Loans for Bad Credit

What is a personal loan for bad credit?

Personal loans for bad credit are designed for those with a subprime credit history who may not qualify for a standard loan. Generally, personal loans available through banks and other traditional lenders require applicants to have a good to excellent credit score. 

However, bad credit personal loans are available through online lenders and finance companies. These lenders may accept a fair or poor credit score or not use credit scores at all in their decisions. 

Where does your credit score fall?

What to know about your credit score and securing a loan

Lenders heavily rely on credit scores for loan underwriting and approval. A credit score takes into account payment histories, types of debts, outstanding balances and available credit. These factors indicate how likely an applicant is to repay a loan versus default. In other words, a credit score indicates the lender’s risk of making a loan to you.

When a borrower has a higher credit score, the lender’s risk is lessened. The lender is willing to offer a lower interest rate in exchange for the lower risk. If the borrower has a low credit score, the lender is exposed to a higher risk. Because of this, the lender charges a higher interest rate.

What makes up a bad credit score?

Payment history

Your payment history comprises more than a third of your credit score. One late payment will damage your credit score, and multiple late payments can cause a bigger hit. Your payment history also includes things like collections accounts, charge-offs and bankruptcies.

Amount owed

The amount owed on your accounts is also a major factor influencing your credit score. The three credit bureaus look at your credit utilization ratio. If you have a high ratio, you are close to maxing out your credit limits. Paying down your balances so your credit utilization rate is below 30% can improve your credit scores.

Length of credit history

While the length of your credit history has a smaller impact than payment history and credit utilization, it does hold some weight. This is measured by the age of your oldest account. The credit bureaus also look at the age of your accounts overall and the age of your most recent account.

Mix of credit types

Individuals with a higher credit score tend to have a combination of both revolving and installment loans. Revolving accounts are lines of credit or credit cards. Installment loans are auto loans, mortgages, student loans and personal loans.

New inquiries

When you apply for a new debt, the lender may make a hard credit pull. This is also referred to as a hard inquiry. Regardless of whether you actually open that new account or not, the hard inquiry can decrease your credit score by a couple of points for several months.

Types of bad credit loans and their uses

• Payday loans: Payday loans are short-term loans with small principal amounts. They are designed to be repaid on your next payday or within a few weeks. Typically, the balance must be repaid in a lump sum. These loans are used to cover immediate financial shortfalls.
• Personal loans: Personal loans have a higher loan amount than payday loans, and their term length typically ranges from 24 to 84 months. These loans are used for debt consolidation, home improvements, wedding expenses, relocation expenses and more.
• Hardship loans: Hardship loans are similar to personal loans but are specifically used for temporarily reduced income or another financial emergency. Loan amounts can range from a few hundred to several thousand dollars or more.
• Lines of credit: A line of credit gives you access to a sum of cash you can draw from as needed. Because you only access the funds as needed, the monthly payments can be lower. A line of credit is suitable when you have a series of expenses rather than one large expense. A wedding or home improvements are examples.
• 401(k) loan: If you have funds in a 401(k) account, you might be able to take a loan against those funds without incurring a penalty. The IRS has a set of rules, so you should ensure you meet the criteria. With a 401(k loan), there is no credit check or approval process.
• Life insurance loan: Whole life insurance policies accrue cash, and you can borrow money against the policy’s cash value. There are no penalties or requirements associated with a life insurance loan. However, death benefits may be reduced until the loan is repaid.
• Student loans: While private student loans require a good credit score, federal student loans are available without a credit check. These loans are used for higher education expenses. They have flexible repayment terms. The outstanding balance may be forgiven in some cases, such as if a specific repayment plan is selected or you work in the public service sector.

How to apply for a bad credit loan

1. Check your credit score: While some bad credit lenders do not check credit scores, others have a minimum credit score requirement. Knowing your credit score upfront allows you to narrow your loan program options to those with a higher chance of approval.
2. Estimate your monthly payment: While you can only know your exact APR after applying, you can find a range for most bad credit loan programs online. Use a monthly loan payment calculator to estimate your payment before applying.
3. Get pre-qualified: Bad credit loans generally have a quick application process and provide quotes immediately or in a short period of time. By pre-qualifying for a personal loan, you can learn what terms are available by pre-qualifying for a personal loan.
4. Submit the required documentation: Generally, you must provide documentation supporting your income and proving your identity before final loan approval. Many bad credit lenders accept document submissions online.
5. Receive your funds: After providing your documentation, wait for final loan approval. Depending on the lender, this process may take a few hours or days. After final approval, your funds will typically be deposited in your bank account.

Do you qualify for a low-interest loan?

Before applying for a bad credit loan, consider if you could qualify for a loan with a lower interest rate. To qualify, you typically need:

• An excellent credit score: 800 or higher qualifies you for the best personal loans but you may qualify for a lower interest rate with a 680 or higher score.
• A low debt-to-income ratio: Your debt-to-income ratio is calculated by dividing your monthly debt and housing payments by your pre-tax monthly income. Multiply this figure by 100. A good ratio is under 42%.
• Stable employment: Lenders typically look for consistent employment without major gaps covering the last two years or more.

Best loans for limited credit history

Getting a loan with no credit history can be challenging, but no-credit loans are available. Here are some of the best loans if you have a limited credit history:

Estimated APR by FICO score range

How to choose the best lender

Lending criteria

The best lender for your bad credit loan is one with a program you qualify for. After learning your current credit score, narrow down your choice of lenders to those with programs for which you have a higher likelihood of approval.

Loan terms

Loan terms, including the APR, loan amount and length, vary considerably from lender to lender. Understand your ideal loan terms and narrow your lender choices based on these factors.

Reputation

Research the lenders’ reputations before applying. Read independent reviews, focusing on customer service and the overall application experience.

Pros and cons of bad credit loans

Alternatives to bad credit loans

401(k) loan

If you have money in a 401(k), you can borrow from it. While cashing out your retirement account will generally trigger taxes and penalties, a 401(k) loan will not. The IRS allows you to borrow against your retirement account for qualifying situations. No credit check is required, and the interest rate is lower than that of a bad credit loan.

Life insurance loan

If you have had a whole life insurance policy for over a few years, you may have a decent amount of accumulated cash value. You can borrow against that cash value at a low interest rate. Sometimes, you can choose your repayment schedule, or you do not have to repay the funds. However, your death benefits will be decreased until the money is repaid.

Co-signer loan

Adding a co-signer to your loan could help you qualify for a better rate. You must have someone agree to be your co-signer, who must meet all of the criteria for a loan with a better rate. In addition to credit scores, this includes stable income and a low debt-to-income ratio, as previously discussed.

Peer-to-peer loan

While some peer-to-peer lending platforms have high credit score requirements, others work with individuals with lower credit scores. However, the rates for a peer-to-peer loan may be similar to a bad credit loan.