You Can Still Get A Loan Even With Bad Credit — Here’s How
Getting a loan with poor credit isn’t impossible. While a low credit score may limit your options, and the options may not be too desirable, you can still obtain a personal loan, car loan, or home loan. We’ll cover everything from the basics of how credit matters to your loan application, to where you can find lenders that specialize in borrowers with poor credit.
How Getting a Loan is Affected by Bad Credit
What is Considered a Low Credit Score
Before we look at the “how” of getting a loan with bad credit, it’s important to understand just what lenders are looking for when they look at your credit report and credit score.
There’s a range of possible scores, from 330 (abysmal) to 830 (perfect), and scores on the lower end change your options, but that doesn’t mean you have no options at all. A bad credit score, below 600, may see you automatically declined from some lenders. It’s possible to find a lender that will approve a loan when you have a low credit score, though you will probably have to suffer a higher APR, a co-signer, or putting up collateral. The loan agreement may include harsher penalties for missed payments or defaulting. But, despite limited options, if you are in dire need of money, it’s still possible to get a loan, even with bad credit.
Beyond your credit score, there are a few parts of your financial record that may be a red flag for lenders. While negative history items may not immediately disqualify you, they may take some explaining.
Negative Credit History Items
- A judgement against you where money is taken from your accounts, such as a lien, shows you have already failed to make payments to someone else.
- Lawsuits in the same vein are also a dark mark on your record.
- Bankruptcy and foreclosures in your past may also paint the wrong picture for a lender, who may not want to risk you not having the money needed to pay back the loan.
Is it Possible to Get a Loan with No Credit?
Bad credit is different from no credit. If you know your score and it is on the low side, the hardest but most effective way to get a loan is to repair your credit. It’s a long road, and not easy, but debt recovery is possible.
Having no credit history at all is trickier. It means the lender is taking a blind leap of faith on you by letting you borrow. If you have never had a loan or credit card, you may want to investigate getting a FICO XD, an offshoot of the FICO credit score, which takes into account paying utilities and rent, rather than just loans. This may help you secure a loan if you would otherwise have no credit history. The best way to build credit is through diligence and utilizing good financial practices. This results in better interest rates and less overall money you will have to pay.
Prepare for Getting a Loan With Bad Credit
Expect Higher Interest
The first thing you need to know is that you will be facing harsher terms. Typically, loans for people with with poor credit have a higher interest rate. Even if you are working with a lender who specializes in customers with bad credit, high interest rates are a pretty standard feature of the loans being offered.
You should also expect to only borrow limited amounts. The lower the credit score, the lower the cap on the loan. For example, at payday loan companies, which specifically target those who can’t get a bank loan, most companies will only allow loans of up to $1,000.
Provide Proof of Income
Before the lender enters a loan agreement with you, they will likely require you to show you are gainfully employed, with a steady paycheck. When you have bad credit, your income is the next best indication that you can and will pay back what you borrow. Proof of income will likely take the form of providing paystubs. It may help to have a letter of recommendation from your employer, as well, to prove they have confidence in you as an employee, and you won’t be losing your job before paying back the loan.
Offer Collateral or Apply for Secured Loans
It’s important to know the difference between secured and unsecured loans. A secured loan means you are offering up with collateral, such as your car or home. If you fail to repay the loan, or make payments on time, the lender would have a right to your property in lieu of payment. This is less risky for a lender and makes the loan more attractive for them to approve. On the other hand, if there is any doubt about your ability to make payments on time, it puts your personal property at risk.In other words, you may need to be prepared to put up something valuable in order to secure the loan. Collateral-backed loans or any other arrangement which involves putting up collateral is just another way of describing a secured loan. We’ll explore this more later.
Understand How Liens Work
While you may be more familiar with tax liens, liens can also be used with secured loans. For example, if you have a bank loan for your vehicle – which can involve a lien – but fail to pay and the creditor can repossess your vehicle, and then sell or auction it to recoup the money.
Liens represent your inability to pay, and will negatively impact your credit score, showing up on a credit report. If the lien remains unpaid, it will appear for 10 years from the filing date; paid loans drop off credit reports after 7 years.
Get a Co-Signer
Much like renting an apartment with bad credit, a fairly easy way to convince a lender to approve your loan is to find a co-signer. Someone with better credit signs on the loan with you, and should you default on the loan, the co-signer is expected to pay. Having a co-signer shows that someone else trusts you, and so should the bank or lender. Much like getting a loan from a friend or family member, this could cause a strain on the relationship, should you have trouble paying off your debt down the road.
