Some people turn to personal loans when financial problems arise, but if you have bad credit, getting a loan can be difficult. If this is your case, you may be relieved to know that some lenders are willing to work with borrowers whose credit histories are less than perfect.
Here are some of the challenges and opportunities faced by borrowers asking, “How do I get a personal loan with bad credit?” “
[Read: Best Personal Loans.]
What is the minimum credit score for a personal loan?
Each lender has their own criteria, including risk tolerance, when establishing the minimum credit score for a personal loansays Rod Griffin, senior director of public education and advocacy for the Experian credit bureau.
“Usually, when you think of subprime borrowing, 680 is what we think is close to the first,” he says. “So you can’t qualify at this point. “
A score of around 700 should help you access a personal loan, “but probably not at the best rates,” says Griffin. “To qualify for the best conditions, you will generally need scores of 750 or higher.”
Lenders also look beyond your credit score to other factors that can affect your ability to repay a loan, Griffin says, including your:
Overall, a lender wants to assess how well you are paying back the money you borrow before giving you a personal loan.
“If you have a history of defaulting on debt – things like lots of late payments or collection accounts – that’s going to make it more difficult,” he says.
What is the best loan for bad credit?
If you have a low credit score but are still hoping to secure a personal loan, be aware that many lenders specialize in helping borrowers with bad credit. You can start by exploring the US News guide best lenders for bad credit.
But before you apply for a personal loan, ask yourself if it’s really in your best interest, says Todd Christensen, education manager at Money Fit by DRS Inc., a national nonprofit credit counseling agency. The best loan for bad credit could be no loan at all.
“If you take out a personal loan with bad credit, you probably have accounts in collection or with payments you’ve already missed,” says Christensen. “Using one loan to pay off another is not a debt reduction plan. It is debt shuffling.”
Instead, try to get to the root of your debt and credit problems before you borrow, he says. “If you have bad credit, adding another loan is like fueling the bad credit fire,” says Christensen.
As a general rule, people with poor credit should consider other options before considering a personal loan, agrees Lauren Anastasio, Certified Financial Planner at SoFi.
“If you have bad credit, a personal loan – assuming you qualify for it – could cost a lot more than other types of financing,” she says.
[Read: Best Debt Consolidation Loans.]
How To Get A Good Loan If You Have Bad Credit?
Get an unsecured personal loan with good terms when you have bad credit can be difficult but not impossible. If you need a personal loan and your credit is weak, you should:
Look at bad credit lenders. “For better or for worse, there are lenders across the country willing to offer personal loans to consumers with poor credit scores,” Christensen said.
Improve your financial health. Work on breaking bad credit habits to increase, or at least maintain, your credit score.
“Lenders find it boring to be super sexy: paying on time, every time, not having huge balances in your balances, keeping balances low,” Griffin says. “Slow and steady is very attractive. “
Show that you have a constant source of income. If your financial situation has recently improved and you are awaiting your credit Goal to catch up, try showing lenders that you are in a good position to borrow.
“If a personal loan is your best option, the best thing you can do is provide proof of consistent and reliable income,” says Anastasio. “A reliable income stream gives the lender the peace of mind that you will have the resources available to make your payments.”
Accept a shorter loan term. By choosing a shorter repayment period, you may get a better rate. “As a general rule, the shorter the repayment period, the lower your interest rate,” says Anastasio.
Expect lower interest rates on personal loans with repayment terms of two to three years and higher rates on loans of five or seven years, she says.
5 alternatives if your request is refused
Just because a lender has declined your application doesn’t mean you can’t get a personal loan, says Anastasio. Here is what you can do:
Talk to the lender who rejected your request. Another arrangement might still work for the lender. “Start by talking with the lender and see if they would approve you for a different loan amount or term,” says Anastasio.
Look at other lenders. Try to find a lender who best suits your needs and circumstances. “You can still shop,” says Anastasio. “The underwriting criteria will vary from one financial institution to another.
Consider borrowing on your 401 (k). This option doesn’t involve a credit check and should cost less than a bank loan, she says. “But there could be tax implications if you leave your employer before paying off the balance,” adds Anastasio.
Ask family members and others for help. Check local nonprofits for special purpose loans or peer-to-peer lenders such as Prosper. Seeking help from small banks and credit unions is another alternative, although a bad credit score can limit your options.
Try to avoid the worst alternatives. Some people with poor credit may want to consider payday and title loans. But both types of loans are expensive and can charge APRs of 300% or more, as well as renewal fees if you extend the due date, according to the Federal Trade Commission. You could also lose your vehicle if you can’t pay off a title loan even if you make partial payments.
[READ: Best Bad Credit Loans. ]
How to increase your credit score
Most methods of increasing your credit score take time. Here is what you can do:
Beware of late payments. Late payments are by far the number one cause of credit score degradation, Griffin says. “If you have late payments, you need to catch up on those payments as soon as you can,” he says.
Reduce your credit card balances. A top credit utilization rate – the percentage of total available credit you use – is the second reason people see their credit scores go down, Griffin says.
Lower this ratio By paying off your debts and resisting new follies, you can improve your credit score. “At the start of the next billing cycle, you’ll likely see an improvement,” Griffin says.
Sign up for Experian Boost. This free program counts one-time payments from cell phones, utilities, or even Netflix in your credit score. Griffin says that 2 out of 3 people who sign up for Experian Boost see their scores increase instantly. Even if your score only increases a few points, it may be enough to improve your credit rating from fair to good. However, like the Experian website Remarks, “Some may not see improvement in scores or chances of approval. Not all lenders use credit information impacted by Experian Boost.”
Check your credit report for errors or fraudulent accounts. You can get free weekly access to each of your credit reports from the three national credit bureaus at AnnualCreditReport.com. If you spot anything on your credit report that is inaccurate or incomplete, the credit bureau and the company providing the information to that bureau should correct it free of charge. You will need to dispute the error separately with each credit bureau after its dispute process.
Continue to use your accounts. Lenders want to see that you manage credit responsibly. Load something on each card at least every two months, then pay it off, Griffin recommends.