What Are Personal Loans for Bad Credit?
Personal loans for bad credit are made available for borrowers with poor credit scores of around 579 or lower. It’s harder to qualify for a loan, especially an unsecured personal loan, when you have bad credit.
There are two main types of personal loans: secured and unsecured. Secured loans are backed by collateral, which the lender can seize if the borrower fails to pay on the loan. Unsecured loans do not require collateral. Borrowers with bad credit can still qualify for a personal loan but will likely end up paying a higher interest rate, more fees or both.
5 Best Loans for Bad Credit
When You Might Consider a Bad Credit Loan
When does it make sense to take out a personal loan for bad credit? In a recent MarketWatch Guides survey, the top reason our survey respondents with bad credit took out personal loans was debt consolidation (one in five) followed by paying everyday bills (one in six).
Our survey showed that the average personal loan for those with bad credit was $13,070. Encouragingly, 53% of those with bad credit have never missed a payment. However, a full 7% of respondents with bad credit have missed six or more payments, a much higher percentage than for those with higher credit scores.
If you’re having trouble meeting your current financial obligations, adding another monthly payment may not be a smart financial move. Here are some situations where it might make sense to take out a personal loan with bad credit, but consider talking to a free credit counselor in your area first. The non-profit National Foundation for Credit Counseling or similar agencies can connect you to resources.
Debt Consolidation
If you need to consolidate several high-interest debts into one monthly payment, then a debt consolidation personal loan could be a smart move. Several recent studies have shown that for people with bad credit, a debt consolidation loan can significantly improve their credit scores. In a MarketWatch Guides survey, people with bad credit saw their scores rise by an average of 111 points after taking out a debt consolidation loan.
Car Financing
Car financing or repairs was the third-most-popular reason that people cited in our survey for taking out a personal loan. While your rates will probably be higher than with an auto loan, since you don’t have your car as collateral to back your loan, there’s less risk of losing your car if you default on your loan. Keep in mind, though, that your repayment term may be shorter than with an auto loan, so your payments may be higher.
Medical Bills
Medical expenses are a common reason people with bad credit in our survey took out a personal loan. According to the Peterson-KFF Health System Tracker, a non-profit online healthcare statistics monitor, 6% of adults in the U.S. owe more than $1,000 in medical debt and 1% of adults owe more than $10,000.
If you have medical bills, see if you can apply for a hardship assistance program through the medical provider’s billing office before resorting to a personal loan. If that doesn’t work, a personal loan may help you consolidate lingering medical debt into a more manageable monthly payment. Just be aware that you will most likely pay high fees and interest rates as part of your loan.
How to Improve Your Chances of Getting Approved
Yuval Elkeslasi, private lender at Hard Money Lenders IO in Miami, Florida, has seen many applications come through his company for personal loans. He said there are several steps you can take to improve your chances of getting approved for a personal loan with bad credit:
“Let’s say your credit isn’t looking its best — what helps? A steady job history reassures lenders that there’s a reliable income stream. Additional income sources from side gigs or rental properties help, too. And if you can point to recent efforts to get back on track financially by paying down debt or building up savings, that demonstrates improved money management.
If we’re talking credit scores below 500, you’ll likely need some heavy-duty reassurances to get approved. That could mean bobbing up your application with valuable collateral like property or bringing on a co-signer with great credit to share responsibility for the loan.
Ultimately, lenders want to see you have the means and commitment to make those payments. So documenting your financial stability with bank statements, asset info and income proof can go a long way to substantiate your case.”
How a Personal Loan Can Affect Your Credit Score
The process of getting a personal loan and paying it off can have a significant impact on your credit score. First, most lenders will allow you to prequalify for a loan with a soft credit pull, which does not affect your credit score.
Once you formally apply, a hard credit check will be performed by the lender which will affect your score. If you’re going to apply for a loan with numerous lenders to compare numbers, we suggest doing it within a short period as the credit bureaus (TransUnion, Experian and Equifax) will treat these similar inquiries as one instead of numerous.
