The trick to get a personal loan with bad credit isn’t to get one but to get a bad credit loan you can afford
I get emails constantly from readers asking how to get a personal loan with bad credit. They tell me their story of credit score disaster and how they’ve been turned down for credit cards and home loans. After explaining that it’s actually pretty easy to get a bad credit loan online but that doesn’t mean they should jump on the computer right away to borrow.
We’ll go over the steps to get a personal loan with bad credit but the reality is that the details are much more complicated. Be sure to follow the steps below, including those about how to boost your credit score to get a bad credit loan you can afford.
How are Personal Loans Different from other Loans?
Understand the difference between personal loans and other types of loans and you’ll have a better idea of the risks and tricks to get better rates. Personal loans are unsecured which means you don’t have to put up your house or car as collateral. If you stop making payments, the lender will send the loan to a collection agency like any other loan but won’t be able to get anything if you simply refuse to pay. That makes personal loans riskier than secured forms of credit so lenders are going to need a higher interest rate to get them to lend you the money.
Unlike credit cards and a home equity line of credit (HELOC), personal loans have a set payoff date, fixed payments and a fixed interest rate on the loan. This is all known as non-revolving credit and is similar to other loans like a mortgage or car loan. It’s actually an important difference because of what it means for your credit score. Paying off higher interest credit card debt with a non-revolving personal loan is one of the most common uses because it can boost your credit score by sending a signal to the credit rating agencies.
There are a lot of different types of loans, each serving a different purpose. Understanding the different types of loans and which is best for your need will help you get the best rates.
Steps to Get a Personal Loan with Bad Credit
We’ve covered how to get a personal loan in other posts but the process of applying and getting your money is only half the story. Getting a personal loan with bad credit means knowing which options are available and the tricks to get lower rates.
We’ll describe the process to get a personal loan with bad credit on the Avant Credit website but these steps will work with just about any online lender. I’ve used Avant before and like that they don’t charge an origination fee and accept borrowers with lower credit scores than other online loan sites.
Your first step is to decide the amount and length of loan you need. This is more important than you might think because it will change the interest rate on your personal loan. Personal loans are generally available up to $35,000 and for up to 60 months. Asking for a higher amount and to pay over a longer period will mean higher rates because it is riskier for the lender. Of course, the trade-off is that paying your loan off over a longer period will mean lower payments each month.
Only ask for what you need and preferably over a 36-month period if possible for the lowest rates on your bad credit loan.
Once you’ve decided on how much you need and how long you want to pay it off, you’ll fill out some basic information to pre-qualify for a loan. The whole process will take less than a few minutes but you’ll be able to see your interest rate before taking the loan. The personal loan lender will do a soft-inquiry on your credit just to verify information but it won’t put anything on your credit report so it won’t affect your score.
Before accepting your personal loan offer, make sure you work out your monthly budget to make sure you can meet the payments. Even though personal loans are unsecured, they can still destroy your credit if you default. Make the regular payments and payoff the loan and you’ll boost your credit score, getting lower rates in on future loans.
While Avant is the preferred choice to get a personal loan with bad credit, there are other sites that may be better for people with a higher credit score. Avant will loan to borrowers with a credit score of 580 and even lower in some cases. You may be able to get better rates on peer lenders like Lending Club but you’ll need a credit score of 660 FICO or higher.
I’ve taken out a loan on Avant and like it for its lack of origination fee, usually 5% of your loan on other personal loan sites. The site will allow you to refinance your loan to get a better rate after your credit score has improved. No origination fee means refinancing your loan doesn’t cost anything extra. This is another personal loan hack most people don't take advantage of to save on interest. Consolidating your debt with a three-year loan will start to boost your credit score after a few months of regular payments. You can then refinance the money you still owe on another loan after a year at a lower rate.
Even if you decide to go with Avant, check out this list of the best bad credit personal loan sites for your money need.
Tricks to Get a Cheap Loan even with Bad Credit
Besides the process above to get a personal loan with bad credit, there are a few tricks you might try to get a better rate. The three tricks below are all part of our credit score hacks for cheap loans in another post. All three will help boost your credit score within a couple of months to get a better rate on your personal loan.
- Increase your credit limit. Calling the credit card company to increase your limit isn’t about getting more money to spend, it’s about making your credit look better. If you’re nearly maxed out on your cards, it looks like you’re over-extended on your bills and you’ll get a lower credit score for it. Getting a higher limit will make it look like you are in better financial shape.
- You want to check out your credit report for any errors or bad remarks. Getting errors taken off your credit report by contacting the three credit bureaus is the obvious answer but you can also get legit remarks off your report. If there’s just one or two missed payments or bad remarks, argue that you don’t remember missing the payment and that it may be an error. There’s a good chance the creditor company won’t respond to the credit bureau investigation and it will get taken off your report.
- If you’ve got any debts sent to a collection agency, negotiate with them to pay it off at a discount. It’s time of some tough negotiation tactics but you can usually settle for less than 85% of what you owe. Demand that the agency agrees to contact the credit bureaus and mark the debt as paid-in-full as part of the settlement.
Credit scores are normally divided into three or four levels to determine your whether you can get a loan. A credit score below 640 is generally considered subprime or bad credit and it will be difficult to get a loan. Other factors besides your credit score come into question when a lender decides your credit risk. I’ve attached a pdf document here describing subprime loans and research by the Federal Reserve Bank of St. Louis.
Having bad credit doesn’t mean you can’t get a loan. The biggest problem is getting a loan you can afford and getting back on track with your finances. Follow these steps to get a personal loan with bad credit and work on improving your credit score for the future.