Plenty of signs — besides a poor credit score– can point to having bad credit. You’re late paying monthly bills. Your checking account is overdrawn. Cellphone companies won’t give you a contract. You make only minimum payments on your debt.
One in five people don’t pay their bills on time, according to the 2016 Consumer Financial Literacy Survey. Paying bills on time can be especially hard for people with bad credit, but personal loans for people with bad credit can sometimes help people get back on track. This article will help you find the best options to get a personal loan with bad credit.
Why personal loans for bad credit?
Around 30% of Americans have a credit score below 640 (source). If that includes you, you probably struggle to get accepted for credit cards. Even if you do manage to get a credit card, it will have a small line of credit, and you’ll pay higher interest rates and fees than someone with a good credit score. According to a report by the Syracuse University, people with bad credit can pay an additional $4,975 in interest on their credit card debt than consumers with good credit. (source).
Personal loans for bad credit borrowers are typically expensive, so their use should be limited to emergency situations.
Lenders that specialize in borrowers with bad credit have more flexible loan requirements and are more likely than other banks and traditional lenders to work with you if you have a borderline credit score.
Types of personal loans
Personal loans come in two categories: secured and unsecured loans.
A secured loan requires collateral that can be taken by the lender if you don’t repay the loan. A car or house is an asset that can be used as collateral. Losing your house to a bank is a big risk to take for a personal loan.
An unsecured loan doesn’t need collateral. This makes it a higher risk for the lender. For that risk, you’ll likely pay a higher interest rate. But you won’t lose your car or another asset if you don’t repay the loan.
Why and how credit matters
Whether it’s a credit card, auto loan, or home mortgage, the amount of interest you’ll pay over the loan term can vary greatly depending on the interest rate. And the interest rate you qualify is heavily based off your credit score. Credit scores allow lenders to estimate credit risk, so if you’re risky you’ll pay more.
Depending on which type of credit score you use, a high credit score of 800 or better — on a scale of 300 to 850 — is considered excellent and can lead to a low interest rate on a home loan, for example. A bad credit score of 550 can lead to loan denial or a higher interest rate such as 36%, versus 10% for having an excellent credit score.
Getting your credit score is free. The majority of adults — 56% — received their credit scores in 2016, the Consumer Financial Literacy Survey found. Thirty-five percent said they ordered their credit score out of curiosity.
Loan options for bad credit
Many online lenders offer personal loans to people with bad credit. The interest annual percentage rate (APR) that’s charged can often exceed 36% APR.
Check out SuperMoney’s personal loan reviews to compare different types of loans, including personal loans for bad credit.
How to apply for a personal loan when you have bad credit
Applying for a personal loan if you have bad credit should be straightforward. You’ll fill out an online application and include information such as your education, employment history and monthly bills.
Here are some other things a lender may need, either online or paper copies of:
- Tax returns from at least the last two years
- Pay stubs
- List of unsecured debts such as credit card and medical bills
- List of assets and how far you are in paying them off
- Alimony or child support payments
- Bank statements
- Bankruptcy or other legal judgments against you
How to get approved
Eventually, a lender may want to interview you in person. The main purpose will be to determine if you can afford the loan payments.
If you have bad credit, this can be difficult to prove, but not impossible. Show the loan officer proof that you’ve paid off other assets in the past. A paid off car loan is a good start. If you’ve consistently paid your monthly bills on time, show them proof of that.
If you’ve lived in the same home for a long time and have a steady job, you have a better chance of being approved for a loan.
Alternatives to personal loans for bad credit
There aren’t many options for people with bad credit who need to borrow money. That’s because they’re considered a high credit risk.
If they do qualify for a loan, even a personal loan, it will be at a higher interest rate than if they had a higher credit score.
Some of the best options are the ones we listed up top. These include a loan from a family member, home equity loan or getting a co-signer on a loan. But those can move the responsibility of the loan to someone else if you don’t pay, or require collateral.
Another option is a payday lender. These loans can leave you in deeper debt than when you started.
Your local credit union may be your best option for an unsecured personal loan. All federal credit unions have a maximum APR of 18 percent on loans. That applies to borrowers with low incomes and low credit scores, according to the National Credit Union Administration.
Things to keep in mind while applying
Here are some things you should look out for in the contract:
- Minimum credit score – At least a score of 580 may be needed.
- Fees – These vary by state, and can include origination fees, late fees, a personal check fee and returned payment fee.
- Loan term – This usually varies between one and five years.
- APR – What is the interest rate and is it fixed for the life of the loan? The Truth in Lending Act requires that the cost of credit be stated as a dollar amount and as an APR.
- Time to funding – Will you get the money the same day? It can take three business days or so to get you the loan amount.
Personal loans for bad credit shouldn’t be used as a way to extend your debt problems. If you can pay a personal loan off on time, it can start to improve your credit score. Doing that may be the best long-term solution to getting better credit options.