How to get approved for personal loan with bad credit

A bad credit loan is a short-term financial fix for consumers who need to borrow money but have a bad credit score or poor credit history.

Bad credit loans get their name because the borrower has a “bad” credit score that forces them to deal with very high interest rates when seeking a loan.

Used properly, a bad credit loan could be the starting point for a financial turnaround. It should improve your credit score and eventually make you a more attractive borrowing prospect.

Relevant warning here: Bad credit loans are not a perfect solution to the problem. Interest rates on bad credit loans are higher, most times considerably higher, than conventional loans. Also, terms are short, usually one to five years, which means you must be committed to finishing what you start.

Other debt-relief options, including debt management or nonprofit debt settlement, may prove to be more cost-effective ways to improve your credit score. It would be wise to seek advice from a nonprofit credit counselor on creating an affordable budget and deciding whether a debt consolidation loan with bad credit solves a problem, or merely adds to your troubles.

Finding a bad credit loan is a five-step process:

• Start by checking your credit score so you know whether you fit in the “bad credit” category and how much you must improve that score to improve your borrowing status
• Fill out a loan application with banks, credit unions and online lenders
• Provide necessary documents to lenders regarding your income and expenses to validate the interest rate you will pay
• Review loan offers, comparing rates and terms of each option
• If approved, receive funding and get to work paying off debt and improving your credit score

Pay on time every month and you should see a nice bump up in your score in as little as six months.

What Is Considered a Bad Credit Score?

Credit scores range from 300-850 and though there is no official start to the “bad credit score” category, it’s safe to say if you’re under 650 you are considered a high risk, which means you will pay highest interest rates. People in this category are prime candidates for bad credit loans.

The definition of a “good” and “bad” credit score varies from lender to lender. Some won’t touch anyone with a credit score under 650; some actually market to consumers with a sub-650 score.

So, it’s hard to say what makes you “good” or “bad” on the credit scoreboard, but the accepted range looks something like this:

• 760-850 – Excellent
• 700-759 – Very good
• 660-699 – Fair
• 620-659 – Poor
• Scores under 620 – Extremely poor

Your credit score might be the most important factor in being approved for a loan. It is made up of five parts, each carrying a different weight. Those parts are:

• Payment history (35%). Do you make on-time payments every month or carry over a balance from month-to-month? Miss even one payment, and it damages your credit score.
• Amounts owed (30%). How much of available credit do you use every month? Use more than 30% of your credit limit, and your score falls.
• Length of credit history (15%). How long have you been using credit? Closing accounts is harmful, especially if there is an unpaid balance.
• New credit (10%). Applying often for a card is a negative. It makes you look desperate. Don’t apply for a credit card, unless you truly need one.
• Mix of credit (10%). What other forms of credit do you have? Credit cards, mortgage, car loans, student loans or if dealt with successfully, help your credit score. Not making payments on even one of them, hurts your score.

How Bad Credit Scores Affect Borrowing

Low credit scores are risky business for lenders and borrowers are punished for it with high interest rates and less than favorable repayment terms.

Many people have gotten that message over the last decade and that is why the average credit score for U.S. consumers has risen to an all-time high of 714 in 2022. That’s a 25-point jump over the last 10 years.

However, the real numbers worth paying attention to are the combination of score and age, which say a lot about how our economy operates. Credit scores are one of the few places in life where being old pays off.

The Silent Generation (75 and older) have an average score of 760. Baby Boomers (ages 57-74) are at 740; Generation X (ages 41-56) at 705; Millennials (ages 25-40) at 686 and Generation Z (ages 18-24) is rock bottom at 679.

There is an 81-point difference between the top and bottom, which is very costly when you are shopping for home loans and personal loans as the graphic below demonstrates. Check out the payment differences among credit scores for a 30-year, $200,000 home loan and a 5-year, $25,000 personal loan in March of 2022.

Top Bad Credit Loan Companies

The approval process for bad credit loans can be very challenging, but some patience and diligent research will pay off with a loan you can afford. The good news is that there are plenty of lenders who want your business.

Here are some examples of the top bad credit lending institutions:

Penfed Credit Union

Three great things about Penfed: 1. Federal law says that until at least March of 2023, the highest interest rate you can pay is 18%. 2. You don’t have to be a member to apply for the loan. 3. No origination fee.

» Learn more about: Penfed Loan Reviews

Payoff

The 550 minimum credit score makes this a very low bar for anyone with credit score problems to get over. The top interest rate of 24.99% is second best in the group and you might not have to pay an origination fee.

