Bad credit: what you need to know
What is a bad credit personal loan?
A bad credit loan is a fixed rate loan for borrowers with low credit scores. Those personal loans are not backed by guarantees. Instead, lenders consider your credit rating, credit report, and debt-to-income ratio.
Having a bad credit score (300-629 on the FICO scale) doesn’t automatically exclude you from getting a personal loan, but it does reduce your chances of getting approved. If you qualify, you could get an interest rate in the upper range of a lender.
Bad loans are often repaid in monthly installments, usually over one to five years. You can use the funds for almost any purpose, whether you need to cover a large expense or consolidate your debt.
Best Loan Companies For Bad Credit
Bad credit lenders each have something different to offer borrowers. These lenders report loan payments to the credit bureaus, so your loan payments on time can help you build your credit.
To improve: Ideal for bad debt consolidation loans.
Reached: Ideal for borrowers with limited credit history.
Before : Ideal for bad credit loans with flexible payments.
Loan Club: Ideal for bad credit credit card consolidation loans.
A principal: Ideal for secured and co-signed bad credit loans.
Universal credit: Ideal for bad loans with credit building tools.
Occasion : Ideal for small credit loans.
Bad credit rate
Personal loans can have high rates for borrowers with low credit scores. Borrowers with bad credit can expect an annual percentage rate in their twenties or thirties. Some lenders may take into account why you are using the funds and how much you are asking for when calculating your rate.
Personal loan interest rate by credit score
28.7% (lower scores are unlikely to qualify).
Source: Average rates are based on aggregated and anonymized supply data from users who prequalified in the NerdWallet lender market between January 1, 2020 and December 31, 2020. Rates are estimates only and are not specific to any lender.
How To Compare Loans For Bad Credit
Many bad credit lenders take your credit score into account, but compare it to other factors such as your monthly cash flow, income stability, employment history, and other debts.
If a lender has a minimum credit score requirement, you will need at least that score – ideally a higher score – to borrow from them.
Bad credit loans usually have high interest rates compared to good credit loans, but you should always shop around to find the most affordable loan. There are two important ways to measure the cost of a loan:
Annual percentage rate: A loan annual percentage rate is similar to its interest rate, but it also includes any fees that a lender may charge, such as a creation or prepayment charges. Most financial experts agree that affordable loans should have an APR below 36%.
Monthly installments: Measure the monthly loan payment against your budget to see if you can afford it. You can use a personal loan calculator to see your monthly payments on a personal loan regardless of the rate and the duration. Many lenders also show you this information when you pre-qualify. If the monthly loan payments are exceeding your budget, consider cheaper alternatives first.
Most personal loans have terms of between two and seven years. Many bad credit lenders allow you to choose a repayment term of three or five years. A longer term will have lower monthly payments, but will cost more in overall interest.
A bad credit loan can be funded the same day you apply or it can take up to a week. During the approval process, a lender may ask you for more documents, like W-2s and pay stubs. In this case, the duration of the financing of your loan is also your responsibility.
When comparing offers, finance time shouldn’t trump affordability, but this information can help you decide between similar offers.
Credit building tools
If you have bad credit, consider choosing a lender who will help you understand and build your credit. Some lenders will share your FICO score with you for free and provide financial education to help you find ways to build credit.
How to get a personal loan with bad credit
Some online lenders cater specifically to people with bad credit. Consider these steps to get a loan with bad credit:
Check your credit report: Before applying for a personal loan, check your credit report and correct any errors that could affect your score. Increasing your credit by several points can not only increase your chances of qualifying, but you also get a lower interest rate. NerdWallet offers free access to your TransUnion Credit Report. You can also get a free report from each of the big three credit bureaus (the other two are Experian and Equifax) from AnnualCreditReport.com.
Review your budget: It helps to know your monthly budget when you are about to get a personal loan – this way you will know how much you can afford in monthly payments.
Pre-qualify online: Prequalification allows you to see potential loan rate, amount, and repayment term offers from multiple lenders online. The process involves a smooth credit check, which doesn’t impact your score.
Consider a co-signed or guaranteed loan: Adding a co-signer or collateral, such as a vehicle, to the loan application can improve your chances of qualifying or get you a lower rate. If you cannot pay a co-signed loan, your co-signer will have to pay the funds. With a secured loan, the lender can take your collateral.
Gather your documents: Most lenders will ask you for your Social Security number, but some may ask for proof of employment or income. Gather things like tax documents, pay stubs, and W-2 forms before you apply to speed up the process.
Submit an application: Applying for a loan can take anywhere from a business day to a week, and the process triggers a serious credit investigation. This may temporarily hurt your credit score, but it should rebound over time as you make on-time payments on the personal loan.
Secured credits and unsecured loans
Credit standards are generally higher for unsecured loans than for secured loans, so it may be easier to qualify for a secured loan if you have bad credit.
With an unsecured loan, the lender only uses information about you, such as your credit profile and income, to decide whether or not to lend you. But when you add collateral to a claim, the risk to the lender tends to be lower – something valuable to take if you don’t make the loan repayments.
Banks and credit unions that offer secured loans may allow you to use an account, such as a CD account or investment account, to secure the loan. Online lenders more often than not allow you to secure the loan with a vehicle.
While adding collateral to the loan can help you qualify or get a better rate, a lender can take the collateral if you don’t pay it back. Weigh the importance of getting the loan against the risk of losing your collateral.
How to manage your personal loan
Update your budget: Follow a budget which divides your income into needs, wants, savings and debt to ensure timely monthly payments for your personal loan.
Configure automatic payment: Setting up automatic payments ensures you’ll make them on time. Over time, this will help improve your credit score. Some lenders offer rate reductions to customers who use automatic payment.
Keep in touch with the lender: If you lose your job or face an unexpected expense and think you might be falling behind on your payments, contact the lender immediately to find a solution. Some lenders offer hardship programs or temporarily go defer your payments and waive late fees until you get back on your feet.