How to get a personal loan with bad credit

A personal loan can be a good way to pay for emergency expenses, finance a big purchase or consolidate debt. While having a lower credit score will mean paying higher interest rates, obtaining a personal loan with bad credit is still possible by taking some simple steps to improve your score and shopping around with multiple lenders.

Credit scores range from 300 to 850. Generally, anything under 670 is considered “bad.” If you have a low credit score, this could make it harder to get a traditional personal loan, but it doesn’t make it impossible.

How to get a loan with bad credit

Knowing what to expect when you apply for a personal loan will help you prepare for the process. If you’re in the market for a personal loan and you have imperfect credit, following these steps could improve your chances of approval.

1. Check your credit score and credit reports

Before you apply for a personal loan, take a close look at your credit report and credit score.

Federal law entitles you to a free copy of your credit report every 12 months from the major credit-reporting bureaus: Equifax, Experian and TransUnion. Visit AnnualCreditReport.com to request your free credit reports. It won’t display your credit scores, but you can visit Equifax and Experian’s websites to view them for free, or for a nominal fee from 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 record. If you find that errors or old debt are dragging your score, make sure you request corrections before applying for a personal loan.

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2. Compare bad credit loans from different institutions and get prequalified

It can be advantageous to apply for a loan with a community bank or credit union that you already have a relationship with. If the bank knows you and your spending habits, your low credit score may be mitigated by your history of paying on time and keeping a balance in your accounts.

Likewise, online lenders are a good place to apply for bad credit loans. That is because some of these lenders use alternative criteria, such as your job and education history, in addition to your credit score to evaluate your application. This, in turn, can make it easier for you to qualify for an affordable loan, even with less-than-stellar credit.

When comparing options, make sure you use a loan calculator to help you determine what you can afford to borrow. This will help you narrow down your choices to lenders that offer loans with the terms and interest rates you’re looking for.

Once you have those numbers down, prequalify with at least three lenders. Prequalifying allows you to find out what you may be eligible for with a specific lender, without hurting your credit.

It’s also equally important to assess any fees the lender may charge, like origination fees and prepayment penalties. In some instances, a loan with a lower interest rate may not be the best deal if the fees the lender charges are on the higher end.

Finally, check to see if any of the lenders offers secured loans. A secured loan is a loan backed by personal assets, such as a home or a car. Because secured loans use collateral to back your loan, they typically have better rates than unsecured loans and are easier to qualify for, but they also come with more risk. If you default on the balance or don’t make the payments on-time for an extended period, then the lender can seize your property to satisfy the delinquent balance.

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3. Add a co-signer if necessary

A co-signer is someone — typically a creditworthy friend or family member — who agrees to sign on to the loan with you to improve your approval odds or to help you score a lower rate. While they can be helpful in securing a loan, not every lender offers a co-signer option and keep in mind that they’re responsible for making the payments if you can’t.

Taking out a loan with a co-signer can sour personal relationships should you have trouble paying off the loan, as missed payments will also negatively impact their credit. Before signing on the dotted line, make a plan with your co-signer and make sure to practice clear communication when it comes to making the payments.

4. Gather financial documents

When you apply for any loan, the lender will request several financial documents to complete your application. To expedite the process, have the following documents on-hand before applying:

  • Personal contact info, including Social Security number, full name, and address.
  • Your driver’s license or another form of government-issued personal identification.
  • Personal loan details, like why you need the loan, how much you need and how long of a term you want.
  • W-2 forms from the last two years.
  • Your federal tax return from the last two years.
  • Two most recent bank statements for all bank accounts.
  • Recent pay stubs.
  • Utility bills or mortgage statements (to verify your address).

Your lender can always request additional documents, so be prepared to provide any extra requests quickly.

5. Be prepared for a hard credit check

When you are ready to officially apply for a personal loan, know that the lender will likely perform a hard credit check, also called a hard pull. In the short term, a hard pull will lower your credit score. Too many hard credit checks in a short time can make it look like you are applying for loans that you can’t afford.

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Be careful with how many loans you apply for, and be prepared to see your credit score drop temporarily with a loan application. As you make timely payments on your loan, you should be able to get your credit score back up in a few months.

What to consider before getting a loan with bad credit

While weighing the various costs and risks associated with a personal loan, there are a few additional things to remember for bad credit loans.

A loan costs more with a low credit score

The unfortunate reality of applying for a loan with a less-than-ideal credit score is that you will be paying more than someone with a higher credit score. Lenders look at your credit score to determine your creditworthiness and the likelihood of you repaying the loan. That being said, a low score or thin credit history will likely result in a higher interest rate.

Predatory lenders prey on people with low credit scores

Individuals with poor credit scores may also be targets of aggressive direct mail campaigns that market personal loans with low interest rates of around 6 percent or 8 percent.

However, these campaigns frequently advertise an introductory or “teaser” rate that will increase after the limited-time offer expires. If you don’t have a plan for a rapid payoff, the rates can skyrocket past the 30 percent range, which is likely much higher than the rate you can qualify for with a reputable lender.

Add-on costs may be hidden in the fine print

Because those with bad credit scores are often considered high risk by lenders, be sure you’re clear on exactly what you’ll be paying to get the loan. Read the loan agreement and fully understand how your interest will be charged and structured; make sure the rate charged is annual, not monthly.

In addition, beware of any add-on costs or hidden fees. These can be found in the loan agreement or the terms and conditions page, which you can review before applying.