» Learn more about: Payoff Loan Reviews

Upgrade

You only need a 550 credit score to be approved, but if you can find someone to sign on as a co-applicant, this might be your best choice. Another plus is that rates as low as 5.94% are available, if you sign up for autopay.

» Learn more about: Upgrade Loan Reviews

Lending Club

If you want reliability and a company with a trusted reputation, this is the one. Lending Club had revenue of $818.6 million in 2021, a 157% increase over 2020. It allows co-borrowers to help with the approval process. The downside is that rates are fairly high.

» Learn more about: Lending Club Reviews

Upstart

Upstart doesn’t care what your credit score is. Your score isn’t a factor in the approval process and the best rates available are 3.22%. That’s huge! On the other hand, the loan origination could be as much as 8% and there is a $15 fee for late payments.

» Learn more about: Upstart Loan Reviews

How to Compare Lenders

Shopping for a bad credit loan is like shopping for anything else, the first thing everyone wants to know is: What’s it going to cost?

With loans, that is determined by the interest rest you pay and the length of time they give you to pay it back. You should know up front that neither one is going to look good when you have a bad credit score, so be prepared to evaluate much more than cost before accepting a loan.

Here are a few things that need to be factored into the equation.

• Will I qualify? The eligibility requirements usually include a minimum credit score can be; what your debt-to-income ratio should be and the minimum income level you must have.
• What are the repayment terms? Typically, bad credit loans open a 3-5 year repayment window, but may allow some wiggle room so you can get the monthly payment down to the right number. Ask before you sign.
• Am I comfortable with the lender? You can get a bad credit loan in a lot of places. You need to know if a face-to-face relationship at a bank or credit union matters more to you than the speed and limited communication you have with an online lender. If something unexpected happens during the repayment period, this could become an issue.
• Interest rates. Yes, it’s last because you probably already compared rates and should be ready to narrow the field to two or three lenders. Compare their interest rates and repayment terms, then decide what’s best for you.

Types of Bad Credit Loans

Finding an affordable bad credit loan can be a challenge, but there are a lot of options. Diligence will be rewarded. The loan could come from your regular bank, but more affordable interest rates and flexible qualifying requirements probably can be found with these options:

• Credit unions
• Family or friends
• Find a co-signer
• Borrow from the equity in your home
• Peer-to-Peer Loans
• Online Loans
• Secured vs unsecured loans
• Negotiate an agreement with your bank
• Cash advances
• Payday loans

Other options like borrowing from a retirement fund (must be paid back or face a penalty); borrowing against life insurance (more penalties); and payday loans (exorbitant interest charges) exist but are risky. A better alternative would be to consolidate debt.

Credit Unions

Think of credit unions the way you would a small community bank from years ago. The most promising aspect of a credit union loan is the interest rate ceiling of 18%, which applies to anyone, regardless of their credit score. A similar loan from a bank could run you as much as 36% interest.

A credit union may be willing to look beyond a poor credit history and make a judgment based on your character and your promise to repay. A veteran of the armed forces might want to approach the Navy Federal Credit Union or PenFed Credit Union. A teacher or government worker might check into the State Employees Credit Union or Schoolsfirst Credit Union.

Friends and Family

This is a great place to find low interest, easy repayment terms, but also is dangerous from a relationship standpoint. Nobody wants Uncle Bob banging on the door for his money. But this kind of borrowing makes a lot of sense from a financial and loan-anxiety standpoint.

Family and friends aren’t likely to put you through a grueling qualifying process and probably would cut you some slack on the interest rate, if they charge one at all. However, failing to repay to a relative or close associate can poison relationships. Treat any loan from someone you know as if it were an important business transaction between you and a stranger. Create a written contract that includes the loan terms and interest rate, and what will happen if you cannot repay the debt.

Get a Co-Signer

If you know someone with good credit ask them about co-signing for a bad credit loan. With a qualified co-signer, the lender will set the loan terms based on the credit score of the person with good credit, who will then be equally responsible for repayment.

All payment information will be recorded on both your credit report and your co-signer’s, so if you default on the loan, or you’re late with payments, you both suffer. If you make timely payments, your own score will improve, making it easier to obtain future loans without a co-signer.

