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. This option, however, might not be as easily accessible for those who 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 FICO, a score of 580 to 669 is considered “fair” 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 history. Having a credit score that’s 600 or below, or one that’s deemed “poor,” can make it harder to meet personal loan requirements, access competitive interest rates, and even get approved for a loan at all.
5 reliable ways to get bad credit loans
Although your personal loan options are fewer when you have less-than-ideal credit, you still have choices Here are a few ways to get loans for bad credit.
1. Opt for community banks or credit unions
Sticking close to home may be an option when it comes to bad credit loans. Community banks have a reputation for serving its local neighborhoods while offering competitive rates and low fees. Credit unions, which are member-owned nonprofits, are known for giving back profits to its members in the form of lower fees, a lower range of interest 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). Like its name suggests, it’s a loan that’s meant to be an alternative to costly payday loans.
These loans are available to members who’ve been with the credit union for at least one month. Borrowing amounts range from $200 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 small, short-term 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 fees and rates. Some online lenders also offer loans specifically for 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 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, an online lender 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, and can also offer more lending accessibility.
Although those with bad credit may be able to access a loan through these lenders, peer-to-peer lenders still have credit score 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 strong 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 a better interest rate.
By agreeing to be legally named as a secondary borrower on the loan, they’re accepting 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, your car, or a savings account or certificate of deposit.
Since you’re backing the loan with something of value, secured personal 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.
This 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.
What not to do 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 loans or cash advance loans, for example, let you borrow a few hundred dollars for a few weeks without a credit check. 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 cash 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.
Other loans for bad credit to be wary of are car title loans. These 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 Commision, 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 sky-high interest rates — that isn’t worthwhile.
Having a credit score that’s considered fair or poor can make getting a personal loan challenging. But despite the 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.