Looking for a Loan with Bad Credit?

Despite a low credit score, it’s possible to find lenders willing to work with you. You’ll have to be your own advocate. Bad credit loans tend to be more expensive than those offered to borrowers with strong credit. And a lot of unscrupulous creditors target people with low scores. Having a low score doesn't mean you deserve to get ripped off. 

There’s a debt solution for you, even while you’re working on improving your credit standing. This guide outlines where to apply, steps to improve your chances of approval, and how to spot less-than-reputable lenders.

What Is a Bad Credit Loan?

Bad credit loans–also called poor credit loans–are personal loans available to borrowers with a low credit score. The exact score that counts as poor credit depends on the lender. 

How FICO Scores break down

FICO, one of the largest credit-scoring companies in the U.S., breaks down credit scores this way:

Bad credit differs from having no credit at all. A thin or nonexistent credit file means there isn't enough history for a lender to generate a score, which lenders evaluate differently than a low score.

Lending to someone with a low credit score is riskier for lenders, so they may offer smaller loan amounts and charge higher rates and fees.

Where Can You Find a Loan with Bad Credit?

• Home bank or credit union. Your bank may consider factors beyond your credit score, like your account history and how long you've banked with them. Credit unions, being member-owned, sometimes have more flexibility and lower interest rates than traditional lenders. Some federal credit unions also offer small, short-term Payday Alternative Loans (PALs) at rates well below typical payday loans.

• Traditional lender. These lenders are upfront about fees and the true cost of the loan, whether they operate online or in person.

• Payday lender or title loan. If you feel you have no other options, you may consider turning to a payday lender or title loan. However, these loan types can carry annual percentage rates (APRs) over 400%, making repayment difficult, if not impossible. The Consumer Financial Protection Bureau (CFPB) reports that the average payday loan is renewed eight times. 80% are rolled over into a new loan, and 20% end up in default.

I Need a Loan with Bad Credit: Steps to Take

• Boost your credit score by correcting errors. Check your credit report for errors and dispute any you find. This is important because a single error in your credit report could dramatically lower your score, depending on the type of error. Make sure all debts shown in your report are still active and that you haven’t already paid them off. Check the balances as well to ensure the report is accurate. Also, look for debts that may have been added to your report by mistake but belong to someone else.

• Decide how much to borrow. Borrow only what you need, as a smaller loan is easier to get approved for and cheaper overall.

• Shop around. Look for the loan that best fits your needs.

• Prequalify. A soft credit check may not affect your score, while a hard check (required for formal applications) could lower it by several points. If you’re unsure whether a lender uses a soft or hard credit check during prequalification, ask before you allow the lender to run your credit.

• Review the loan details. Once you prequalify, the lender will share the loan details, including the loan amount, rate, fees, and term (how long the loan will last). Confirm the payment fits your budget.

• Gather your documents. Typically, you’ll be asked for identification, Social Security number, pay stubs, employer contact information, and recent bank statements.

• Formally apply. Once you're confident that the payment fits in with your budget, it’s time to apply. While the hard credit check can drop your credit score by up to five points, consistent, on-time payments could help rebuild your score.

• Read the entire contract. Don’t sign anything before reading every line of the contract. Ask about anything unclear.

• Wait for funding. Funding times vary by lender, although some take no more than a few days.

How to Compare Bad Credit Loan Offers

• Compare APRs, not just interest rates. For personal loans, the APR reflects the loan's true cost, including fees, so it's the best way to compare offers.

• Ask about funding time. If you need cash quickly, learn how long it will take a particular lender to disperse the money.

• Review the fine details. No matter how many loan offers you receive, review each one carefully. For example, one may offer an autopay discount that could make the loan better for you. 

Is It a Good Idea to Get a Bad Credit Loan?

The reality is that bad credit loans are not worth taking out because they could make your financial situation worse, not better. While mainstream lenders work with borrowers with fair credit or better, bad credit loans are for borrowers who need tools to improve their financial situation. A new loan at a high interest rate could just add to your financial woes.

If you have high debt, a new loan may not fix the problem. It might be time to explore other ways to deal with the debt. For example, settling your debts could put you on a stronger financial footing and help you start building your savings. The debt settlement process could damage your credit. The damage could be less severe for someone who’s already starting at a low point.

How to Make Sure Your Bad Credit Loan Is Legitimate

If your situation requires you to get a bad credit loan, get quotes from multiple lenders, and ask yourself:

• Who are you borrowing from? Research unfamiliar lenders online, checking reviews on sites like TrustPilot and the Better Business Bureau. If you can’t find legitimate information about a lender, skip that one and move on to another.

• Do they check your credit? A lender that skips this step isn't looking out for you. Instead, they may be more interested in trapping you in high-interest debt than ensuring you can repay.

• Are there upfront costs? A flat application fee is normal, although not every lender charges one. However, be wary of percentage-based application fees before moving forward with a loan.

• Do they guarantee approval? No legitimate lender can promise approval without reviewing your application. If anyone can get the loan, that’s a sign of likely exploitation. High rates and fees, short repayment periods, balloon payments, and the like.

• Are they pressuring you? Scammers rush borrowers to prevent them from reading the fine print.

• Did you read the contract closely? Confirm the rates, fees, and what happens if you miss a payment.

Alternatives to Bad Credit Loans

It’s natural to consider a debt consolidation loan if you’re carrying a heavy load, but it may not be your best option. Consider these alternatives instead:

Debt settlement

Debt settlement involves negotiating with unsecured creditors to accept less than what you owe—the type of relief companies like Freedom Debt Relief offer. You deposit money into a dedicated account each month, and once enough has accumulated, the company negotiates with your creditors one at a time. Once they reach an agreement, you get to review and approve it before any payment is made. 

Creditors are often more willing to negotiate when your financial hardship is clear. Debt settlement could reduce what you owe and lower your monthly outflow compared to your current minimum payments. However, it may require you to stop payments, which could damage your credit. 

Credit counseling

Credit counseling agencies are usually nonprofits that work to help you build a budget and set up a debt management plan (DMP) to consolidate your unsecured debts into a single payment.

A DMP has pros and cons. An advantage is that the credit counselor may negotiate lower interest rates and fees on your accounts. A disadvantage is that you must give up your credit cards when you’re in the program. It’s important to know that DMPs don’t work for secured debts like car loans or mortgages, and your credit report typically shows that you’re on a negotiated repayment plan. In addition, there is no debt forgiveness, meaning you’ll repay your enrolled debts in full.

Bankruptcy

Bankruptcy is legal protection from your creditors. When you file for bankruptcy, a court analyzes your financial situation and determines your eligibility. The court may then liquidate (sell) some of your assets and give the proceeds to your creditors, or set up a repayment plan.

There are two main types of bankruptcy:

• Chapter 7: This is the most common form of bankruptcy, also known as liquidation bankruptcy. Chapter 7 allows you to walk away from unsecured debts. However, during the process, the court may sell some of what you own. Some assets are protected; the protected list varies by state.

• Chapter 13: If you can afford a monthly payment, you might not qualify for Chapter 7 bankruptcy. In that case, you’d file for Chapter 13 instead. With Chapter 13, you repay your debt over three to five years and get to keep your assets.

Bankruptcy may affect your credit score for seven to 10 years. If your credit is already damaged when you file, your score might not have far to fall. If you have good credit when you file, your score could drop sharply. The same is true if your accounts go into collections.