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How to Get a Personal Loan with Bad Credit

Chris Gottschalk

Chris Gottschalk About The Author

Jan 4, 2024 4:45:00 AM

In a perfect world, you wouldn’t have to worry about your credit score when applying for a personal loan. In reality, though, that’s not the case. Financial institutions can place a lot of emphasis on your credit score, and if you’ve had some financial difficulties, your chances of getting a personal loan can be pretty low.

Having said that, a bad credit score doesn’t automatically disqualify you from getting a personal loan. You can still get a loan even if you have a less-than-perfect credit score, but you need to know what steps to take, as well as who you can trust.

Here's how to get a personal loan with bad credit

Get a personal loan with bad credit

Understanding Bad Credit and its Challenges

If we're going to talk about getting a personal loan with bad credit, though, we need to understand why a bad credit score can be such a hurdle to getting approved for a loan. The short answer is that your credit score (also known as a FICO score) is based on the information in your credit report, and many lenders use it as a quick and dirty guide to determining your creditworthiness. Some events can lower your credit score, like:

  • Late payments
  • Foreclosures
  • Repossessions
  • Any bills in collections

What this means is that the lower your credit score gets, the higher risk you are considered to be. This makes sense--if you've had trouble paying off loans in the past, lenders might worry whether you'll pay off this loan as well. Even if they do offer you a loan, they'll try to mitigate that risk with a higher interest rate, a shorter term or just loaning you less money.

What is a bad credit score?

So what, exactly, is a bad credit score? To answer that question, you need to know that everyone's credit score falls between 300 and 850. If your credit score is at 850, you have impeccable credit, while a credit score of 300 means your credit is as bad as it can get.

If your credit score is at least 700, you have at least a good credit score, while lenders consider a credit score of above 750 to be great. Once your credit score dips below 700, though, is where the problems begin. That's when your credit score is only considered fair, and you'll have to deal with higher rates and a lower chance of being approved for a loan. If your credit score falls below 650 lenders consider it poor, and a credit score of 550 or lower is bad.

Common challenges in getting a personal loan with bad credit

As we mentioned before, lenders want to mitigate their risk to people with low credit scores. If you're trying to get a personal loan with bad credit, you might encounter these hurdles:

  • High Interest Rates: Lenders often charge higher interest rates to borrowers with a low credit score to offset the risk they pose.
  • Exorbitant Fees: Some lenders might impose steep origination fees or other charges on borrowers with bad credit.
  • Strict Repayment Terms: These loans might come with inflexible repayment plans that leave little room for any changes.
  • Loan Approval Difficulties: Getting approved for a loan with a poor credit score can be challenging, especially without providing a form of security or applying with a co-signer.

Is it possible to get a personal loan with bad credit?

Having said all that, it is possible to get a personal loan, even with bad credit. However, you need to be aware that you'll have more issues getting a loan than you would with a good credit score. You need to do your research, compare lenders and consider options like co-signers to increase your chances of success.

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How to Apply for a Personal Loan with Bad Credit

Even with a poor credit score, there are effective strategies that can boost your chances of securing a personal loan. These may include prequalifying for loan offers, considering a cosigner or co-borrower, or using collateral to secure the loan. Each of these strategies comes with its own considerations and potential benefits. Adopting the right strategy can help you navigate the lending application process more successfully, allowing you to gain access to the funds you need.

Pull your full credit report

Before you start applying for a personal loan, you need to know how you look to lenders. While you can look at your credit score for free if you're a First Alliance Credit Union member or by going to websites like Credit Karma, you'll also want to take a look at your full credit report to see what a lending advisor will see when you apply for a loan.

You can get a free copy of your credit report from all three of the credit reporting bureaus, Experian, Equifax and TransUnion, at AnnualCreditReport.com. Once you have your reports, you can go through them and see if all this information is accurate. It might be painful to revisit events you wish could have gone differently, but by confronting these issues now, you'll be able to talk to the lending advisor about why a bill went to collections, or why you fell behind on payments.

Pulling your credit report will also let you look for errors, such as:

  • A hard credit inquiry you didn't approve
  • An account marked delinquent that you paid off
  • A collections account you paid off that hasn't been closed

If you do spot any errors, you can reach out to the companies responsible in order to correct them and improve your credit score as a result.