Home Equity Loan

If you have equity in your home, you can apply for a home equity loan or home equity line of credit (HELOC). Your home is used as collateral, and home equity loans can be obtained regardless of your credit score. The interest rate is usually low, because the loan is secured by the home. Also, the interest you pay on a home equity loan is usually tax-deductible.

It is important to remember that tapping your home equity puts your property in jeopardy, if you don’t repay the debt. But if you are disciplined and have a reliable income, it is an inexpensive way to borrow from a reputable lender.

Peer-to-Peer Lending

Peer-to-peer lending, also known as P2P lending, has been around since 2005. It’s an online platform that allows you to get a bad credit loan directly from another individual or group of individuals rather than from an institution. Potential borrowers post a loan listing on various peer-to-peer websites, indicating the amount needed and what it’s for. Investors review the loan listings and choose borrowers they wish to fund.

Your credit score is still a factor, but since an individual investor has much greater leeway in how factors are weighted, these loans are often more readily available for people with bad credit. Lending standards are significantly more lenient and interest rates are usually lower than those offered by traditional lenders. In addition, peer-to-peer websites help evaluate risk for the lender, while verifying the lender’s credentials for the borrower.

Online Personal Loans

These lenders are essentially banks that don’t have offices. They do their work online and offer bad credit loans for things like debt consolidation and home repairs. Their primary appeal is they work fast. They can make decisions in minutes and deposit funds in an account in a few hours or days. Many have no application fee or pre-payment penalty.

Online personal loan applications are simple and easy to fill out. Credit scores are only a part of the decision-making process so this could be an appealing option if you have bad credit or no credit. In fact, some personal loan lenders have their own credit-score model and don’t use FICO scores. Other factors considered include whether you have a college degree, the school your degree came from and your employment history.

Secured vs. Unsecured Bad Credit Loans

If your credit score draws red flags, the best chance to get money you need could be through a secured loan, one in which you borrow against an asset you own, such as a home, car, boat, property, savings or even stocks. The lender will hold the asset as collateral against you defaulting on the loan. If you don’t repay the loan, you lose the asset. Secured loans offer lower interest rates, better terms and access to larger amounts of money than unsecured loans.

An unsecured loan has nothing more than a promise that you will repay behind it and could be very difficult to get from most banks. Banks are willing to make unsecured loans to their best customers – people who have the income and credit history to prove they will repay the loan – but are very cautious about lending money otherwise.

An unsecured loan is no risk for the borrower, but high risk for the bank so you can expect considerably higher interest rate charges and little flexibility on qualifying or terms of the loans.

Negotiate an Agreement with Your Bank

If you happen to be a long-time customer at your bank and have a good record until some recent mishaps, it’s possible you could talk them into an agreement that would provide you a bad credit loan on a short-term basis.

The loan limit probably won’t be very high and it would really be a good-faith gesture on the part of your bank; there likely is no policy regarding this.

But the bottom line is that it’s only possible if you ask. It doesn’t cost anything to try, and the worst that can happen is the bank says no.

Get a Cash Advance

A cash advance is a loan using your credit card line. This is a really high-risk solution for a financial problem. A cash advance carries heavy interest charges, higher than those on purchases and there usually is a fee (3%-5%) charged for receiving one.

If you’re in a hole, this just digs you deeper, so it’s not advisable. But it’s there, if it’s the only one to get a loan. It’s also one of the fastest ways to get money if borrowers face an urgent situation.

Payday Loans

This is last on the list because it absolutely should be the very last place you go for a bad credit loan. Payday loans are often called “predatory loans” because the lender typically charges a 399% interest rate with a two-week payback period.

That’s not a misprint. You pay $15 for every $100 you borrow. And you’re expected to have the $115 or $230 or $345 or $460 ready to repay by the time your next paycheck arrives.

That works out to 399% APR interest. If your situation is this dire – and you’ve been unsuccessful in every other way – good luck at the Payday window.

Pros and Cons of Bad Credit Loans

It makes sense to use caution when taking on any loan, but if you have bad credit, don’t make it worse by being irresponsible. Predatory lenders are all too happy to take your money and make your life miserable if you get sloppy.

It’s time to look elsewhere if the lender:

• doesn’t require a credit check
• doesn’t check your income
• guarantees you’ll be approved
• can’t be found for customer reviews or a Better Business Bureau ranking

Those are red-flag warnings that you might have encountered a loan scam. Closely examine the pros and cons of the situation before making a final decision.

