Are you in a bind and in need of a personal loan? A personal loan can be a great way to cover unexpected expenses, pay off high-interest credit card debt, and more. Personal loans, however, can be challenging to get for those with poor credit. Here, we discuss steps to take to get a personal loan, even if you have bad credit.
What does it mean to have “Bad Credit”?
Lenders use a person’s credit score to determine how likely they are to pay back a loan. The higher the credit score, the more likely a orrower will pay back the loan, and the more likely a lender will issue the loan. On the other hand, the lower the credit score, the less likely the borrower will pay back the loan, and the less likely a lender will issue one.
What constitutes “bad” or “poor” credit depends on the credit-scoring model a lender is looking at and varies from lender to lender. For example, FICO scores borrowers on a scale of 300 to 850 and considers scores under 579 to be “poor.” While the exact number may change from model to model and lender to lender, generally speaking, a score below 600 is considered bad or poor. If your credit score falls into that category, it will be more difficult to secure a personal loan (and on favorable terms), but it is not impossible.
What is a personal loan?
A personal loan is an installment loan issued by a bank, credit union, or online lender, that is paid back in monthly installments. These loans are either secured or unsecured.
Secured personal loans
With these loans, the amount borrowed is secured by one or more of your personal assets. The asset is collateral for the loan if you fail to make payments, meaning the lender can seize the asset. Typically, secured personal loans are used for car loans or mortgages. Because an asset secures the loan, these loans may be easier than unsecured loans for a borrower with bad credit to get.
Unsecured personal loans
Conversely, “unsecured” personal loans are not backed by any security or collateral. If a borrower fails to make a payment on the loan, there are no assets to seize. Because of this, unsecured loans may be more difficult for those with bad credit to obtain, since these loans are viewed as riskier for a lender.
Steps to take to obtain a personal loan when you have bad credit
Now that you understand what bad credit and personal loans are, it is time to discuss how a person with bad credit can still secure a personal loan. If this is you, here are a few steps you can take to get started on the right path.
1. Gather your personal financial information
First, gather all of your personal financial information to prepare to meet with potential lenders. This includes the following.
- Check your credit report – Make sure there are no errors on it and correct any errors you find. You do not want a mistake on your report to prevent you from getting a loan.
- Check your credit score – If you know your credit score ahead of time, you will be better prepared to know which lenders you can approach and the likelihood of qualifying for a loan.
- Gather financial details – Lenders will ask to see your income and debt levels, so gather information related to your income, expenses, and employment.
2. Decide how much money you want to borrow
Just because you can take out a personal loan, does not mean that you should. Determine how much money you need, and apply for a loan only for only that amount. If you do receive a loan with bad credit, it will likely have a high interest rate, so you do not want to pay high interest rates on money that you do not actually need.
3. Reach out to banks and credit unions for quotes
Even with bad credit, you will likely have options for personal loans from a couple of different lenders. You should send your personal financial information (income, debt, credit score, etc.) to the lenders to see if you are prequalified for any loans.
Lenders will inform you whether you are prequalified and, if so, what the terms of the loan (estimated APR and amount) will likely be. While a prequalification will not guarantee a personal loan (you must still follow the formal application process), this is a good way to shop around for quotes.
4. Compare your offers and formally apply for a loan
Once you have, hopefully, received a couple of offers, compare them and determine which is the best for you at this time, based on the APR, loan amount, and loan term. The next step will be to formally apply for the loan following the lender’s application process.
5. If need be, improve your credit
Sometimes, those with bad credit (or no credit history) will have a difficult time securing a personal loan. If you have followed the steps above, and are unable to qualify for a personal loan, focus on improving your credit health. This way, you will be more likely to qualify for a loan in the future if needed.
Some factors that influence your credit score that you can work on improving include:
- On-Time payments – Make sure you pay all of your credit card payments on time. Any late payments you have made in the past will continue to affect your score, but you can improve it by making on-time payments going forward.
- Credit usage – Try to maintain a credit utilization of 30% or less.
- Recent credit – Do not open or apply for new credit accounts in a short time period or immediately before applying for a personal loan. This could make you appear risky to lenders.
Personal loans are available to those with bad credit, it just may take some extra work to find one
Instead of resorting to other forms of credit (such as payday loans, which have unfavorable terms for borrowers), those with bad credit can still qualify for a personal loan, so long as they put in the effort to organize their financial information, shop around among various lenders, and are willing to put in the time to improve their credit health if need be.
