Personal Loans with Bad Credit - A Simple Guide

Overview

Getting a personal loan with bad credit isn’t as hard as you might think. Your lower credit score will decrease your chances of getting the best interest rate on a personal loan, but it doesn’t mean you can’t borrow money.

The good news is you probably don’t have to resort to a payday loan (the interest rates are incredibly high). With the right steps, you can secure a personal loan for bad credit with terms you can afford.

Check out our tips on where to get a personal loan with bad credit below.

What are Bad Credit Personal Loans?

Bad Credit Personal Loans are usually a type of loan that lenders offer to borrowers who have a lower FICO score. In this case, if you are borrowing a personal loan with a bad credit, lenders will take a large risk loaning you money.

Each lender classifies bad credit differently, but in general, any credit score under 620 is ‘bad.’

If you have bad credit, lenders have to make up for the risk of default by charging a higher interest rate. Low credit scores usually happen because you have a bad history of paying your bills. Either you didn’t pay them, you overextended your credit or a combination of both.

Bad credit personal loan options

Lending Partner	APR	Loan Amount
	5.99 - 35.99%	$1k - $50k	Apply Now

Unfortunately it doesn’t matter if you only had some late payments or you had to go as far as filing for bankruptcy, your credit score tells lenders you are a high risk and they usually use caution before lending the funds to you.

The best personal loan for bad credit is a loan lenders who are willing to provide despite your bad credit. It may have ‘different’ terms than someone with great credit, but it’s still typically much better than predatory loans, such as payday loans.

Understanding how the loans work, what the long-term effects are, and how you can best improve your chances is important.

How do you Get to Know If You Have a Bad Credit Score?

If you don’t know your credit score, know is the time to look. It’s easier than ever to find out. Check with your bank or credit card company – one or the other likely offers free credit score access. If not, you can sign up with a service like Credit Sesame and get free monthly credit score access.

If your credit score is 620 or lower, figure out why. Pull your free credit reports and go through your history. Every consumer gets free annual access to their credit report from each of the three credit bureaus.

During the pandemic, everyone gets free weekly access until April 2021, so take advantage and look for the following:

• Late payments
• Credit balances that exceed 30 percent of your credit line
• Bankruptcies
• Foreclosures
• Errors on your credit report
• Multiple inquiries
• Collections or judgments

Any or all of these issues could cause a bad credit score. Fortunately, you can bounce back from any credit score with a little work.

First, it's important to understand how our credit scores work. Here’s the breakdown of how FICO scores are usually calculated:

• Payment history – 35%
• Credit utilization – 30%
• Length of credit history – 15%
• Credit mix – 10%
• New credit – 10%

If you would like to improve your credit score, focus on any late payments and overextended credit first. Late payments hurt your credit score the most. Bring them current and keep paying your bills on time. This has the largest effect on your credit score.

If you notice any errors, dispute them to the appropriate credit bureau. Write a letter stating the issue and provide any proof you have that the information is incorrect. It takes 30 – 60 days to fix issues, so act as quickly as you can. Once you fix your credit score as much as you can, know what to look for in a bad credit loan.

What to Look for in a Personal Loan for Bad Credit

Like any personal loan, you should know what you’re getting. It affects your finances, credit, and future.

Before you accept any loan look at the following:

What’s required to qualify?

First you should look at what is generally required by the lender to qualify for one of their loans. It's time to do some research about the following:

Find out the minimum credit score the lender require first as that's usually important. Then, look at the debt-to-income ratio maximums the lender allows.

For example, is your debt ratio (comparison of your debts to your monthly income) too high? Does your credit score fall within the requirements?

The more your qualifications meet the requirements, the better your chances of approval and/or better terms are.

What’s the term?

The term plays an important role. Most personal loans have terms of 1 – 5 years, but you may find some with longer terms. Choose your term carefully.

A shorter term allows you to pay off the debt faster but has a higher monthly payment amount. A longer term has a smaller monthly payment but it takes you longer to pay off the debt and you’ll pay more interest because take longer to pay the debt in full.

Interest rate

The interest rate for a personal loan for bad credit will be much higher than rates on a personal loan for good credit. Each lender uses different criteria and charges different rates. Look around for the most affordable rate – don’t just jump at the first offer you get.

Loan fees

The interest rate is important, but the fees are just as important. You could have a great interest rate on a personal loan, but if the fees are excessive, it’s not worth it. Pay close attention to origination fees and prepayment penalties.

Origination fees are written as a percentage of your loan amount. For example, a 2% origination fee on a $30,000 personal loan means a $6,000 fee. The lender takes the origination fee off your loan amount, so you’d walk away with $24,000 versus $30,000 but make payments on $30,000.

Lenders assess a prepayment penalty to make up for the interest they’d lose if you pay the loan off early. Read the fine print carefully. If there’s a prepayment penalty it could cost you a significant amount to pay your loan off early.

What Types of Lenders Offer a Personal Loan with Fair or Bad Credit?