If you aren’t comfortable with rejection, getting a co-signer may not be the best option, as even close family are likely to prove hesitant in co-signing a loan wit you. They are trusting you to always pay in full, on time, or their credit will suffer for actions they didn’t even take themselves.
Despite this, your family are probably the people who trust you the most, and should still be the first place you look. They probably already know the reasons you need a co-signer, and some may be willing to help you.
If your family won’t co-sign, try friends. Longtime friends might be willing to put their trust in you to not wreck their own credit score by co-signing with you.
Actually asking someone to co-sign is not something to be taken lightly. The key is to be open and honest about how you came to be in this situation, and what you are doing to fix it. It may help to have numbers handy, especially what the prospective loan is, what the payments will be, and your income, to prove to a co-signer you will be able to make payments.
Know Your Loan Options
A personal loan is a generic term for unsecured loans you take out for personal purposes. Unlike mortgages or auto loans, the purpose of the loan is not in the name, and it is not secured by the property you use it to purchase (a house, car, etc). Personal loans are usually based on your credit score, which then determines whether someone will loan you money, and at what interest rate. These must be paid off in a set amount of time.
A payday loan is a type of personal loan, regardless of being predatory. It’s an option that is based on your credit score, and you often don’t have to put up collateral. The name comes from it often being used as a way to cover bills or debts until payday. These loans are usually small amounts, similar to what an individual might receive in a single paycheck.
A wedding loan isn’t technically its own type of loan. It’s just a personal loan used for a wedding, but has become a popular term mostly due to some clever marketing. As wedding website The Knot puts it, “You can’t just walk into a bank and request a wedding loan.” However, it’s still popular enough to merit its own name. Just like any other personal loan, this has a set time to pay it off, with interest.
Just had a kidney stone, went to the ER, and now you need to pay off medical bills but can’t do it up front? You probably need a medical loan. Often, the hospital can recommend you to a company that will help you pay your medical bill. It could be a personal loan, which you then use to pay off the bill, or the company could pay your bill, and then you pay back the company. This is still a loan, but the difference is who pays your health care provider. In the first instance, it acts just like a personal loan, with APR based on your credit. In the latter case, depending on the company, you may be able to simply pay off the loan, and if you are able to do it within a set timeframe (such as a year), there may be no interest.
Lines of Credit
Unlike traditional loans, lines of credit are revolving. This means rather than taking a set amount of money upfront, you are given permission to spend borrowed money, up to a certain limit. You don’t typically have to pay it off in full by a set date, but instead make monthly minimum payments as long as you are using some amount of the line of credit. The most common example is a credit card. Just like loans, however, the APR of the card will be based on your credit score. With poor credit, cards with better rewards or low interest rates will likely be locked out to you.
Unlike a credit card, a home equity line of credit or HELOC uses the equity in your house as a limit to how much you can borrow. You can only borrow for a certain period of time, usually between five and 25 years. It’s akin to having a second mortgage. However, because of the often large limit, this should be reserved for bigger purchases, like education or home improvements. Unlike credit cards or loans, the interest rate on a HELOC is variable, according to an index. Interest is paid off first, and then the principal of the loan. A certain level of equity in the home is usually required by lenders, and failure to pay back the loan could result in a foreclosure.
Secured Credit Card
As an alternative to a personal loan, a secured credit card could be another answer to your money woes. Instead of borrowing, you give money to the bank. The bank then gives you the credit card, which acts like a debit card. Using a secured card builds credit, which you can then use to apply for a better loan. Using this means you won’t be getting money in the short term, and will be using money you essentially already had, but will help you in the long run by improving your credit score if used responsibly. If you aren’t in urgent need of a loan, a secured credit card could help you repair your credit before you apply for a loan.
Borrowing From Family and Friends
If neither bank nor credit union has terms you can agree to, you may try family or friends. Asking a relative is a tricky proposition, however. There may not be interest to pay, but your relationship could be at risk if you don’t pay the loan back. On the bright side, it’s highly unlikely a member of your family or a friend will ask to see your credit report before agreeing to a loan.
