Can I get a personal loan with bad credit?
If you have bad credit, it can be difficult but not impossible to get a personal loan. For some, it’s a situation full of painful irony: You have bad credit because you’re in debt; refinancing or consolidating that debt would help improve your credit but you have trouble qualifying for a good loan because you have bad credit.
Fortunately, there are lenders out there who will extend financing to those with less-than-stellar credit. You may not get the lowest interest rate, but you won’t be disqualified simply because your credit score is less than stellar. Lenders will consider other information as well as your credit, such as your income level and whether or not you have a cosigner with strong credit.
One of the most versatile ways to get funding is through a personal loan. Personal loans are unsecured installment loans, which means you’ll get a lump sum upfront to pay off your debts, and you’ll be left with just one fixed loan payment that will be due over a set period of time. Because the loan is unsecured, you won’t have to put up any collateral.
How does a bad credit score affect my loan?
A bad credit score indicates to lenders that you aren’t a reliable borrower. For whatever reason, you have struggled to make on-time payments in the past, or you have taken on a large amount of debt relative to your income.
Because you look risky, they may be more reluctant to lend you money at all. When you are offered a loan, it’s likely to be for a smaller amount with higher interest rates.
Where to shop for a personal loan
When you’re shopping for a personal loan, it’s important to comparison shop. You want to be sure you are getting the best rates and terms before signing your name on the dotted line.
MagnifyMoney’s parent company, LendingTree, can potentially connect you with numerous lenders who offer personal loans to those with less-than-perfect credit. Their personal loan tool will ask you some basic questions, weeding out lenders who aren’t a good match, and saving you time and unfruitful hard inquiries on your credit report.
Credit Unions and community banks
In your search for a lender, don’t overlook credit unions and community banks. Rachael Bator, CFP at Lake Street Advisors, says these institutions tend to have lower minimum credit score requirements on top of lower interest rates. And they are often willing to work with people with low credit scores.
Most LendingClub borrowers have a credit score of at least 600. All loans are issued at a fixed APR between 5.99% and 35.89%. Your credit score, current debt burden and the amount you want to borrow will all affect where you fall in that range. LendingClub issues personal loans up to $40,000.
LendingClub personal loans do come with some fees:
- Origination fees. This will be 1%-6% of the amount you’re borrowing. You will not have to pay it upfront; it will be rolled into your loan, and included in your APR.
- Late payment fees. If your monthly payment is more than 15 days late, LendingClub may charge you a late payment fee. This fee will be the greater of $15 or 5% of the unpaid payment.
- Check processing fees. If you choose to pay your loan via paper check, you will be charged a $7 check processing fee.
The application process happens online and will require information about your employment history and income, on top of identifying information like your address and Social Security number. If you’re not confident you’ll qualify with your credit history, you can add a co-borrower with a better history to your application to increase your odds of approval.
“If you’re considering your options and want to talk through your unique situation, don’t hesitate to reach out to us,” said Alia Dudum, spokeswoman for LendingClub.
LendingPoint is on a mission to provide access to financing for those without good credit.
“Most of our competitors have started to deny anyone below a 660-680 [credit score], running up the credit rankings,” said Mark Lorimer, LendingPoint’s CMO. “We’ve started trying to provide access to more — the way down to a 590 [credit score].”
LendingPoint recently launched a program called Step Into More, which helps those with a lower credit score and other negative aspects of their credit rating get personal loans and improve their score at the same time.
The program starts with a $2,000-$3,000 loan which is to be repaid over the course of two years at 34.99% APR. If you make on-time payments for the first three months, your interest rate drops by one percentage point. If you continue making on-time payments up to the six-month mark, your interest rate will drop by yet another percentage point. At the twelve-month mark, your interest rate will go down at least two percentage points more if you have consistently made on-time payments.
You may qualify for a personal loan from LendingPoint independent of the Step Into More program — even with a credit score of 590. Your score alone isn’t enough to get you approved; your income, debt and other factors will be a part of the decision process. But Lorimer says that with a 590 credit score, most applicants could expect to be offered an interest rate of 23.99% to 34.99% APR. Loan amounts vary from $2,000-$25,000.
There is an origination fee ranging anywhere from 0%-6% depending on your state of residence. This origination fee will already be accounted for in your APR.
You can apply online and will need to provide basic identifying information such as name, address and Social Security number. You will also need to verify your bank account with the routing and account number. If you need help with the process, the company has telephone support; a live human being can help walk you through the process.