Get pre-qualified for loan offers

Once you know where you stand credit-wise, you can start to see what offers are available by getting prequalified. During prequalification, lenders perform a soft credit check, which does not affect your credit scores. This allows you to check your eligibility and potential interest rates with multiple lenders without hurting your credit score.

Getting pre-qualified will also help you compare loan options from various lenders, including:

  • Loan requirements, like the minimum credit score you need to qualify
  • Loan details, including loan amounts, personal loan rates and repayment terms
  • Loan fees, such as an origination fee and an early payment fee
  • Additional helpful features like credit-building tools

Figure out how you'll pay the personal loan

As previously mentioned, lenders consider people with a lower credit score to be riskier bets. If you plan how you're going to pay off your loan, though, you can present the lending advisor with your strategy and show them you're serious about paying back what you borrowed.

First, calculate what your monthly payments will be using a loan repayment calculator. Once you have that amount, look through your monthly budget to see where you'll get the money. You might have some extra money that you can put toward your monthly installments, or you can take money from multiple accounts to make your loan payments.

Build up your credit score

While you're figuring out what the best personal loan you can get is and how you'll make the monthly payments, you can also work on rebuilding your credit score. The best, and easiest, way to do this is to make sure your bills are paid on time every month. Having a consistent payment history goes a long way toward showing credit bureaus that you're creditworthy.

Another way to improve your credit score is to make sure you're current with all expenses. If you're having difficulties paying off any bills, reach out to your creditors and let them know you're having some financial difficulties. They may be able to temporarily pause your payments to give you some breathing room, and they might also be able to restructure your debt.

Finally, throw as much money at your existing debts as possible. While you're paying off your debts, avoid putting any new charges on your credit cards to avoid getting deeper into debt.

If your credit score does rise as a result of this, you should point this out to the lending advisor with whom you're working. This will show them that you're serious about your finances, and you might even get better conditions for your personal loan.

Consider a cosigner or co-borrower

You can also improve your chances of getting approved for a personal loan by involving a cosigner or co-borrower. This is somebody who applies for the loan with you, promising to make repayments if you are unable to do so. This might include:

  • Providing reassurance to lenders: A co-signer with excellent credit can provide added assurance to lenders about the loan being repaid on time.
  • Increasing chances of approval: Having a co-signer or co-borrower often increases the chances of approval as it lowers the risk for the lender.
  • Possibility of better terms: The presence of a reliable co-signer might even earn you better loan terms, such as lower interest rates or more flexible repayment periods.

Getting a secured personal loan

Finally, see if any lenders offer a secured personal loan. Most personal loans are unsecured, meaning that you don't offer anything as collateral in order to get the loan. A secured loan, on the other hand, means that you're putting up something as collateral, typically the item you bought with the loan. Keep in mind, though, that many financial institutions only offer unsecured personal loans, so you might have to search a bit to find a place that offer secured personal loans.

Bad credit personal loan application

The Role of Credit Unions in Providing Personal Loans for Bad Credit

Credit unions, unlike traditional banks or online lenders, operate on a not-for-profit basis. This unique approach often allows them to offer financial products at lower rates and more flexible terms. For individuals with bad credit, credit unions can come as a breath of fresh air, providing opportunities for personal loans that may not be available elsewhere. They also offer more personalized service, taking into account factors other than just your credit score during the approval process.

Advantages of Credit Union Loans

Obtaining a loan from a credit union comes with several advantages for individuals with bad credit:

  • Lower Interest Rates: Since credit unions operate on a non-profit basis, they often offer lower interest rates compared to traditional banks or online lenders.
  • Flexible Loan Terms: Many credit unions tend to offer more favorable and flexible repayment terms to their members.
  • Personalized Service: Credit unions often focus on the personal element of banking, which could mean more personal attention and a willingness to work with you even with a low credit score.
  • Membership Benefits: As a member, you'll gain access to additional financial benefits beyond personal loans, such as savings and checking accounts, financial education resources, and more.

How to Join a Credit Union 

Joining a credit union is often a straightforward process. To become a member, you need to qualify under the credit union's membership criteria, usually based on your geographic location, employer, or association memberships. Most credit unions also require you to open a savings account with a minimum deposit as a prerequisite for membership. Ensure to verify these details on the credit union's website or by contacting them directly. The application process can often be completed online or in person at a branch. Upon acceptance, you'll be able to take advantage of the financial services offered to members, including personal loans.

