If you have bad credit, it doesn’t mean you can’t get the personal loan, but you should be aware of what to expect when looking how to get personal loans with bad credit. A sudden need for money is something almost everyone experiences at least once in their lives. Car repairs, medical emergencies, and even an attempt at debt consolidation to get payments under control are all situations that anyone can find themselves in. However, these situations are worse if you don’t have good credit because a lower credit score can cut off potential avenues for getting more money. Luckily a personal loan is not impossible to get if you have bad credit. However, you will find your choices restricted, and the terms surrounding the loan will be strict.
What Is a Credit Score?
A credit score is a ranking that describes to lenders, landlords, banks, and others how well you have fulfilled financial obligations in the past and how well you’re fulfilling them now, along with information such as how long you’ve had credit to begin with. The number corresponds to a specific label that others can use to determine how risky you would likely be as a borrower, renter, or customer. For example, a credit score of 800 would be considered excellent credit, while a score of 640 would generally be considered fair credit. Lenders would likely consider someone with a score of 800 to be a low-risk borrower, but that person with the 640 score would be seen as a bigger risk, and lenders would place more restrictions on loan approval for the lower score.
Everyone with a credit history has several credit scores, and it can be frustrating to try to pin down which score a particular lender will use. The two main types of scores are the FICO score and VantageScore:
- The FICO score is the older of the two, introduced by the Fair Isaac Corporation in 1989 as a way to give lenders a snapshot of customers’ financial stability and ability. Several versions of the FICO score exist, with the latest (as of 2019) being FICO Score 9, and these versions have subcategories such as “Bankcard” and “Auto.” Not all lenders automatically use the latest score type, so you may find one lender looking at FICO Auto Score 8 for a car loan and another using FICO Score 5 for a mortgage application.
- VantageScore was introduced in 2006 by the three main credit reporting bureaus, Experian, TransUnion, and Equifax. It works essentially the same way that FICO scores do, albeit with fewer variations. One version, VantageScore 3.0, expanded the score range to look more like the ranges used for other credit scores and created more avenues for historically credit-invisible people to get on the credit radar. VantageScore 4.0 refined the process further, incorporating legal changes that reduced the types of “bad” accounts that could affect a score.
Lenders may choose which type of score to reference.
How Does Bad Credit Affects You?
Like it or not, your credit score has become a major influence on how companies deal with you. This is logical, in a way, as credit and credit-like applications (such as post-paid cell phone accounts) are much more present in our lives now than they were a couple of decades ago. But it’s also frustrating as scores can be both slow to rise and vary widely from each other. In other words, the score your bank sends you with your credit card statement may not be the score your bank actually uses to evaluate your mortgage application or the one a third-party lender uses to evaluate your auto loan application.
Bad credit can result in rejected applications, higher deposits, much higher interest rates, and more stringent repayment terms. While the exact dividing lines between bad, poor, fair, good, and excellent credit vary between lender, in general:
- Around 580 separates bad and poor
- 670 separates poor and good
- 740 or so indicates very good credit
- 800 is usually the threshold for excellent credit
However, it pays to double-check with a lender about their specific score divisions. If you have a score of 580—bad, according to the previous list—but the lender considers 580 to be poor, then you may have a better chance of getting a personal loan from that lender. Nothing is guaranteed, but at least you can try.
Personal Loans with Bad Credit
Personal loans are loans, both secured and unsecured, that you can use for purposes such as car repair, debt consolidation, or other personal issues. A bad credit score makes getting these loans more difficult simply because you’re seen as a non-payment risk, meaning it looks like you’re more likely to default on the loan given your financial history.
But that’s not the end of the story. Not only are there lenders who are willing to consider bad credit, but additional lenders may be willing to consider why your score is so low. Just as people can get secured credit cards with bad credit, so too can people with bad credit get personal loans if they can find the right lender.
Online lenders such as Lending Club, One Main Financial, and Avant have personal loans that you could qualify for even if your credit is bad. Note that you may be subject to lower lending limits, and you’ll almost certainly be subject to higher interest rates. But lenders such as these three also have:
- Fixed interest rates: No matter which company you apply to, a fixed interest rate is crucial. You do not want a personal loan with a variable rate as that could send your monthly payments skyrocketing should rates go up. A fixed rate ensures that your monthly payment is steady and won’t suddenly destroy your budget.
- Small loan amounts: While an online lender has the ability to lend out larger amounts, lenders who are sympathetic to those with bad credit also have small loan amounts that can be just enough to cover the expense you’re having trouble meeting. This works in your favor as it can look much better to apply for a small loan with a lower credit score, as you would think. Again, there’s no guarantee you’d be approved, but it is a positive sign.
- Payment term options: While some of these lenders may have only a couple of repayment options, the fact that they have options is a plus. These give you more flexibility when figuring out what repayment schedule might work best given your budget.
When evaluating a lender, be aware not only of high interest rates and variable interest, but also of origination fees. These are fees that you pay back with the loan but that are not actually included in the loan. For example, if you borrow $1,000 with an origination fee of $100, you might receive a $900 loan but have to repay $1,000 plus interest on top of that. Or you’d get $1,000 but have to repay $1,100 plus interest.
Alternative Lenders for Personal with Bad Credit
Credit unions are often a good place to look for personal loans when you have bad credit, if you have an account already set up. Credit unions sometimes offer loans known as payday alternative loans, which are small loans subject to strict regulation designed to prevent the debt spiral that often accompanies taking out high-interest payday loans.
And, if you have a good record with the credit union, you might want to talk to a representative about a personal loan despite bad credit if the bad credit was due to something beyond your control. For example, if your low credit score is the result of documented ID theft or emergency medical debt, you may want to see if the credit union can take those factors into account when processing an application for a personal loan.
If you have bad credit and want to apply for a personal loan, look for pre-qualification tools on lender websites that use soft credit pulls. These don’t affect your credit score the way a hard inquiry might.
Do not be discouraged if you have bad credit. Personal loans for lower credit are available, as are alternatives. It may take some time to find a lender that will approve your application, but you aren’t shut out of the personal-loan market.