Personal loans can be a great way to pay for many important life expenses including travel, weddings, home improvements, and even big purchases that you don’t want to put on a budget. credit card. But getting approved for a loan and getting a favorable interest rate if your credit score isn’t great can be challenging.
A bad credit score usually anything below 600. If your score is below that, you will likely experience some difficulty getting approved for a loan and in cases where you do receive approval, you may not be offered the most competitive loan. interest rates. But that doesn’t have to be the case. With a little advance effort and by shopping around, it is possible to get a personal loan with subprime credit.
5 ways to get a personal loan with bad credit
Getting approved for a personal loan if you have bad credit is out of the question. But you can improve your odds of success—and maybe even the interest rate you’re offered—by following some of the steps below.
1. Check your credit
The first step before applying for a loan is check your credit. Your credit score and credit profile play a major role in determining whether you qualify for a loan and at what interest rate. That’s why it’s important to know what your current score is and take whatever steps are available to improve it.
“The best thing you can do is make sure you credit is in good shape as much as possible before applying,” said Barry Rafferty, senior vice president for the personal finance company, Obtainable. “That starts with checking credit reports to make sure everything is accurate and in good order. Why? Because the information from credit reports is what goes into the calculations for credit scores. “
2. Compare your options
The lending market is very competitive, so you need to shop around and find the best loan offers possible. There are also many types of loans available, some of which may be more accessible to borrowers with lower credit scores. Options include:
- Secured loan: These types of loans are backed by collateral. That means they are secured by your own financial assets, such as your car or home. “Because you’re putting up collateral…you can get more favorable terms on a secured loan,” said James Lambridis, founder and CEO of DebtMDa free service that connects consumers with lenders, credit counseling agencies and debt settlement companies.
- Bad credit loans: Bad credit loans are loans designed for borrowers whose credit scores are at or below 600. Interest rates on these loans are usually higher than other loans. In addition, the terms for these loans can be very short.
- Title loan: A title loan does not require good credit. Instead, your car is used as collateral for the loan. These loans can be very risky. Not only are the interest rates higher than most other forms of lending, but in order to qualify borrowers must hand over their car title to the lender. The timeline for paying off a title loan is also usually very short—as little as 15 to 30 days.
- Payday loans: Like title loans, payday loans are often considered predatory. The interest rate is very high and the repayment timeline is very short. “Payday loans come with very high interest rates. When calculated on the basis of APR, up to 400%,” said Lambridis. “Furthermore, some companies that offer these loans are victims of desperate borrowers, so you may not be dealing with the most ethical companies.”
Pre-qualifying multiple lenders is another important part of the process when you’re looking for a personal loan with bad credit. By shopping around, you can get a better picture of the rates and loan terms you may qualify for. “Different lenders will offer different advantages to prospective borrowers. Each has different rates and also different ways of working with customers,” explained Rafferty.
In fact, some lenders that specialize in working with borrowers with lower credit scores may consider different financial factors to help you qualify for a loan. This may include your income, employment history, and even your educational background.
“Getting a personal loan isn’t just about credit scores,” adds Rafferty. “Additional factors, including the amount of total debt one holds, debt-to-income ratios and income, can influence whether a consumer is approved for credit and the rate they qualify for.”
4. Find a co-signer
Finding someone willing to cosign a loan for you is one way to increase your chances of approval.
“A co-signer with an excellent credit profile and score can help an applicant secure a loan and at a good rate, because it means that the applicant and co-signer have a legal responsibility to pay the debt,” said Rafferty. “The co-signer acts as a back-up in case, for some reason, the main applicant cannot pay.”
When looking for a cosigner, it’s important to find someone who not only has a good credit score themselves, but also someone you have a good relationship with and trust. If you default on the loan or fall behind on payments, your cosigner is responsible for fulfilling the payment obligations.
5. Apply for a loan
Once you’ve chosen the lender you want to work with, it’s time to apply for the loan. The documents required for the application usually include W-2s, paystubs, tax returns, Social Security numbers and more. Although each lender may have slightly different documentation requirements.
Additional considerations when opening a bad credit loan
Before making a final decision on a loan, it’s important to consider the whole picture—which includes the monthly payment amount, total interest costs, and all the fees that are usually included in the fine print.
- Understand the monthly loan payments before you take out a loan: It is important to review carefully your budget and how the loan payments fit within your cash flow. Make sure you don’t take on more than you can handle.
- Understand the total interest costs before you take out a loan: The total cost of your loan includes not only the principal but also the interest you will pay over the life of the loan. Be sure to carefully calculate the interest rate on each loan offer you receive to compare your total borrowing costs.
- Fees associated with bad credit loans: Loans come with various fees, so be sure to read the fine print before signing on the dotted line. These include initiation fees, late payment fees, and early termination fees.
Having less than good credit does not rule out being approved for a personal loan. Reviewing your credit score and taking steps to improve it before applying, and shopping around with multiple lenders are just some of the steps that can help improve your chances of approval. But it’s also important to avoid predatory lenders that offer title loans or payday loans with high interest rates and extremely short repayment timelines.