Once you receive a personal loan, your credit score may temporarily dip, since you have added new debt. As you make on-time payments, however, your score will likely rise. Paying your bills on time is one of the best ways to raise your credit score. Conversely, if you miss payments, that will hurt your credit.
PrincipalInterest
Total Principal Paid$10,000
Total Interest Paid$2,166
Total Paid$12,166
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Other Types of Bad Credit Loans
An unsecured personal loan is just one type of bad credit loan. Below are other common types of bad credit loans. Unfortunately, bad credit loans can be predatory, meaning lenders charge you high fees and interest rates and lock you into a cycle of debt, where you’re unable to pay back your loan and continue to accrue interest charges. Think carefully before utilizing one of the following:
Cash Advances
Cash advances are cash loans you can take out from your credit card which are added into your total credit card balance, with higher interest rates than you normally pay. Your credit card will generally let you borrow up to a certain limit, and then require you to pay it off when you can. But in addition to a higher interest rate, you may also be charged a cash advance fee, which will drive your annual percentage rate (APR) even higher.
Car Title Loans
A car title loan is a short-term secured loan for a small amount of money, generally $5,000 or less. These loans generally have high fees and interest rates. Normally you have to pay your title loan back in 30 days or less, and you’ll need to surrender the title to a paid-off vehicle in order to qualify for the loan. If you don’t repay your loan as promised, the title loan company can take your car as payment.
Payday Loans
Payday loans are short-term, high-interest loans that you can usually get without a credit check to be paid back by your next paycheck. They’re usually for amounts less than $500. These loans charge very high fees and interest rates that, combined, can equal APRs of close to 400%, according to the Consumer Financial Protection Bureau. If you can’t pay back your original loan, your loan is often rolled over to a new loan, where you’re charged more interest and fees, multiplying the amount you owe.
Some credit unions, which are non-profit organizations, offer their members payday loans capped at interest rates of around 17%. If your credit union offers this type of loan, it will be a much cheaper option than a payday loan from a for-profit business.
Credit Builder Loan
Kendall Meade
Certified Financial Planner at SoFi
“A credit-builder loan is designed to help people who have little or no credit history build credit. With a credit-builder loan, the lender keeps the total loan amount while the borrower makes payments. Once all the payments have been made, the borrower receives the full loan amount. So in addition to helping build your credit, it can help build savings.
However, it is important to be aware that there are still fees and interest associated with these loans. It is also important to make sure that you can afford the monthly payments; you do not get your money back until it is paid off — and if you miss payments you risk losing the money you put down as collateral in addition to it hurting your credit.”
Alternatives to Bad Credit Loans
If you’re thinking about taking out a personal loan, you may want to consider these alternatives that might have a lesser impact on your finances and could be better suited to your needs.
| Source | Pros | Cons | Best For |
|---|---|---|---|
| Credit cards | Allow you the flexibility to just pay for what you need | The APR is usually higher than a personal loan | Borrowing lower amounts that you can pay back quickly |
| Home Equity Loan or HELOC | Lower rates because it is a secured loan | These use your home as collateral, so you risk foreclosure if you miss payments | Lower monthly payments that you’re sure you can make each month and if you don’t mind paying a higher total loan cost |
| Peer-to-Peer Lending | These work with private investors, so you might have a better chance of securing a loan with bad credit | These loans are less regulated than traditional loans, and the fees could be high | If you don’t mind paying higher fees in order to get matched with a lender |
| Borrowing from friends/family | Might be able to borrow the money without fees or interest | Possibility of ruining relationships if you don’t pay them back | When you’re in a pinch and have a close relationship with someone who could lend you funds |
How to Compare Bad Credit Lenders
The difference between choosing the right lender and the wrong lender can be hundreds or even thousands of dollars in total interest over the life of the loan. With so many lenders to choose from, it’s important to use the right criteria to pick the best loan for you.
