Some people look to personal loans when money woes strike, but if you have bad credit, getting a loan can be challenging. If this is you, you may be relieved to know that some lenders are willing to work with borrowers whose credit history is less than perfect.
Following are some of the challenges and opportunities facing borrowers who are wondering, “How can I get a personal loan with bad credit?”
[Read: Best Personal Loans.]
What’s the Minimum Credit Score for a Personal Loan?
Each lender has its own criteria, including tolerance for risk, when setting the minimum credit score for a personal loan, says Rod Griffin, senior director of public education and advocacy for the credit bureau Experian.
“Generally, when you think about subprime borrowing, 680 is what we think of as near prime,” he says. “So you may not qualify at that point.”
A score of about 700 should help you access a personal loan, “but probably not at the best rates,” Griffin says. “To qualify for the best terms, you’re generally going to need scores of 750 or greater.”
Lenders also look beyond your credit score to other factors that may affect your ability to repay a loan, Griffin says, including your:
Overall, a lender wants to gauge how well you pay back money you borrow before giving you a personal loan.
“If you have a history of failing to repay debts — things like lots of late payments or collection accounts — that’s going to make it more difficult,” he says.
What Is the Best Loan for Bad Credit?
If you have a low credit score but still hope to land a personal loan, know that many lenders specialize in helping bad-credit borrowers. You can start by exploring the U.S. News guide to the best lenders for bad credit.
But before you apply for a personal loan, ask yourself whether that is really in your best interest, says Todd Christensen, education manager at Money Fit by DRS Inc., a nationwide nonprofit credit counseling agency. The best loan for bad credit could be no loan at all.
“If you’re taking out a personal loan with bad credit, you likely have accounts in collection or with payments you’ve already missed,” Christensen says. “Using one loan to pay off another isn’t a debt-reduction plan. It’s a debt shuffle.”
Instead, try to get to the root of your debt and credit issues before you borrow, he says. “If you have bad credit, adding another loan is like adding fuel to the poor credit fire,” Christensen says.
Generally, people with poor credit should look at other options before considering a personal loan, agrees Lauren Anastasio, a certified financial planner at SoFi.
“If you have poor credit, a personal loan — assuming you’re eligible — could cost far more than other types of financing,” she says.
[Read: Best Debt Consolidation Loans.]
How Can You Get a Good Loan if You Have Bad Credit?
Getting an unsecured personal loan with good terms when you have bad credit can be difficult but not impossible. If you need a personal loan and your credit is shaky, you should:
Look to bad-credit lenders. “For better or for worse, there are lenders all around the country willing to offer personal loans to consumers with poor credit ratings,” Christensen says.
Improve your financial health. Work on breaking bad credit habits to raise, or at least maintain, your credit score.
“Lenders find boring to be very sexy: paying on time, every time, not having huge swings in your balances, keeping balances low,” Griffin says. “Slow and steady is very appealing.”
Show that you have a consistent source of income. If your financial situation has recently improved and you are waiting for your credit score to catch up, try to show lenders that you are in a good position to borrow.
“If a personal loan is your best option, the best thing you can do is provide evidence of consistent and reliable income,” Anastasio says. “A reliable income stream gives a lender peace of mind that you’ll have resources available to make your payments.”
Agree to a shorter loan term. Choosing a shorter repayment period might get you a better rate. “Typically, the shorter the repayment period, the lower your interest rate,” Anastasio says.
Expect lower interest rates on personal loans with two-to-three-year repayment terms and higher rates on loans with five- or seven-year terms, she says.
5 Alternatives if Your Application Is Denied
Just because one lender has declined your application does not mean you can’t get a personal loan, Anastasio says. Here’s what you can do:
Talk to the lender that rejected your application. Another arrangement might still work for the lender. “Start by speaking with the lender and seeing if they would approve you for a different loan amount or term,” Anastasio says.
Look at other lenders. Try to find a lender that is a better fit for your needs and circumstances. “You are always able to shop around,” Anastasio says. “Underwriting criteria will vary from one financial institution to the next.”
Consider borrowing from your 401(k). This option doesn’t involve a credit check and should cost less than taking a bank loan, she says. “But there could be tax implications if you leave your employer before paying the balance back,” Anastasio adds.
Ask family members and others for help. Check local nonprofits for special purpose loans or peer-to-peer lenders such as Prosper. Seeking help from small banks and credit unions is another alternative, although a bad credit score may limit your options.
Try to avoid the worst alternatives. Some people with poor credit may consider payday and title loans. But both types of loans are expensive and can charge APRs of 300% or more, plus rollover fees if you extend the due date, according to the Federal Trade Commission. You could also lose your vehicle if you can’t repay a title loan, even if you’re making partial payments.
[READ: Best Bad Credit Loans. ]
How to Boost Your Credit Score
Most methods of lifting your credit score take time. Here’s what you can do:
Take care of late payments. Late payments are far and away the leading cause of damaged credit scores, Griffin says. “If you have late payments, you need to catch up on those payments as soon as you can,” he says.
Reduce your credit card balances. A high credit utilization ratio — the percentage of total available credit you’re using — is the second-biggest reason that people see their credit scores dip, Griffin says.
Lowering this ratio by paying down debt and resisting new splurges can improve your credit score. “As you enter the next billing cycle, you would likely see an improvement,” Griffin says.
Sign up for Experian Boost. This free program counts on-time cellphone, utility or even Netflix payments toward your credit score. Griffin says 2 out of 3 people who enroll in Experian Boost see their scores instantly rise. Even if your score increases by just a few points, this could be enough to move your credit rating from fair to good. However, as Experian’s website notes, “Some may not see improved scores or approval odds. Not all lenders use credit information impacted by Experian Boost.”
Check your credit report for errors or fraudulent accounts. You can get free weekly access to each of your credit reports from the three national credit bureaus at AnnualCreditReport.com. If you spot something on your credit report that is inaccurate or incomplete, the credit bureau and the business supplying the information to that bureau must fix it for free. You will need to dispute the mistake separately with each credit bureau following its dispute process.
Continue to use your accounts. Lenders want to see that you handle credit responsibly. Charge something on each card at least every couple of months and then pay it off, Griffin recommends.
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