Personal loans can have many benefits, like helping you consolidate high-interest debt or providing quick cash for emergencies. But if you have bad credit, qualifying for one could be difficult. And if you do qualify, you will likely get a higher interest rate than someone with good credit.
Fortunately, it’s possible to get a personal loan with bad credit. But you’ll want to consider the pros and cons of doing so, any alternative options, and know what steps to take before applying.
[Read: Best Bad Credit Loans.]
How to Get a Personal Loan With Bad Credit
While it’s more challenging to qualify for a personal loan with less-than-stellar credit, it’s possible. Some lenders have minimum credit score requirements as low as 550. Here are some steps you can take to get a bad credit loan.
Check Your Credit Reports
When you apply for a personal loan, lenders will look at your credit score and history to assess risk, says Jennifer Jessop, debt solutions manager at America First Credit Union. So it’s crucial to check your credit reports to ensure they are accurate. You can check your reports for free from the three major credit bureaus by visiting AnnualCreditReport.com.
If you notice any errors listed on your reports, dispute them with the respective credit bureau. You can dispute a credit report error online, by phone or by mail. If your dispute is successful, the credit agency will typically fix the inaccurate information within 30 to 45 days.
Research and Compare Lenders
To find the best deal for your unique financial circumstances, research and compare your options from multiple lenders. While shopping, pay close attention to loan amounts offered and minimum credit score requirements. “Also, look at whether there are any origination fees or prepayment penalties and what the late payment fees are,” says Jessop.
Prequalify
Prequalifying for a personal loan allows you to compare estimated rates, terms and fees without harming your credit. Lenders that offer this only perform a soft credit check, which has no impact on your credit score.
To prequalify, you provide information such as your desired loan amount, loan purpose, annual income and Social Security number to see what loan offers you qualify for. Although prequalifying doesn’t guarantee approval, it can help you gauge whether to move forward with submitting a formal loan application.
Consider Adding a Co-signer
If you have trouble prequalifying for a personal loan on your own, adding a co-signer to your loan application could help. Chris Diodato, a certified financial planner and founder of WELLth Financial Planning, says to consider asking a family member or spouse with good credit to co-sign the loan. This could improve your chances of getting approved and securing a more favorable interest rate.
“Always make sure the co-signer knows the implications of signing on a loan — it will show on their credit report and may affect their future ability to attain credit,” says Diodato. “In addition, if you can’t pay back your loan, it becomes your co-signer’s responsibility.”
Submit a Full Application
After you’ve found a lender that offers you the best terms, submit a complete loan application. While the application process varies by lender, you generally can complete this step by providing the following information online or in person:
— Social Security number
— Date of birth
— Mailing address
— Phone number
— Monthly income
— Monthly housing payment
— Most recent W2s or pay stubs
Pros and Cons of Getting a Bad Credit Loan
Pros
— Quick funding. If you need to cover an emergency expense, such as an unexpected car repair, taking out a bad credit loan could be beneficial since many lenders can fund your loan as quickly as the next business day.
— Lower rates than payday loans. Personal loans are generally a better option than payday loans with sky-high rates and fees. “The rate will typically be much lower for a personal loan versus a payday loan,” says Jessop.
— Flexible repayment terms. Personal loans also tend to come with more flexible repayment terms than short-term loans. While loan terms vary, lenders usually allow you to spread out payments over several years.
Cons
— Limited borrowing potential. “Poor credit signals to banks that you’re a potentially high-risk borrower,” says Diodato. As a result, you may not get approved for as big a loan as a borrower with a strong credit profile.
— Higher costs. You will likely get a higher interest rate and pay more in fees with a bad credit personal loan.
— Potential to harm your credit score. If you’re struggling financially and add a loan payment to your monthly bills, you run the risk of missing a payment, which could cause your credit score to drop even further. As a result, you may have a harder time qualifying for future loans.
Alternatives to Getting a Personal Loan With Bad Credit
If you don’t think a bad credit personal loan is best for you, consider the following alternatives.
— Family and friend loans. “Loans from family members and friends can be a good first option,” says Diodato. Before you accept a family or friend loan, he recommends creating a contract to lay out the loan terms, repayment schedule and consequences for non-payment.
— 401(k) or insurance policy loan. Another potential option, says Diodato, is to borrow money from your 401(k) or insurance policy. Those types of loans are less expensive than what a lender would offer someone with poor credit. However, a major drawback of taking out a 401(k) loan is that you could miss out on potential investment gains.
— Payday alternative loans. In the last few years, sites like Dave and EarnIn have provided ways to access limited funds without paying high fees.
— Saving. If you don’t need to use the money right away and have a steady income, consider saving for a purchase instead. Doing this ensures that you avoid paying interest.
More from U.S. News
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How to Get a Personal Loan With Bad Credit originally appeared on usnews.com
Update 11/18/24: This story was previously published at an earlier date and has been updated with new information.