Research Lenders
Research several potential lenders and pre-qualify with your top three picks to find out how much the loan will cost you. But look at more than just the annual percentage rate.You need to consider the total cost of the loan – APR, fees and repayment term. The APR affects your monthly payment. Origination fees affect how much money you’ll be able to borrow and the repayment term affects the total amount you’ll pay back for your loan.
Consider the Trade-Offs
What’s more important to you? A lower monthly payment or a lower total cost for your loan? Most bad credit lenders will charge you either a higher interest rate or higher fees. A lower interest rate may mean higher origination fees. Keep in mind that fees come directly out of the amount of your loan, decreasing the amount of money you receive. Interest rates are tacked on to your monthly payments, increasing the total cost of your loan.
Monthly payments
How much can you afford to comfortably repay each month? Make sure you can make the monthly payments before committing to a loan. A longer repayment term usually means lower payments, but a higher total cost of the loan.
Questions to Ask Before Applying
Some questions to consider before selecting a lender include the following:
- Can I get prequalified without a hard credit check?
- What are the available repayment terms?
- Can I choose my own loan term?
- What is the maximum loan amount?
- What is the APR?
- Are there any origination fees or prepayment penalties?
- Am I eligible for any discounts?
- Are there limits on what I can use the funds for?
- Are there special benefits like a forbearance program or lower payments if I’m having trouble making payments?
- Is it easy to speak with a customer service representative?
How To Boost Your Loan Approval Odds
If you have a poor credit score of below 580, you will probably find it hard to secure a personal loan. There are options, but the rates and fees might be higher than you would prefer. There are ways to boost your odds, however, but they will take time.
- Lower your debt-to-income (DTI) ratio: Your DTI measures the amount of monthly income you have to the amount of debt payments each month. Most lenders would prefer this number to be at 35%, although some go as high as 43%. The less debt you have at the time of applying for a loan, the better your chances will be of approval.
- Raise your credit score: If you know you have a low credit score, take steps to improve that number before applying. Make sure to pay your bills on time, as that has a huge influence on your score. If you don’t know your score, you can check your credit report for free once a year at annualcreditreport.com. Look over your report and fix any mistakes.
- Add a co-signer: Adding someone who has a higher credit score to your loan can help reduce your rates. Some lenders don’t allow a co-signer, so make sure your preferred lender does before taking this step. Note that your co-signer would be responsible for the loan if the primary borrower fails to do so. That lowers the risk for the lender, and therefore your rates.
Frequently Asked Questions About Loans for Bad Credit
While you may qualify for a personal loan with a 500 credit score, you’ll likely have to pay a high interest rate. Also, you may only be eligible with lenders that have high origination and application fees.
Each lender has its own credit scoring and income criteria, making it tough to factually identify which loan or lender will be the easiest to qualify for. There are plenty of loans available for people with bad credit, but consider speaking with a financial adviser before making a final decision.
The best thing you can do is improve your credit score as much as possible before completing the loan application. Go through your credit report and look for any mistakes that can be removed. Most negative events only stay on your credit report for seven to 10 years, so double-check to see if you can remove any of those. You may obtain one free credit report per year from AnnualCreditReport.com.
Secured loans are generally easier to qualify for than unsecured loans. Because secured loans are backed by collateral, the lender has more assurance that they’ll recoup any losses in case you default. Keep in mind that you could lose your collateral if you default on a secured loan if opting to take that route.
Methodology: Our System for Ranking the Best Personal Loans
Our team put together a comprehensive 100-point rating system to evaluate personal loan companies. We gathered data points from 28 of the most prominent lenders in the US and analyzed disclosures, licensing documents, sample loan agreements, marketing materials and websites. Our rating system takes into account four broad categories.
- Affordability (35%): How expensive each company’s loans are to pay back.
- Loan features (35%): The breadth of loan terms and features available to prospective customers.
- Customer experience (20%): Ease of application, prequalification and customer service interactions.
- Company reputation (10%): An exploration of lenders’ Better Business Bureau files, customer reviews and outstanding regulatory actions.
Our top-rated lenders may not be the best fit for all borrowers. To learn more, read our full personal loans methodology.
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