A personal loan can be a useful tool if you want to consolidate credit card debt or if you need to fund a necessary purchase. You might wonder, however, how to get a loan if you have a poor credit history.
If you need to borrow money but aren’t sure if your credit measures up, keep reading to learn more about your options for bad credit loans.
What does a bad credit score mean when you need a personal loan?
There are many different credit scoring models, each of which may have different score ranges. This can make it difficult to know what’s considered a “bad” credit score.
One commonly used credit scoring model is the FICO score, which ranges from 300 to 850. According to the credit bureau, a "fair" credit score is between 580 to 669,” while a score of 579 and lower is deemed “poor.” On the other hand, the VantageScore, another popular scoring model, ranges also ranges from 300 to 850. A “fair” score is from 601 to 660, while a “poor” credit score is from 500 to 600.
Lenders use your credit score to evaluate your creditworthiness, specifically, the likelihood you’ll be able to repay the loan, based on your past borrowing and payment history, your credit utilization rate, and your debt-to-income ratio.
Having a credit score that’s 600 or below, or one that’s deemed “poor,” can make it harder to meet personal loan requirements, qualify for competitive APRs (annual percentage rate), and even get loan approvals at all.
7 reliable ways to get bad credit loans
Although your personal loan options are fewer when you have a low credit score, you still have choices. Here are a few ways to get some of the best personal loans for bad credit.
1. Opt for community banks or credit unions
Sticking close to home may be an option for bad credit loans. Community banks have a reputation for serving their local neighborhoods while offering competitive rates and low fees. Credit unions, which are member-owned nonprofits, are known for giving back profits to their members through lower origination fees and late fees, a lower range of loan rates, and a wider option of services.
One service, in particular, is especially helpful when it comes to bad credit loans. Federal credit unions offer Payday Alternative Loans (PALs). As its name suggests, it’s a loan that’s meant to be an alternative to high interest rate payday loans.
These loans are available to members who’ve been with the credit union for at least one month. Minimum loan amounts range from $200 up to $1,000, with a repayment term of one to six months. Within a six-month period, you may apply for a maximum of three PALs as long as they don’t overlap.
These loans for bad credit can be a helpful option if you’re in need of a short-term small loan. An added benefit is that loan fees are capped at $20, which can make this a viable borrowing method compared to other pricey alternatives.
To find a federal credit union in your area, check out the National Credit Union Administration.
2. Look to online lenders
There are many benefits to working with online lenders. You get the convenience of applying for a loan from the comfort of your home, as well as low-cost application fees and rates. Some online lenders also have loan offerings with a lower minimum credit score requirement specifically for those with bad credit.
Avant is an online lender that offers personal loans to those who don’t have the strongest credit. In fact, it states that most of its qualifying loan borrowers have a score of 600 to 700.
If you need the kind of person-to-person service that a traditional brick-and-mortar offers, however, getting an online personal loan might not be the right fit for you.
3. Consider peer-to-peer lenders
Unlike going through a bank — that’s essentially a middleman — for a loan, peer-to-peer lending allows individual investors to lend money directly to a borrower. Typically, peer-to-peer lending occurs through online platforms such as Upstart and LendingClub. It provides the convenience of applying for a loan and obtaining funds digitally to your bank account and can offer more lending accessibility.
Although those with bad credit may be able to access an unsecured personal loan through these lenders, peer-to-peer lenders still have credit score eligibility requirements for loans. For example, Upstart won’t accept your application if you have an insufficient credit history. Again, this method does require a certain comfort level with technology and doesn’t offer the hands-on approach you might find at a traditional bank.
4. Use a cosigner
Seeking the leverage of a cosigner may help you get a personal loan if you have poor credit. A cosigner is someone who ideally has good credit and agrees to be added to your loan application. This person may help you get approved for the loan and may even help you get better loan terms and lower interest rates.
By agreeing to be legally named as a secondary borrower on the loan, they accept responsibility for repaying the debt if you miss a payment or default. Traditional banks such as Wells Fargo typically let you apply for a personal loan with a co-applicant, as do some online lenders.
5. Research secured personal loans
Secured personal loans require collateral to guarantee the loan. If you were to default on the loan, the lender would claim the collateral you put forward as payment. Common forms of collateral include your home’s equity, car, savings account, or certificate of deposit.
Since you’re backing the loan with something of value, secured loans may offer more competitive interest rates and can be more accessible to those with bad credit. You can often find this type of debt at conventional banks, local banks, and credit unions.
The biggest risk when it comes to secured personal loans for bad credit is losing your collateral. Before moving forward, make sure you can withstand the loss of your collateral if the worst-case scenario, like an unexpected job loss, were to happen.
6. Use your home equity for a line of credit
After the housing bubble, many homeowners owed more on their homes than it was worth. However, if you have equity in your property, you might still qualify to get a low-interest, tax-deductible line of credit to spend any way you’d like. This option does come with a caveat, though; by tapping your home equity, your property could be in jeopardy if you don’t repay the loan.
Not to worry, though, if you have a reliable annual income, are disciplined about paying down the debt, and know how to manage your money, this is definitely a great option to consider.
7. Consider a loan from family or friends
If an online peer won’t lend to you, you might have better luck asking a friend or family member to grant you a loan. If you do go this route, it's highly recommended that you treat the loan as a legitimate business transaction that is legally binding, just as you would with a normal lender. That way, there's less chance of tarnishing the relationship over a financial situation.
Both parties should also write a letter of agreement that states the terms of the loan: the amount, interest rate, repayment period, monthly payments, what happens if you make late payments or if the loan cannot be repaid, and so on. Websites like LegalZoom have documents specifically for this type of loan.
What to avoid when you need a bad credit personal loan
When you don’t have strong credit and are faced with limited options, turning to less reputable lenders that don’t require a credit check can be tempting.
Payday or cash advance loans
Payday loans or cash advance loans, for example, let you borrow a few hundred dollars for a few weeks without a credit inquiry or a thorough application process. Just visit your local payday loan dealer, show proof of income, write a post-dated check for the loan amount (plus interest and fees), and you’ll receive your loan funds in hand.
Despite the ease of this option, it comes at a steep cost. According to the Consumer Financial Protection Bureau, the APR on a typical two-week payday loan can be almost 400% — significantly more costly than the alternatives noted above.
Car title loans
Other loans for bad credit to be wary of are car title loans. These auto loans often tout a no credit check application but require that you provide your car’s title or pink slip as collateral. According to the Federal Trade Commission, this type of loan often offers an amount that’s 25% to 50% of your car’s value. And just like the dangers of payday loans, car title loan lenders charge interest in the triple digits.
If you’re unable to repay the loan, the lender can repossess your car if you default. Not only are you now left without a car, but may have lost your only reliable transportation to and from work.
These bad credit loans may seem like harmless alternatives. However, you’re likely putting an exorbitant amount of money upfront — whether in the form of valuable collateral or much higher interest rates — that isn’t worthwhile.
Bottom line on getting a loan with bad credit
Having a credit score that’s considered fair or poor can make getting a personal loan challenging. But despite the scams and predatory loans vying for your attention, know that you have a handful of legitimate loan options to explore if you’re in need of a temporary boost.
If none of these options work for you, it’s probably a better idea to focus heavily on raising your credit score before trying to secure a loan. You can check your credit score as often as you want with a site like Credit Karma without impacting your credit report.
If you absolutely need the funds, consider signing up for a secured credit card to help build your credit quickly and get a line of open credit now.