You can find a personal loan for bad credit from many different lenders. If you have really bad credit, you may not qualify for a loan from a bank, but there are many other options including:

Credit unions often have more flexible guidelines because they are non-profit

Today there are many opportunities to join credit unions through employers, groups, and other affiliations.

Online lenders

Lenders online often have more flexible guidelines or other programs for borrowers with bad credit. Since they don’t have the overhead of a brick-and-mortar location, they charge fewer fees and have more leeway for borrowers with less than perfect credit.

Best Personal Loan Options in USA by SimpleDirect

Lending Partner	APR	Loan Amount
	5.99 - 35.99%	$1k - $50k	Apply Now

Peer-to-peer lenders

P2P lenders are individuals investing in other individuals like yourself. They often have more lenient guidelines, but higher interest rates. They are a good option if a bank or credit union won’t approve your loan.

Types of Bad Credit Loans

Be careful when choosing a poor credit personal loan. Because you have bad credit, lenders may take advantage of the situation. Know your terms before you apply. Here are the most common.

Unsecured personal loan

This is the most common type of personal loan. You don’t have to put up any collateral, but this makes it riskier for lenders. If you default, they have nothing to liquidate to make the money back. Unsecured personal loans usually have higher interest rates to make up for the risk.

Recommended Unsecured Personal Loans Options for Bad Credits

SimpleDirect partners with multiple lending partners in the country to bring a simplified financing experience to its customers.

The loans are unsecured and are generally between $1,000 - $100,000. SimpleDirect can also help you see your options without impacting your credit score.

Lending Partner	APR	Loan Amount
	5.99 - 35.99%	$1k - $50k	Apply Now

Secured personal loan

If you have any assets you can put up as collateral, you may have an easier time qualifying for a personal loan with fair credit. You promise the assets if you default, which gives the lender ‘backup’ and allows them to charge you lower rates or fees.

Peer-to-peer loans

These online loans come from lenders like Fundrise or LendingClub. They don’t have specific underwriting requirements, they look at loans on a case-by-case basis. The P2P platform evaluates your qualifying factors and ‘grades’ your application. It then looks for investors willing to invest in your ‘grade.’ You pay the P2P lender and they pay the investors back the principal you borrowed plus the interest.

Hard money loans

If you can’t qualify for a standard loan, a hard money loan may be a good option. You’ll need an asset to qualify because hard money lenders focus on the value of the asset, not the qualifying factors of the borrower (as much). Hard money loans usually have higher interest rates and fees, so read the fine print.

Home equity loan or line of credit

If you own a home, you may be able to use your home’s equity to get funds. Lenders allow you to borrow up to 80% of your home’s value minus your first mortgage balance. You may apply for a home equity loan (receive funds in one lump sum and make fixed payments for 20 years) or a home equity line of credit (works like a credit card with minimum payments and a variable interest rate).

Watch out for These Signs on a Persona Loan with Bad Credit

Before you choose a personal loan with bad credit, look for signs of a scam. It’s easy to get taken advantage of when you’re desperate for funds.

If you see any of the following, look elsewhere

Instant approval

All lenders have some type of underwriting. They usually can’t approve you on the spot. It might only take a day or two, but they have to underwrite your loan. If you get approval right away without your credit getting pulled, think again.

Promise for unrealistic loan amounts

If a lender promises more money than you thought you could afford or crazy low interest rates, it’s probably not legitimate. Personal loans are usually modest, with the maximum loan amount around $25,000 - $30,000 especially with bad credit.

Pressure to take the loan right away

If a lender pushes you to make a decision, it’s likely a scam. You should have as much time as you need to weigh the pros and cons and look at the various options before choosing a loan.

No contact information

Even if you deal with an online lender, they should provide a way to contact them including a physical address. If the lender can’t provide any contact information, look the other way.

Excessive fees

Borrowers with bad credit often pay higher fees and/or interest rates, but they shouldn’t be predatory. Secure a few quotes to find out what the average rate is for your situation and you’ll quickly be able to spot the scams.

How to Increase your Chances of Approval

Sometimes a credit score is so low that no lender can help. Since personal loans with no credit check don’t exist anymore, you must work on fixing your credit. Here are a few simple ways:

Make all current payments on time

If you had late payments, give it about 6 months of on-time payments for your credit score to improve.

Lower your debts

Debt-to-income ratios tell lenders how committed your monthly income already is and if it’s too high, they may deny your loan. Pay your debts down and see how it helps your credit score and your eligibility for a loan.

Stabilize your employment and income

If you changed jobs, lost your job, or had inconsistent income, work on stabilizing it so you are a better risk. Lenders like at least 12 months of stable income and employment before you apply.

Bad credit personal loans are out there. Search online or with your local credit union. If you already work with a credit union, they’ll be your best bet. When you already have a financial relationship with an institution, they are more likely to work with you if they know how you operate.

If you don’t have any luck, work on fixing your credit. It may take a few months, but with consistent effort, you can get your credit score to increase and improve your chances of securing a personal loan.

Whether you need the funds to pay off existing debts, pay for an emergency, or fund your emergency fund, there are options out there. Just watch the interest rates and fees and make sure it’s the right financial choice for you and your family, especially during these difficult times.