If you've been late paying bills or racked up debt in the past, your credit score may be lower than you expected. Bad credit can be a frustrating disadvantage, especially when it tricks lenders into believing you'll be able to pay back over time.
A personal loan can be a great way to pay off emergency expenses or consolidate debt. While a lower credit score means a higher interest rate, it's still possible to get a personal loan with bad credit by taking some simple steps to improve your credit score and buy from multiple lenders.
What does bad credit mean?
Almost every American has a credit file compiled by one or more credit bureaus: TransUnion, Equifax, and Experian. Your credit file is used to create a credit score, a number that attempts to define how risky you are as a borrower.
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Credit scores range from 300 to 850. Generally, anything below 670 is considered "poor." When you have bad credit, you typically have a short credit history, a history of late payments, large amounts of debt relative to your income, or a combination of these factors.
How to determine credit Ultimately, unless you're desperate for money, spending time improving your credit score may make more sense than continuing to take out extremely high-interest loans. Some areas to focus on when looking to improve your credit score are:
Payment history (35% of FICO score). If you have a pattern of missing or late credit card payments (known as late payments), your score will be affected. Payment history also includes timely payments of debt from other sources, such as auto and mortgage loans.
Credit Utilization Ratio (30% of FICO Score). This is the ratio between the available balance you have and the balance you are currently using. If you have multiple cards or multiple loans, your ratio will weigh all of these sources of debt. A higher ratio usually indicates that the lender may be at risk in extending credit to you because you may not be able to make your payments on time.
Length of credit history (15% of FICO score). Generally, the longer you have been building your credit, the better it will be for your score. A long history of on-time borrowing and repayment gives lenders confidence that you will pay off your debt within the stipulated time frame.
Credit Type (10% of FICO Score). Your score takes into account how much different forms of credit you use, including credit cards and loans -- also known as your credit portfolio. The more diverse your portfolio (assuming you pay on time), the better for your score.
New balance (10% of FICO score). Your score takes into account the new balance in your account and the number of loan requests you have initiated in the past 12 months. Try to stay calm when opening a new account or applying for a new loan, especially if you don't have a long credit history. Applying for too many credit cards or loans in a short period of time can adversely affect your score.
Ways to Get a Bad Credit Personal Loan
Knowing what to expect when applying for a personal loan can help you prepare for the process. If you're looking for a personal loan and your credit score isn't perfect, here are eight steps to take.
1. Check your credit score and credit report Before applying for a personal loan, review your credit report and credit score carefully.
Federal law allows you to get a free copy of your credit report every 12 months from the following major credit reporting agencies: Equifax, Experian, and TransUnion. Visit AnnualCreditReport.com to request your free credit report. They won't show your credit score, but you can visit any credit bureau's website to check for free (with Equifax or Experian) or for a small fee (with TransUnion).
With your report in hand, you'll know exactly what your credit score is, and you'll be able to identify any negative marks on your files. If you find any errors or old debts in your report, you can try to correct them before applying for a personal loan.
2. Make sure you can repay the loan If you have bad credit, you definitely don't want to take out a loan you can't repay. This will only worsen your credit rating. When buying credit, make sure you know your monthly payment and when it's due. Use Bankrate's personal loan calculator to estimate monthly payments and review your budget to create a repayment plan. If you're having trouble paying, consider other ways to receive cash. You don't want to apply for a personal loan that you can't afford.
3. Compare Bad Credit Loans While bad credit doesn't qualify you for the best rates and terms, don't assume that only the worst rates and terms are available. You can get a better deal from your bank or credit union.
This may help if you have a relationship with a community bank or credit union. A history of paying on time and maintaining account balances can mitigate your poor credit rating if the bank knows you and your spending habits.
Some reputable online lenders provide credit to consumers with poor or average credit ratings. Some of the lenders that Bankrate recommends for bad credit personal loans offer rates starting at 6.50%.
4. Get pre-qualified Prequalification is sometimes used interchangeably with preapproval to let you know if you might be eligible for a loan. You can share your information with lenders to find out if you have been pre-approved with a soft credit request. Why is this important? Typically, when you apply for a loan, credit agencies conduct a rigorous credit check. Strict credit checks can temporarily lower your credit score. It can be frustrating when you apply for a loan, go through a rigorous credit check, and get rejected. Then you have to apply for other loans that may have a lower credit rating than you started with. Talk to potential lenders to see if you can pre-qualify for a personal loan. You can then evaluate multiple loan options without multiple hard loan inquiries. Some lenders even allow you to complete the process online in minutes. When comparing your loan options, consider the rates offered and loan terms. It is also important to pay all fees such as B. Assess processing fees and prepayment penalties that the lender may charge. In some cases, a loan with a lower interest rate may not be the best deal if the lender has higher fees. 5. Check Secured Loans A secured loan is a loan secured by an asset such as a house or car. Because secured loans use collateral to secure your loan, they often have higher interest rates than unsecured loans. If you have bad credit, having collateral for your loan may be the best option If you think this is a viable option, consider finding a lender that offers secured loans. Remember, there is a risk of losing your assets with secured loans. Therefore, you should only consider using them if you can afford to pay the loan in a timely manner. 6. Add co-signers if required A co-signer is someone who agrees to sign the loan with you. If you can't, you agree to repay the loan. If you're having trouble qualifying for a loan, a co-signer can help you qualify if they have a better credit rating and credit history. But you want to confirm with the lender that co-signers are allowed, as this is not always allowed. Taking out a loan with a co-signer can be damaging to relationships if you're having trouble repaying the loan. If you decide to apply for a co-signer loan, make sure you both know what you're signing for. 7. Collection of financial documents When you apply for a loan, lenders will ask for several financial documents to complete your application. Gather these documents and information before you start applying for credit, as you may need some or all of them to complete your application: Personal contact information, including social security number, full name and address Your driver's license or other form of personal identification Personal loan information such as B. Why do you need a loan and for how long W-2 forms from the past two years Your federal tax returns for the past two years Two recent bank statements for all bank accounts current pay slip Utility bill or mortgage statement (to verify your address) Your lender may request additional documentation at any time, so be prepared to make additional requests quickly. 