Do not mistake this for an informal loan, however. It’s best to draw up a legal agreement, as though this were a loan from someone you did not know personally. Your friend or family member may insist on you paying interest, having loan terms such as a final due date or monthly payments, and there may be consequences for not meeting the terms beyond a strained relationship.
Learn About Peer-to-Peer Lending
Peer-to-peer lending, or social lending, allows for borrowing directly from a lender, with no financial institution as a middleman. This is a purely digital loan personal loan — there are no brick-and-mortar lenders, and everything is handled through a service. The company offering the service takes a fee for matching you with a lender and performing a credit check, while the lender — which runs with lower overhead — passes on the savings to you in the form of lower interest rates.
In short, you post the loan amount and what it will be used for, and investors can decide to offer you a loan. Because it’s an individual, they are likely to be more lenient when it comes to your credit score than a bank.
Loans with No Credit Check
Loans with no credit checks exist, often not involving backs with lower fees. These could be personal loans, like peer-to-peer lending, or could be from a company. However, loans with no credit checks often carry substantially higher interest rates, as is the case with payday loans.
Terms depend on type.
Unsecured or personal loans do not have any collateral. Because of that, the interest rates are higher. They are typically smaller loans than secured, meant for purchasing a computer or furniture.
Another major difference deals with how the loans are taxed. Come tax season, interest on secured loans, such as student loans, can be deducted. Interest on unsecured loans, however, cannot be deducted.
Know Where to Find Loans With Bad Credit
Finding Peer Lenders
While there are many resources for finding peer lending, we’ll list a few of the bigger names. This is by no means an exhaustive list.
If a bank won’t give you a loan you can realistically pay back, try a credit union. Credit unions require membership — often based on being in a geographic location, labor union, or having a qualifying employer. Because credit unions are smaller and cater to a specific part of a community, it’s often easier to get a loan even with poor credit. To them, you are not a faceless number, and they may be willing to overlook, or work with, bad credit scores. Since credit unions are member-owned, the loan is money from your community, giving you a better reason for paying the loan back.
Friends and Family
Finally, as mentioned, talk to your friends and family. They may be willing to help you out of a tight spot and lend you money. They’ll help you get back on your feet, and hopefully raise your credit score.
Recognize the Risks of Bad Credit Loans
Avoid Predatory Lenders
Because you may be desperate for a loan when you have poor credit, there are plenty of predatory scams. For example, if there are upfront fees or the lender offers a loan without knowing your income, credit score, or other personal information, someone is likely trying to cheat you out of money. You can check a lender’s online reviews or their Better Business Bureau profile to see if they are a legitimate lender.
Let’s take a look at a few types that can be considered predatory, but are still options for those in need.
Title Loans: Essentially a secured loan where you put up collateral, normally a vehicle, these types of loans usually have high interest rates, with APRs between 100 and 300 percent being common. In other words, by the time you pay off the loan, you will have paid at least the loan amount twice. For simplicity’s sake, if you got a $1,000 car title loan, with 100 percent interest over a year and with 12 installments, you will pay back $2,000 total by the end of the year. This can create a payment treadmill, as you need more money to pay back than what you initially borrowed.
Payday Loans: Beware of advance payday loans. While they may not check credit, and they are legal, their interest rates can be sky-high. For example, a typical credit card APR is between 12 and 30 percent, while an advance payday loan can be 400 percent.
It’s important to know your rights — and the lender’s — to be prepared if you decide to go this route. For example, they must disclose the APR (though they may present it in a different way, such as telling you that you owe $15 for every $100 borrowed instead of saying it’s a 400 percent APR) if you default on the payday loan, you can’t be arrested. You can, however, be sued by the company. Failure to show up in court to face said lawsuit could result in a warrant for your arrest. The lawsuit could also end up with your wages garnished to pay back the loan.
If you can pay back the interest, but not the principal on the loan, the company may extend the loan with additional fees. However, this puts you again on a treadmill of paying what you might not be able to pay back.
Don’t feel pressured to make a deal, especially if you haven’t explored all of your options, be it lenders or another type of loan.
Trying to raise your credit score? Check out our tips and guides at the Fiscal Tiger credit score resource center.
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A former newspaper journalist, Cole spends his free time reading, writing, playing video games, watching movies, and learning about every subject under the sun. He lives with his wife and daughter in Idaho. Follow Cole on Twitter: @ColeMayer42
This post was updated December 19, 2017. It was originally published March 23, 2017.