If life’s thrown you a few curveballs and you find yourself left with a less-than-ideal credit score, know this: bad credit doesn’t have to mean the end of your borrowing opportunities. If you find yourself in need of a personal loan to address short-term emergency expenses, meet certain goals, or for debt consolidation, there are still avenues open to you. Here’s how to get a loan when you have bad credit.
Can you get a loan if you have bad credit?
A common question people with bad credit histories ask is whether it’s possible to get a loan with a low credit score. The answer is yes.
Bad credit means you have a spotty credit history or a low credit score. Credit scores are commonly calculated based on factors such as your payment history, the length of your credit history, how many new credit accounts you’ve opened lately, and the types of credit you use. If you have poor credit, it could be due to missed loan payments, defaults, high credit card balances, or bankruptcies in your past.
While traditional lenders may be hesitant to extend loans to individuals with bad credit, some specialized lenders cater specifically to these kinds of borrowers. These lenders are often referred to as “subprime” or “bad credit” lenders and will consider factors beyond credit score when evaluating loan applications. Some classic examples of subprime lenders include online lenders, credit unions, and peer-to-peer (P2P) lending platforms.
While there are legitimate subprime lenders out there, it’s important to watch out for unscrupulous operators. Borrowers with bad credit can be particularly vulnerable to scams and predatory lenders, who may take advantage of their desperation and charge higher interest rates and fees. Here are some common traps to steer clear of:
Payday loans: Payday loans may seem like a quick solution for immediate cash needs, but they often come with high interest rates and short repayment periods, trapping borrowers in a cycle of debt.
No credit-check loans: “No credit-check loans” may seem convenient on the surface, but they come with high interest rates and fees. Any lender who doesn’t perform a credit inquiry is likely taking advantage of your financial situation.
Paying for cosigners: Many lenders offer their best loan terms to borrowers with cosigners. However, if a lender asks for an upfront payment to secure a cosigner, run.
Advance fee scams: If you’re asked to pay origination fees or monthly payments before being granted a loan, it’s likely a scam. Legitimate lenders typically deduct fees from the loan amount itself rather than demanding them upfront
Pressure tactics: Scammers often try to pressure borrowers into making hasty decisions. Legitimate lenders will give you ample time to review and understand the loan terms before committing.
How to get a loan if you have bad credit
Pull your credit report
Before you begin the process of obtaining a loan, it’s important to have a clear understanding of where you stand. You can get free copies of your credit reports from the three major credit bureaus — Equifax, Experian, and TransUnion — via AnnualCreditReport.com.
Once you have your report, take a look at your credit score. A FICO score below 580 is considered low. Also keep an eye out for inaccuracies. Reporting errors can inadvertently lower your credit score. If you spot anything that seems incorrect, take swift action to dispute the error. It could boost your score.
Improve your credit score
Improving your credit score might seem like a long-term solution to your problem, but you might be surprised to discover that you can actually build credit in as little as a few months. Some tactics, like using Experian Boost or enlisting the help of rent-reporting services, can actually boost your credit score fairly immediately. If you can wait a while to take out your loan, here are some other, more traditional ways to do it:
Pay bills on time: The most important factor affecting your credit score is your payment history. Make sure to pay all your bills, including credit card payments, loans, and utilities, on time.
Reduce credit card balances: Keep your credit card balances low and aim to pay off your credit card debt and streamline it through a debt consolidation loan. High credit utilization can negatively impact your credit score, so try to use only a small percentage of your available credit.
Don't close old accounts: Closing old credit accounts can decrease your overall credit history and potentially lower your credit score range. Consider keeping those accounts open but inactive to maintain a longer credit history.
Limit new credit applications: Applying for multiple new credit accounts in a short period can raise red flags for lenders and lower your credit score. Only apply for new credit when necessary and spaced out over time.
Monitor your credit report: Regularly review your credit report for any errors or inaccuracies. If you find any, dispute them with the credit bureau to have them corrected. A clean and accurate credit report can positively impact your credit score.
Diversify your credit mix: Having a mix of different types of credit, such as credit cards, loans, and a mortgage, can help improve your credit score. This shows lenders that you can handle various forms of credit responsibly.
Become an authorized user: If someone you trust has a credit card with a long and positive history, they can add you as an authorized user. This allows you to piggyback off the account holder’s good credit history.
Remember, improving your credit score is a gradual process, and there are no quick fixes. Be proactive, establish excellent credit habits, and you'll see positive changes in your credit score over time.