SoFi doesn’t publish any specifics about its credit score requirements. It is a unique lender in that they focus more heavily on things like education, employment and income potential. Those with higher income or income potential are more likely to be approved. To this end, SoFi’s personal loans come with unemployment protection — which defers payment and helps you find a new job should you find yourself unemployed.
SoFi grants personal loans from $5,000-$100,000 with interest rates between 5.49% and 13.49% APR after a 0.25% discount for setting up autopay. They do not charge origination fees, and the terms on these loans can be anywhere between three and seven years. If you’re 15 days or more late with your payment, you may be assessed a fee 4% or $5 — whichever is less.
You can apply online. Come armed with your basic contact information, education history and employment information. You may have a hard time getting approved with a bad credit history, but SoFi does a soft pull on your credit report — which does not negatively affect your score. If you have a solid education and earn a decent income, it’s worth seeing if they will take you on.
Read our full review of Avant’s personal loans here.
In some cases, online lender Avant will issue personal loans to those with credit scores of 580. Their personal loans range from $2,000 to $35,000, and have terms between two and five years. Interest rates are between 9.95% and 35.99% APR.
There is an administration fee of 1.50%-4.75%. Other fees include a $25 late fee after your payment is 10+ days delinquent, and a $15 fee if your payment is returned.
You can apply online with your name, address, Social Security number and income information. If you are approved, you could have funds in your bank account the very next day.
Alternatives to personal loans
Bator says that while a personal loan may be a good option in certain situations, in others you may be served by a different product.
First, she says you can ask family members if they’d be willing to give you a loan. She does note that in order for this money to be considered a loan and not a potentially taxable gift, your family member will have to charge you the applicable federal rate, which is usually much lower than the interest rate you would get with a lender — especially if you have bad credit.
Another area for examination is a home equity line of credit (HELOC). Bator says because your home is put up as collateral, the interest rate on this product tends to be lower than that of a personal loan.
One source of funding she does not recommend is payday loans.
“The repayment periods are incredibly short,” said Bator. “You can expect to pay outrageous interest rates — they’re illegal in many states for good reason. It’s proven that they don’t help people get out of debt, but rather the debt snowballs into an uncontrollable situation which profits the lender — not the borrower.”
How to rebuild your credit score
Just because you have a bad credit score now doesn’t mean you will forever. There are steps you can take to rebuild it.
The two best things you can do to improve your credit score are making on-time payments and lowering your utilization rate (you can do that by paying down your balances). Your utilization rate is calculated by dividing the total amount of all your statement balances by your credit limits. If you do get a personal loan, be sure to make your payments on time every month to fulfill the first course of action. Be sure you’re paying other bills on time, too, like rent and your cellphone bill.
If you are consolidating debt with a personal loan, making on-time monthly payments may slowly help improve your credit score as you will be eliminating debt.
Other financial options
How your score is calculated: Your credit score is calculated after reviewing your credit report, which includes a record of loans and other accounts in your name and your history of payments. Think of it like your grade point average in school. It’s a score calculated on your overall credit performance over time.
The same way a failed exam would hurt your GPA, a missed credit card payment or significant negative event like a bankruptcy or foreclosure could hurt your score. Vice versa, if you failed that one exam in the early part of the year but score A’s on every other exam moving forward, that new positive information will be factored into your score as well and can boost it.
After a lender looks at your credit report, they will take the information and plug it into a scoring model. There are two main models: FICO and Vantage. Ninety percent of lenders use FICO models, so for our purposes, we’ll assume your credit score is calculated using a FICO model.
Credit scores fall into five different categories:
- 750+ – Excellent Credit
- 680-749 – Good Credit
- 620- 679 – Average Credit
- 550-619 – Sub-Prime Credit
- Below 550 – Poor Credit
If you fall into the sub-prime or poor credit categories, you have are going to have a harder time borrowing money — especially with low interest rates.
How to get your credit score: Check your credit cards. Many offer customers access a free FICO score once per month. Otherwise, use a free tool, such as through Discover, which you can access even if you don’t have any accounts with the company.
How to prepare your personal loan application
Before you apply for a personal loan, make sure you take advantage of your free credit report. Check it for accuracy, and if you find any errors, take measures to fix them.
After you’ve made sure your credit report contains only accurate information, you’ll want to get your paperwork together. Many lenders will ask you to provide:
- Your full name
- Social Security number
- Residency status
- Proof of income
- Information regarding your debts — especially if you are consolidating
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