- Poor credit usually means credit scores under 580.
- Poor credit loans can be risky and expensive.
- Shop carefully for poor credit loans and make sure you can pay them back.
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If you have poor credit, it may be difficult for you to qualify for a loan. The good news, however, is that obtaining poor credit loans is not impossible—even if you have a credit score between 620 and 659. By researching your options, you may be able to find a loan to help you fund an unexpected car repair, home improvement project, medical bill, or anything else that you can’t pay for with cash.
If you have poor credit, a loan may be less expensive than charging a credit card, but before you apply for one of these loans, it’s important to understand how they work and the risks that could come with them.
What are poor credit loans?
Poor credit or bad credit loans are specifically designed for borrowers with poor credit, which means they can be expensive. From a lender’s perspective, if you have poor credit then you probably don’t have a good track record of paying your debts. Therefore, it’s risky for them to lend money to you. To make up for this risk, they’ll charge you a higher interest rate, thus increasing the overall cost of your loan.
Lower interest rates and favorable loan terms are reserved for borrowers with good to excellent credit scores, since they’re considered less risky and more likely to pay back their loans.
Types of poor credit loans
These types of loans are available online through personal lenders or peer-to-peer lenders. You may also find them through a local bank or credit union. The two main types of loans are unsecured loans and secured loans. Here’s a brief overview:
|Unsecured loans||Secured loans|
|What are they?||Offer funds that are not secured by collateral like a house or car||Require collateral like a house or car to back them up|
|Pros||No need to put down collateral to borrow money A fixed repayment schedule, fixed interest rate, and fixed monthly Easy to shop around and compare unsecured loans online||Easier to qualify for than unsecured loans Lower interest rates than unsecured loans Could help you build your credit score over time|
|Cons||Some loans are very expensive and risky||Puts your collateral at risk if you default on your loan|
|Who are they best for?||Borrowers who do not want to put any of their assets at risk and are able to qualify for favorable terms||Borrowers who do not qualify for unsecured loans, have a valuable asset like a car or house, and want to build their credit|
How do you find poor credit loans?
You can find lenders that provide loans for individuals with bad credit online or in person. Whichever approach you take, you’ll need to review the details of the available offers and accept the one that best suits your needs.
To search online, begin by performing a simple keyword search. Be sure to compare the interest rates and terms of lenders before deciding on the right one for you. You can complete the online application process after you’ve determined the lender you’d like to go with, which typically only takes a few minutes to complete and will provide you with offers right away.
You can also start by visiting a local bank or credit union. Bring the necessary documents like tax returns, pay stubs, and list of assets so you can prove your credit-worthiness and increase your chances of getting approved.
Tips for getting a loan with poor credit
Even though these loans come with certain risks, they may still be one of the only options available to you. To increase your chances of qualifying, follow these tips.
Check your credit report
Before applying, you should check your credit report. You can visit AnnualCreditReport.com and obtain reports from the three major credit bureaus for free once a year. Then, search for any errors or inaccurate information that may be lowering your credit score. If you find them, be sure to file a dispute as soon as possible.
Try to increase your credit score
If you need the loan for a kitchen renovation, vacation, or another investment that can wait, focus on increasing your credit score first. You can do this by paying your bills on time, paying off debt, and keeping credit card balances low. It’s also a good idea to keep your credit utilization ratio (the amount of available credit you’re using) below 30 percent.
Apply with a co-signer
Applying for a loan with a co-signer can make it easier for you to get approved, although there are risks involved. If you don’t pay back your loan, your co-signer’s credit score will suffer and they’ll be on the hook to pay it back. You should only apply with a co-signer if you believe you’ll be able to make on time payments and will not default on your loan.
Join a credit union
Credit unions are often a great option for borrowers with poor credit. They’re similar to banks, but look at more than just your credit score when considering you for a loan. A credit union will look at your financial history but also takes other factors into consideration, such as your location, place of employment, and education history. If you’re looking for credit unions in your area, MyCreditUnion.gov is a great resource.
Do not borrow more than you need
If you need $1,000 to pay for a car repair, then take out a loan for exactly $1,000. It can be tempting to collect extra cash and spend it on something else you need or want, but this could set you up for higher monthly payments and lead to a more serious debt problem.
Compare all offers
Although it can be tempting to accept the loan that comes your way, doing so could be a costly mistake. Shop around and compare all of the offers available to you, paying attention to:
Loan repayment periods
You should also look at loan minimum and maximums as these vary from lender to lender as well. In addition, consider the lender’s reputation by checking out their profile on the Better Business Bureau and reading reviews online.
Think twice before taking out a payday loan
A payday loan is a short-term loan for a small amount of money (usually less than $500) that is typically due on your next payday. It’s best to avoid taking out payday loans if possible because payday loan lenders are known to charge incredibly high interest rates.
Risks of taking out a poor credit loan
While it is possible to take out a loan even if you have poor credit, know that doing so comes with some risks, including:
High interest rates
If you have poor credit, any lender will view you as a risky borrower. While interest rates vary from lender to lender, some lenders offer interest rates of almost 36 percent.
Higher monthly payments
Higher interest rates lead to higher monthly payments. This can be a real issue if you’re struggling financially and already having trouble keeping up with your other monthly expenses.
Fees and penalties
Do not sign on the dotted line until you read the fine print. There may be an origination fee, late fee, early repayment fee, and other fees or penalties that may end up costing you a great deal of money.
Taking out a loan could take a significant toll on your credit if you don’t make your monthly payments and default on your loan. If you aren’t confident you can pay back the loan in time, it’s better to find an alternative.
Unfortunately, there are many predatory lenders that market to borrowers with poor credit. Look elsewhere if a lender:
Guarantees you’ll be approved
Is not registered in your state
Pressures you to act immediately
Requires an upfront payment
If a lender is legitimate, they should be associated with a bank and registered with a major credit bureau like Experian. Additionally, you may check to see if they have positive reviews on websites like ConsumerAffairs.com.
Hard credit checks
Lenders may perform a hard credit check (where they review your credit report) as part of their loan decision-making process. You can expect every hard credit check to appear on your credit report and lower your score by a few points each.
To prevent hard credit checks from impacting your credit too much, only apply for credit when you need it and check your credit report regularly to make sure the hard credit inquiries on there are ones that you really did initiate.
Consider other options
Depending on your needs, there may be other options available. For example, if you’d like to take out a loan to consolidate debt, debt settlement may be a better alternative. If you have equity in your home, a cash-out refinance or home equity line of credit may make more sense. Consider all your debt relief options before committing to a personal loan.
Determine if heavy debt is the problem
If you’re looking at loans because of overwhelming debt, you may be a good candidate for bankruptcy. For example, Chapter 7 bankruptcy involves selling your assets to clear away your debts, while Chapter 13 restructures your debt and creates a repayment plan for three to five years.
Should you take out a loan if you have poor credit?
While you can find (and get approved for) certain poor credit loans, it’s important to understand the risks first. Do your research, compare all offers available to you, and consider alternatives to ensure you’re making a wise financial decision.
In addition, focus on improving your credit score so that you’ll be able to land loans with lower interest rates and more favorable terms down the road.
Loans are not your only option: learn how to get relief from your debts
If you’re struggling with debt or concerned about falling behind on payments, a loan is not your only option. Freedom Debt Relief can help you understand your options for dealing with your debt beyond additional loans, including our debt relief program. Our Certified Debt Consultants can help you find a solution that will put you on the path to a brighter financial future. Find out if you qualify right now.