Advantages of Loans for Bad Credit

• Loans for Bad Credit Are Fast: Most bad credit loan applications are available online and only take a few hours to get a response. At some places, you can have the money in your account within a day.
• Lower Interest Rate than Credit Cards: If you are able to get a bad credit loan, it likely would come at a lower interest rate than you pay on credit card debt.
• Many Lender Options: The number of peer-to-peer lending businesses seems to double every year. If you’re patient, and make lenders compete for your business, you might find a loan with an interest rate that you can afford.
• Repayment Term Length: Depending on who the lender is, repayment terms could stretch anywhere from 1-to-5 years.
• Improve Your Credit Score: If you commit to making on-time payments, your credit score will improve and make you a more desirable candidate next time you need a loan.

Disadvantages of Loans for Bad Credit

• High Interest Rates: You’re a risk, so the lender wants a reward; sometimes a huge reward.
• Fees and Penalties: Read the fine print. Is there a loan origination fee? What is the late fee? Prepayment penalty? Check carefully – some lenders charge a fee for making payments by check.
• Collateral Sometimes Required: You may have to put a house or car at risk to get the loan. If you miss payments, you could lose that house or car.
• Might Not Be Licensed: Not every online lender is licensed in every state. Be sure the company you choose is certified in your state before you start paying for their service.
• Can Increase Debt: It’s vital to budget and ensure you can afford what you borrow. Predatory lenders are all too happy to take your money. Decisions should have long-term benefits. If you’re unsure, call a nonprofit credit counseling agency and discuss options.
• Assess Multiple Offers before Making a Final Decision: The competition gives you a chance to compare and research the company you eventually choose.

Avoid Bad Credit Loan Scams and No-Credit Check Loans

Consumers often get frustrated trying to find a loan when they have bad credit and that frustration can lead to carelessness in recognizing loan scams.

Be on the alert that not all loan opportunities are good ones. Loan scammers target the elderly, people in debt over their head and those who don’t have experience making financial decisions.

Some of the warning signs that you’re dealing with a scammer include:

• The lender doesn’t pull your credit report or do a credit check
• The lender doesn’t ask for proof of employment or income statements
• The lender isn’t registered in your state
• The lender conducts all his business over the phone and has no physical address for his company
• The lender says you can get a lower interest rate if you put money up front
• The proposal you receive is not transparent about fees or interested rates
• The lender asks for a prepaid debit card or a gift card as “insurance” or “collateral” for the loan

Don’t hand over personal information such as social security or bank account number before verifying that the lender you’re dealing with is legitimate. Don’t let a lender pressure you into making a quick decision. If it sounds too good to be true, it likely is too good to be true.

Repaying Bad Credit Loans

The purpose for a bad credit loan is to pay off debts while simultaneously improving your credit score. You accomplish both when you create a budget that will allow you to make on-time payments every month.

The easiest way to do that is to set up automatic payments through your bank account. You might even get small discount for doing so.

And if something unexpected happens, like reduced hours at work or loss of a job, alert your lending institution. They typically have hardship programs to help borrowers out in situations like this.

Don’t dig the hole deeper by not making payments.

Bad Credit Loan Alternatives

If you find yourself in a financial emergency, there are alternatives that can help you take positive steps toward making you a more attractive candidate for borrowing.

The first alternative would be a debt management program from a nonprofit credit counseling agency. A debt management program could reduce the interest rate on your credit card debt to 8%, sometimes lower.

That would help you pay down, and eventually pay off credit card debt, which often is the single largest negative impact on a consumer’s credit score.

The second choice, offered by a small group of nonprofit credit counseling agencies, is nonprofit debt settlement. If you qualify, the card companies involved allow you to settle your credit card debt by paying 50%-60% of what you owe over a 36-month time frame.

However, nonprofit debt settlement will not help your credit score because you pay less than what is owed..

Need Help? Talk to a Financial Professional

Calling a nonprofit credit counseling service for a free evaluation is the first step someone in financial distress should take.

The counselors are trained and certified in helping consumers create an affordable budget and recommending the best steps to eliminate debt.

They have several debt-relief options to choose from and after reviewing you income and expenses, will discuss each option’s pros and cons and tell you which choice would solve your problem.

If your goal is to get your financial house in order so you can take advantage of the historically low borrowing rates now available, call or go online to a nonprofit credit counseling agency and get started today.

Which bank gives personal loan easily?

What is the minimum credit score for a loan?

What is the easiest loan to get right now?

What can I get with a 500 credit score?