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Alternatives to Personal Loans for Bad Credit

While personal loans can be an accessible option for individuals with bad credit, other alternatives might be more suitable or offer lower interest rates based on your specific circumstances. Home equity loans, debt consolidation programs, and assistance from non-profit organizations or government programs are all valid alternatives to consider. These alternatives can provide financial relief without the drawbacks associated with high-interest rates or stringent repayment terms commonly associated with personal loans for adverse credit.

Home Equity Loans or Lines of Credit

A home equity loan or a home equity line of credit (HELOC) involves borrowing against the equity in your home. If you've built up substantial home equity, these options can offer lower interest rates than other types of loans. However, there's a significant risk involved as your house is used as collateral. If you're unable to make payments, you could lose your home. It’s crucial to assess if a home equity loan or HELOC is feasible for your financial situation and risk tolerance before proceeding.

Assistance from Nonprofits or Government Programs

Some philanthropic organizations or government programs provide emergency financial aid, either in the form of a small, low-interest loan or a grant. They may also offer financial counseling to help you improve your financial situation in the long run. In cases of dire financial crises, this assistance can provide immediate relief and help you dodge high-interest loans or defaulting on existing debts. Ensure to thoroughly research any entity offering financial aid and ensure they are legitimate and ethical before accepting assistance.

Detecting and Avoiding Loan Scams targeting those with Bad Credit

Unfortunately, individuals with bad credit are sometimes targeted by dishonest entities looking to take advantage of their vulnerable financial situation. These predatory lenders may promise certain approvals without any credit checks, charge outrageous fees or interest rates, or trick borrowers into falling for scams. Being able to identify such lending scams and protect yourself from them can save you from financial distress and potential identity theft.

Red Flags to Lookout for

When dealing with lenders or loan offers, be vigilant for these common red flags:

  • Advance Fees: Legitimate lenders never ask for fees or payments upfront before a loan is approved.
  • Unsolicited Loan Offers: Be wary if you receive loan offers without applying or revealing interest in obtaining a loan.
  • Guaranteed Approvals: Real lenders never guarantee loan approval without conducting a thorough evaluation of your creditworthiness.
  • No Physical Address: Genuine lenders will have a registered physical address. If a lender is operating only online and doesn't have a verified physical address, it could be a sign of a scam.

Reporting and Protecting Yourself from Scams

If you think you've fallen victim to a loan scam, it's crucial to report the incident to law enforcement agencies and to file a complaint with the Federal Trade Commission. Make sure to share as many details as possible. Further, protect your personal information by not sharing it with unverified entities, being cautious when clicking on email links, and using safe and secure Wi-Fi networks when submitting financial information online. Regularly monitoring your credit reports can also help you to detect any fraudulent activities early.

Payday Loans

Payday loans are short-term loans that require you to repay the borrowed amount plus interest by your next payday. Though they don't usually require a credit check, these loans often come with extremely high interest rates. Even though these types of loans aren't illegal, almost everyone who gets a payday loan gets caught in a vicious cycle where they end up having to take out yet another payday loan in order to cover the amount they previously borrowed, plus the interest their loan accumulated.

Let First Alliance Credit Union Help you Get a Personal Loan with Bad Credit

While having a bad credit score might seem like a dead end, there are still avenues to explore when seeking financial aid. Whether it's through personal loans, home equity loans, debt consolidation programs, or nonprofit assistance, various options could fit your personal situation.

If you need help getting a personal loan and your credit score isn't as good as you'd like, talk to a lending advisor at First Alliance Credit Union. Our "no judgment, just guidance" lending practice is all about looking deeper at a loan applicant than just their credit score. Even if we can't approve you for a loan, we'll give you the guidance we need on how to improve your credit history to make sure you get a "Yes" the next time you apply.

We do our best to provide helpful information but we cannot guarantee the accuracy or completeness of the information presented in the article, under no circumstance does the information provided constitute legal advice. You are responsible for independently verifying the information if you intend to use it in any way. Additionally, the content is not intended to be reflective of First Alliance Credit Union’s products or services, for accurate and complete details about our product and service information you must speak to an advisor at First Alliance Credit Union.