Research alternative lenders
Some alternative lenders assess more than just credit score. Instead, they focus on an individual’s overall financial health, employment history, and repayment capability. Some of these lenders include:
Online lenders: Some online lenders provide loans specifically to borrowers with bad credit scores. Many online lenders offer a streamlined application process and quicker loan approval times.
Credit unions: Credit unions are not-for-profit financial institutions that may be more willing to work with individuals with bad credit. They offer lower interest rates compared to traditional banks.
Community Development Financial Institutions (CDFIs): CDFIs focus on underserved and economically disadvantaged communities. They offer a range of financial products, including personal loans, small business loans, auto loans, and housing loans.
Credit builder loans: Some financial institutions offer credit builder or bad credit loans designed to help borrowers establish or improve their credit. These loans are typically between $500 and $5,000.
Microlenders: Microlenders provide small-dollar loans to individuals and small businesses, particularly those with limited access to traditional financing.
Peer-to-peer lending: P2P lending platforms connect borrowers directly with individual investors willing to fund loans. These platforms may have more flexible lending criteria than traditional banks.
Online personal loan marketplaces: Online personal loan marketplaces, such as Navient Marketplace, use loan comparison tools to help borrowers compare various loan options. You can receive tailored loan offers that align with your specific needs and financial circumstances. Loan comparison tools also allow you to explore a range of lending options without triggering multiple hard inquiries, which can negatively impact your credit score.
Consider a secured loan
A secured loan is a lending arrangement where the borrower provides collateral in exchange for the loan. This collateral provides the lender with a form of repayment if the borrower defaults. Collateral can include real estate, vehicles, savings accounts, or other valuable assets. Home equity loans are just one example of secured loans.
Unsecured loans, including unsecured personal loans, typically require fair credit, if not good to excellent credit. Secured loans, on the other hand, don’t always have a minimum credit score requirement.
Shop smart
Before you commit to a bad credit loan, make sure to review the repayment terms. Understand what kind of late fees you’ll be charged if you file a late payment, and check to see if you’ll be charged prepayment penalties if you decide to get out of debt faster. Some lenders may offer special discounts, as well. Many of the best bad credit loans will provide an interest rate discount if you sign up for autopay, for example.
Find a cosigner
A cosigner is a creditworthy individual who agrees to take joint responsibility for a loan along with the primary borrower. This is typically a trusted family member, though it can also be a good friend. Unlike a co-borrower, the cosigner doesn’t receive an equal share of the loan. Instead, they promise the lender that they’ll help pay back the loan if the primary borrower becomes unable to. This extra layer of creditworthiness gives lenders more security, which means they may be able to offer you lower rates.
Get prequalified
Prequalification is a preliminary step in the loan application process that allows you to gauge your potential eligibility for a loan before formally applying. To get prequalified, you first provide some basic personal information to a lender. That lender then conducts a soft credit check and gives you an estimate of what loan amount you’ll qualify for.
It’s important to note that prequalification is not a guarantee of a loan approval. The actual approval process, which involves a more comprehensive review of your financial history and credit score, occurs when you submit a formal loan application.
Gather documentation
You’ll likely need to provide these main documents during the loan application:
Proof of identity: A government-issued photo ID and social security number
Proof of income: Recent pay stubs, tax returns, W-2 forms, or other proof of income
Bank statements: Recent bank account statements that show your transaction history
Proof of residence: Utility bills or a lease agreement to verify your current address
Collateral documents: Secured loans may require proof of the collateral being offered, such as property deeds, vehicle titles, or other ownership documents.
Debt information: A list of your current debts, outstanding loans, and credit card balances that will allow lenders to assess your debt-to-income ratio
Apply for the loan
When you’re ready to submit a formal application, contact your lender to begin the process. You'll be asked to provide information about your personal finances and employment details. Most online personal loan lenders offer fast online applications and will allow you to submit any documentation electronically. Many larger financial institutions, like banks, also allow you to go into a branch to submit a physical application.
In some cases, online lenders may approve a loan within one or two business days, while traditional lenders may have a longer processing window, often spanning a few weeks. Once you have your approval letter, be sure to carefully review the details of the loan agreement — including the loan term, annual percentage rate (APR), and any fees — before signing on the dotted line.
Compare loans with Navient Marketplace
Online loan marketplaces can help you compare various types of loans from different lenders and ultimately make a thoughtful, informed choice. If you’re looking for a personal loan, consider starting your search with Navient Marketplace1. To help you find the best personal loan rates, Navient collaborates with Fiona, a leading personal loan search tool. Explore your options and find personalized loan rates by visiting our marketplace today.
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