8. Be prepared for a rigorous credit check When you're ready to formally apply for a personal loan, you should know that lenders may conduct a rigorous credit check, also known as a hard pull. In the short term, deadlifts can lower your credit score. Doing too many rigorous credit checks in a short period of time can make it look like you're applying for a loan you can't afford. Be aware of how many loans you apply for, and be prepared for a temporary drop in your credit score as a result of applying for a loan. Because you make your payments on time, you should be able to improve your credit score again within a few months. 9. Find a lender with no credit requirements Some lenders have no credit requirements. Working with a credit bureau that doesn't require a credit score is an easy way to find a personal loan, no matter how low your credit score is. Remember, these lenders specialize in high-risk loans. They charge very high interest rates to compensate for their risk. So, make sure your purpose for applying for a personal loan is worth the substantial additional interest charges you will pay. Types of Bad Credit Loans There are several types of loans that may be beneficial to people with bad credit. Personal loans are not your only option. Consider these loan options when shopping around: Bank agreement: If you already have a relationship with a bank, they may be willing to provide you with a short-term loan agreement until your credit is restored. It never hurts to ask. Cash Advance: A credit card cash advance is a way to withdraw cash using a credit card. Most credit cards have limits on the amount of cash you can withdraw. It's important to remember that you'll be charged interest every time you withdraw cash, and cash advance fees are often higher than other credit card purchases. Home Equity Loan: A home equity loan is a type of loan that allows you to use the equity in your home and use it as collateral for the loan. Your loan will be paid in one lump sum and must be repaid in monthly installments. Home Equity Line of Credit (HELOC): A HELOC is only an option if the mortgage balance on your primary home is significantly lower than the home's value. As the name suggests, a HELOC is a revolving line of credit, similar to a credit card. You have a limit based on the equity you have, and you will only charge interest on online purchases. Installment Loans: An installment loan – a general term that includes personal loans – is a loan that allows you to borrow a specified amount and pay it back over a period of time. Unlike a credit card, which lets you access a revolving line of credit and charges interest based on the amount you use, an installment loan pays you upfront. You then pay a fixed amount over a certain number of months. Payday Loans: A payday loan is a small loan with a short repayment period -- usually before your next paycheck. These loans usually have high interest rates and must be repaid in one lump sum. Payday loans are costly and often not the best option. Peer-to-Peer (P2P) Lending: Peer-to-peer lending is an alternative to traditional lending and is an option for people with bad credit. Most peer-to-peer lending is offered by online personal lenders like Prosper or LendingClub. With peer-to-peer lending, you apply for a loan as usual, but the loan is funded by individual investors rather than the lender itself. Secured personal loan: A secured personal loan uses something you own as collateral, such as a loan. B. House or car. If you are unable to pay the loan, the lender has the right to take title to the property you use as collateral for the loan. Secured personal loans often have better rates and terms than unsecured loans. Student Loans: You can apply for government and private student loans. Both options are viable if you need money to pay for college. Government student loans often have better terms and interest rates than private student loans. Unsecured Personal Loans: Unsecured personal loans do not require any collateral from the borrower. The rates and terms are not as favorable as secured loans, but unsecured loans offer an option when you don't have any property to use as collateral. Things to Consider Before Getting a Bad Credit Bureau Loan Bad credit loans have a few other things to consider when weighing the various costs and risks associated with personal loans. Loans with low credit ratings cost more The unfortunate reality of applying for a loan with bad credit is that you will pay more than someone with a better credit rating. The lender will conduct a credit check to determine your creditworthiness and likelihood of repaying the loan. If you look riskier, you pay a higher interest rate. Predatory lenders prey on people with bad credit Those with bad credit can also be targeted by aggressive direct mail campaigns marketing personal loans at low interest rates of around 6% or 8%. However, these campaigns often advertise introductory or "teaser" prices that increase after the limited-time offer ends. If you don't have a quick payment plan, the interest can skyrocket to 20% to 30%, which can be much higher than what you'll get from a reputable lender. Additional fees can be hidden in the fine print Because people with bad credit are considered higher risk, you should know exactly what you will have to pay to get a loan. When applying for a bad credit loan, read the loan agreement and understand exactly how your interest will be calculated and scheduled. Make sure the advertised interest rate on the loan is an annual rate, not a monthly rate. Also, be aware of any additional credit costs. Again, the key is to read the agreement carefully and in its entirety to make sure there aren't any fees or extra benefits your loan officer may be hiding. where do you get bad credit bureau loans While it may be more difficult to get a loan if you have bad credit, it is actually possible. Loans for people with bad credit are often offered by online lenders and a handful of banks and credit unions. Some lenders that offer loans to people with bad credit include Upstart, OneMain Financial, Avant, LendingPoint, and Upgrade. Credit requirements for these lenders typically start at around a 560, but requirements vary from lender to lender, so it's important to do your research and review all options. In many cases, loans to people with bad credit are secured, meaning they must be backed by collateral such as a car or house. But for those with subprime loans, there are also unsecured loan options, often involving higher interest rates. When looking for credit, it's best to avoid payday loans and no credit check loans, both of which are often targeted at people with bad credit. The interest rates and fees on these loans are exorbitant and can quickly overwhelm you, creating a cycle of debt that is hard to break out of.