How to Get a Personal Loan When You Have Bad Credit

Your credit score is used to determine what loans you can receive and for how much. Because of this, it can be difficult to get a loan if your credit score is poor. Most financial institutions use your credit score to determine your creditworthiness (how likely you are to pay a loan back), so having a poor credit score can leave lenders unsure of whether you will be a trustworthy client.

Your credit score is also one of the most important aspects of your financial health. That said, many people simply don’t know their credit scores. According to the New York Post, 1 in 8 Americans doesn’t know what their credit score is.

It’s very easy to damage your score if you aren’t keeping track of your credit. Simple mistakes like not making payments on time, using too much of your credit limit, and having multiple sources of debt can all have a negative impact on your credit score.

Fortunately, it’s possible to receive a loan even if you have bad credit. In order to be approved for a loan, you have to prove that you will be able to pay it back; this can be done even with a less-than-perfect credit score.

Here, we’ll give you some tips on how to get a loan with “bad” credit. But first, let’s go over what exactly “bad” credit is.

What does “bad credit” mean?

Every person that has used any kind of credit has a credit score and a credit report, which shows how they’ve handled their credit in the past. The credit score most commonly used by lenders is the one created by the Fair Isaac Corporation, otherwise known as the FICO score. FICO scores range from 300 to 850, with the range being classified as follows:

  • 300 to 580: Poor
  • 580 to 669: Fair
  • 670 to 739: Good
  • 740 to 799: Very good
  • ~800: Exceptional

Regardless of your score, bad credit is what any given lender decides it is. What one lender considers a “good” credit profile could be viewed as “bad” by another. Most lenders will consider someone with a FICO score of 680 and above to have reasonably good credit. But it depends on a variety of factors. Some lenders deem credit “bad” even with a good score, for example, if you have a bankruptcy or are unemployed.

Having bad credit shows lenders that you have had trouble with credit in the past. This can mean anything from missing payments to borrowing beyond your means. You can also have a low credit score if you lack credit, meaning that you’ve not borrowed before; if you haven’t used credit, lenders have no way to see if you are able to handle the use of credit. Having a low credit score makes you a risky borrower to lenders. When lenders determine that you are less creditworthy, they are less likely to approve you for loans. The most important thing to lenders is that you’ll be able to pay them back in a timely fashion, and having bad credit makes them wary of your ability to do so.

What makes credit “bad”?

Not everyone has a high enough income to live comfortably without having to borrow money. This is why so many people rely on credit to get by.

Credit cards use something called revolving credit. This allows you to continually repay the credit you have used and restore your available credit to its original limit. Because of this, it is very easy for people to continue to use their credit without paying off enough to keep them in good standing.

This leads to bad spending habits, forcing borrowers to rely too heavily on their credit. When people depend too heavily on credit, they often begin to use their credit poorly or use it too often, leading to lower credit scores—and, ultimately, bad credit.

There are many factors that can negatively affect your credit. One of the biggest is choosing a credit card that isn’t right for you. There are many different kinds of credit cards on the market, all with different credit limits, interest rates, and fees. But having a card that you can’t afford can lower your score.

Another factor that can harm your credit is not being able to keep up your end of the agreement. When you apply for credit, you’re making an agreement to pay it back. When you fail to make the required payments each month, you lower your score. Making only minimum payments while continuing to use your credit can also hurt your score. Finally, paying less than what you’ve used every month or continuously maxing out your card shows that you aren’t budgeting your credit well, both of which will lower your credit score.

How bad credit affects your chances of getting a loan

Most lenders use credit scores to assess a borrower’s creditworthiness. Borrowers with lower credit scores are seen as higher risk than those with good scores. Lenders want to feel confident that you are able to pay back what you’ve borrowed along with any interest. Some lenders aren’t willing to take the risk of lending to those with lower credit scores, but there are lenders focused on helping this population.

Getting a loan when you have bad credit

Before you start hunting for a loan, make sure you really need it. If you have bad credit, it is likely that any loan you receive will be expensive. Carefully consider if you can make do without a loan by cutting expenses or getting extra income (such as by working overtime hours). If you decide that a loan is the best decision, the most important thing is that you prove to lenders that you are able to pay them back. There are ways to do this without having good credit, depending on the type of loan you apply for. Here’s how:

  1. Alternative Lenders: You can turn to online lenders, like Personify Financial, who consider more than just your credit score when determining eligibility and offer unsecured personal loans.
  2. An unsecured personal loan with a cosigner: Because unsecured personal loans are given based on creditworthiness, it can be difficult to be approved for one on your own. However, having someone with a good credit score cosign on the loan assures lenders that they will be repaid (even if you're not the one who pays them).
  3. Secured personal loan: This kind of loan allows you to use assets, like a car or a savings account, as collateral. Doing this makes lenders more likely to trust you with a loan because they know that you have valuable assets. While you can apply for a secured personal loan with bad credit individually, you should be careful with this kind of loan. If you default on a secured personal loan, the lender may be able to seize whatever assets you tied to it.
  4. Consider a credit union: Credit unions tend to look at your whole financial history, not just your credit history, when assessing your creditworthiness. For this reason, a credit union may be able to offer you a loan with an interest rate that isn’t as high as those of some other bad credit loans.
  5. Contact your bank: If you have been banking at the same bank for a long time, they may be more willing to extend you a loan because they know your financial history.
  6. Borrow from friends or family: You can reach out to those close to you for a loan, as they know you and can be more likely to lend to you, but it could lead to tension if you can’t pay them back and can put a strain on your relationships.
  7. Payday loans: Use only as a last resort. While these loans may offer the amount you’d like to borrow, their interest rates are extremely high. Such lenders charge exorbitant interest rates, up to 400%, in order to mitigate the risk associated with lending to borrowers with bad credit. Make sure you do the math and understand what your loan will actually cost.

The Bottom Line

Although having bad credit makes it more difficult to receive a loan, it doesn’t make it impossible. It’s important to do your research, carefully explore alternatives, and figure out what’s best for you, before applying for a bad credit loan. Understand that this kind of loan will likely be more expensive, so be certain that you afford to pay the potentially higher costs. Then, when you’re approved for your loan, you can work toward improving your credit health, which will make you eligible for better loans in the future.

The material presented here is for informational purposes only and does not represent specific financial advice to you or your circumstances personally.