A personal loan can give you access to cash for almost anything, but securing a loan is often more difficult if you have bad credit. Less-than-stellar credit does not necessarily make getting a personal loan impossible, however.
“It’s tough to get a personal loan with bad credit,” says credit expert Gerri Detweiler. “But every lender has its own criteria in terms of the scores it will accept.”
Here’s what you can do to improve your odds of approval for a personal loan with bad credit.
[Read: Best Bad Credit Loans.]
What Is Bad Credit?
Bad credit is generally considered a FICO score below 670, which falls in the fair or poor credit ranges. Your credit score is a three-digit number, typically between 300 and 850, that predicts how likely you are to repay a debt based on information from your credit reports.
FICO and VantageScore are two popular credit scoring models. But FICO scores are the most widely used credit scores, with 90% of top U.S. lenders relying on them to measure credit risk, according to FICO.
Common reasons for bad credit can include making late payments, defaulting on loans and having debts in collection, among others.
How to Get a Personal Loan With Bad Credit
1. Check your credit. Know where your credit score stands to get an idea of which lenders might be a good fit. Review your credit reports and look for mistakes that can be corrected to raise your score quickly. Even if you do not find errors, you can gauge how challenging it might be to get a personal loan with your credit history.
2. Prequalify. Look for lenders that allow you to prequalify online with a soft pull that won’t damage your credit score. Prequalification determines your likelihood of approval and estimates rates, repayment terms and loan amounts. Note that being prequalified for a personal loan doesn’t guarantee approval.
3. Compare lenders. Shopping around can help you find the best deal on a bad credit loan. Evaluate your prequalified offers, comparing interest rates, loan amounts and fees to choose the best option for your situation.
4. Consider a co-signer. Adding a co-signer with good credit to your loan application may increase your chance of approval and help you access a better interest rate on the loan. A co-signer is someone who agrees to take legal responsibility for paying back your loan if you do not. Check that the lender accepts co-signers and that your co-signer meets the lender’s requirements.
5. Apply. When you’re ready, you will need to formally apply for the loan, which will trigger a hard credit inquiry. This may result in a temporary hit to your credit score.
Generally, approval can take anywhere from one day to one week, depending on factors such as your credit score and type of lender, according to the Credit Union of Southern California. You can gather documents the lender may need, such as W-2 forms, pay stubs and financial statements, to speed up the process.
If your application is rejected, you will typically receive a notice from the lender explaining why.
[Read: Best Personal Loans.]
Where to Get a Personal Loan With Bad Credit
If you have a bad credit score, you may want to focus your search for a personal loan on a few types of lenders, including:
— Online lenders. Some of these lenders specialize in bad credit loans. Check eligibility requirements, including credit score, income and debt-to-income ratio.
— Credit unions. They can have more flexible lending requirements than banks, making approval for a personal loan easier even with bad credit.
— Smaller lenders, such as community banks. Having a relationship with a local bank or credit union can help with approval. Many of these lenders also offer credit-builder loans if you have no credit or limited credit and want to improve your score.
[Read: Best Home Equity Loans.]
What to Do If You’re Denied for a Personal Loan
If your application for a personal loan is turned down, do not give up. Instead, try to learn why your loan was rejected and what you can do to fix that problem.
“You’ll get a notice explaining why your application was declined,” Detweiler says. “Note what it says and see if there are any factors that you can work on over time.”
Next, revisit your credit score and each credit report. Make sure the information on your credit reports is accurate and complete, and dispute errors with the appropriate credit bureaus.
You can focus on building credit if you’ve fixed errors. Pay all debts on time, keep credit card balances as low as possible, and think about asking a trusted family member or friend to add you as an authorized user on a card.
Also, consider moving on and applying with another lender. Each lender has its own criteria, including a minimum credit score, for determining eligibility, which means you might be more successful with some lenders than others.
If you continue to struggle, you might want to tweak your approach even further. You could try:
— Rethinking your loan amount. Asking for only what you need rather than the largest amount might help.
— Applying with a co-signer or collateral. Either one can strengthen your application.
— Putting a personal loan on hold. You may want to pause and work on improving your credit score by paying down debt, for example.
Alternatives to Personal Loans for Bad Credit
A personal loan is not your only option for fast access to cash if you have bad credit. You might consider these choices, depending on your financial situation:
Secured personal loan. The lender requires collateral, such as a car or savings account, to guarantee the loan. This can help you qualify more easily and for better terms than traditional unsecured personal loans, but you risk losing your collateral if you default.
Credit card. Look into a new card to pay some of your bills. You can find cards for bad credit or secured credit cards. Aim to cover all or most of your balance to avoid paying interest.
Family loan. Make sure the terms are clear to avoid ruining a relationship.
Home equity loan or line of credit. If you have a home with equity you can tap, you might consider one of these loans. The risk is that the loan is secured by your home, and you could lose it if you can’t keep up with payments.
Buy now, pay later.BNPL services can help you finance a purchase in a pinch, typically with no interest or hard credit check. You’ll pay equal installments over a period of time.
Beware of payday loans and title loans, Detweiler says. A better option may be to talk with a nonprofit credit counseling agency. “In addition to helping create a payment plan, they may be able to point you to other local or federal resources that can help with some of your essential bills,” she says.
A better plan than borrowing could be to look for another source of income, says Nadine Marie Burns, certified financial planner and president and CEO of A New Path Financial, Ann Arbor, Michigan. “Earning more is one alternative,” Burns says. “Gig work is really good for that, like yard cleanup, planting flowers, dog walking.”
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How to Get a Personal Loan With Bad Credit originally appeared on usnews.com
