finding the Best Loan for Your Situation
Once you understand your credit score and available options, here are some tips for choosing and applying for the right loan:
Compare Interest Rates and Fees
Shop around to lenders like credit unions and online lenders to compare interest rates and fees. Consider rates, origination fees, late fees, insufficient funds fees, and prepayment penalties. Weigh the costs carefully based on your situation.
Aim for the lowest rate possible based on your credit score, but don’t sacrifice important protections to get the lowest rate. For example, loans with no origination fees often charge very high interest rates.
Understand the Loan Terms
Carefully evaluate the loan amount offered, length of the repayment term, the required monthly payment, and other terms like collateral requirements. Ensure you understand the contract before signing.
Borrow only what you can confidently afford to repay each month. Use online calculators to estimate your monthly payment at different loan amounts and terms.
If the loan terms aren’t favorable, explore alternatives like borrowing from family or community programs. Compare costs and terms to make the financially optimal decision for your situation.
For very large loans like mortgages, wait to apply until you can improve your credit and income to qualify for better rates and terms. Avoid very risky lending situations in the meantime if possible.
Strategic loan applications preserve your credit score while increasing approval odds:
- Only apply for the specific credit products and amounts you need based on your situation. Avoid unnecessary inquiries.
- Compare similar loan offers within a 14-45 day period so inquiries combine into one inquiry.
- Consider having a family member co-sign the loan application with you to improve approval chances and potentially receive a lower interest rate.
- Ask lenders for prequalification before formally applying. This “soft” inquiry guides your application strategy without impacting your score.
- Apply first to lenders likely to approve you based on your credit data and debt factors. Then proceed to those with stricter requirements.
- Limit applications to no more than five lenders at once. Too many inquiries can overwhelm your credit reports and raise concerns.
With some diligence, those with bad credit can still find loans well-suited to their budget and financial circumstances. Monitoring your credit, exploring specialized lending options, and taking proactive steps to rebuild over time expands your financing opportunities. The key is borrowing responsibly – stick to loan terms you can realistically repay. This financial discipline serves your credit score well as you work toward access to new credit products with better interest rates.
Getting a Loan With Bad Credit Conclusion
Getting a Loan With Bad Credit – While having bad credit presents challenges, accessing financing is still possible for those willing to put in the effort. Taking the time to check your credit reports, research options beyond traditional lenders, and gradually improve your credit standing can open doors. Most importantly, borrow responsibly once approved and make payments on time. With diligence and patience, your credit can rebuild to qualify for better loan terms in the future.
Getting a Loan With Bad Credit FAQ
Q : What is the minimum credit score needed for most loans?
Ans : Most conventional personal loans require a credit score of at least 620-650 to qualify. Lenders that offer bad credit loans may approve borrowers with scores in the 500s. Payday lenders often do not even check credit scores.
Q : How long does it take to improve your credit score by 100 points or more?
Ans : It typically takes at least 6 to 12 months of responsible credit management behaviors to raise your credit score by 100 points or more. This includes making on-time payments, lowering credit utilization, and limiting new account applications. Patience and diligence in making credit-building behaviors habitual is key.
Q : Can you get a mortgage with a credit score below 600?
Ans : It is very difficult, but possible in some cases. Specialized subprime mortgage lenders are more willing to work with borrowers with credit scores as low as 500. However, interest rates and fees will be much higher, and overall terms less favorable.
Q : What is the easiest loan to get with bad credit?
Ans : Payday loans are the easiest option for borrowers with bad credit, as there is minimal credit check. Lenders are more concerned with verifying employment. However, payday loans have astronomically high interest rates and should be a very last resort option only.
Q : Are personal loans a good idea with bad credit?
Ans : Personal loans from specialized lenders willing to work with bad credit borrowers can make sense as part of a credit-building strategy. Starting with a small loan amount you know you can repay on time helps establish positive payment history. Just avoid borrowing more than you can handle.