How to Choose a Loan for Bad Credit

Spreadsheet showing loans for bad credit

If your credit is not great, securing a quality loan can be a challenge. You might face high interest rates, low credit limits, and even rejected applications for financing. But you’re definitely not alone. One in three Americans currently has a credit score below 670. 

Fortunately, there are solutions. If you’re dealing with below-average credit and need a loan, you have a number of options. With a bad credit loan, you can access the financing you need while working to build your credit and improve your financial health. 

Here’s how. 

The anatomy of a bad credit score 

When lenders reference “bad” credit, what exactly does that mean? A bad credit score is simply one that’s classified as “fair” or “poor.” 

If you’re looking at your FICO® score — one of the most commonly used credit scores — the average American has a score of 710. So, a score of 580 to 669 is labeled “fair,” while anything less than 580 is “poor.” 

To understand your FICO® credit score better, it helps to identify what information is considered in calculating that score: 

  • Payment history (35% of your score): Whether you pay your bills on time and how late you make any late payments 

  • Credit utilization (30% of your score): The amount of credit you actually use, compared to the amount of credit that’s available to you 

  • Credit age (15% of your score): How long you’ve had credit in your name 

  • Credit mix (10% of your score): The collection of different types of credit you have (credit lines, installment loans, a mortgage, etc.) 

  • New credit (10% of your score): Newly opened lines of credit and loans in your name 

So how can you get a “bad” credit score? Usually, people with low scores have run into one or more of the following problems: 

  • Missing at least one payment due date: Missing just one due date by 30 days can reduce your score by up to 100 points

  • Making late payments long after the due date: The later the payment, the greater the impact on your score.  

  • Making a late payment recently: The more recent the late payment, the greater the impact on your score. 

  • Using a high percentage of your credit limit: Having a balance that’s at least 30% of your available credit can hurt your score. 

  • Opening new credit accounts: Applying for a lot of credit at once can damage your score. 

  • Having debt go to collections 

  • Experiencing a foreclosure or bankruptcy 

Types of loans for bad credit 

If your credit is below average, you still may have a number of financing options available. But not all loans are created the same. 

A loan can be secured or unsecured. Secured loans require collateral — like your home or car — to back up your promise to pay. If you don’t follow through on your commitments to the lender, that financial institution could seize the property with which you’ve secured your loan. 

One type of financing you might consider is a cash advance on your credit card. An advance offers you quick cash that comes out of your available balance on the card. And the funds are unsecured. However, your card issuer starts charging interest on that advance from the moment you pocket it. And the rate you pay is typically higher than your card’s interest rate for purchases. 

Another option is a home equity loan or home equity line of credit (HELOC). These secured forms of financing leverage your home as collateral. You borrow against the equity in your home — the portion of your home’s value that’s not covered by your mortgage. Home equity loans and lines of credit may offer you lower interest rates than some other forms of financing. But people with poor credit may struggle to qualify or may need to apply with a co-signer. 

Payday loans offer yet another form of financing when you have bad credit. Though you can typically receive a payday loan without a credit check, these loans usually offer just a few hundred dollars of funding at extremely high interest rates. Plus, you’ll need to pay the amount owed quickly — usually in just two to four weeks. 

Finally, you might consider what’s called a “bad credit loan.” 

What is a bad credit loan? 

Generally, you’ll need at least an average credit score to qualify for a traditional loan. So, if you currently have no credit — from having too short of a credit history —or bad credit, you may struggle to find the financing you need. 

That’s where bad credit loans come in. 

A bad credit loan is an unsecured personal loan designed for people with below-average credit. These loans usually offer a fixed interest rate and require payment in monthly installments. 

Bad credit loans are designed specifically for people who can’t get approved for a traditional loan. Generally, bad credit loans feature higher interest rates than standard loans, but they do offer a way for people with a poor credit score to get the money they need. 

The terms of each loan vary, depending on the lender you choose and your application details. But many bad credit lenders will offer you a variety of options for repayment — ranging from several months up to five years. 

And you can use the money you borrow for any purpose. So you can consolidate existing debt, cover an unexpected medical bill, pay for a surprise home repair, or anything you need. 

Is a bad credit loan right for you? 

Before you apply for a bad credit loan, ask yourself the following questions: 

1. Do you need the money now? 

All loans come at a cost, and bad credit loans usually have a higher price tag than traditional loans. Sometimes your need for money can’t wait, and a bad credit loan can provide that valuable financial cushion. 

But, if possible, consider delaying your purchase until you can save up the cash you need or borrow after you improve your credit. 

2. What’s your credit look like? 

First, find out what your current credit score is. If you have a credit card, check your online account, as many card issuers provide your score automatically. Or tap one of these sources to get your free FICO score. 

Then review your free credit history report before you start applying for loans. If you find an error or suspect fraud, report the problem right away. Mistakes aren’t uncommon on credit reports, and clearing them up can boost your score. 

3. How much money? 

If you do get a loan, how much money do you need to borrow? 

And how much can you afford to pay each month toward your installment loan? Be conservative in your estimate if you’re not sure. You’ll need this number to evaluate your options when choosing your loan. 

4. What repayment term fits your needs? 

A longer period for repaying the loan typically translates to lower monthly payments. But a shorter term means less money spent on interest and a faster path out of debt. Choose what works for you and your finances. 

5. Do you feel confident that you’ll be able to pay on time? 

Remember: Late payments can trigger high interest, penalty fees, and a decline in your credit score. So, you’ll want to ensure you can reliably make your loan payments on time. 

6. Do you have a co-signer? 

If you have a relative or friend with great credit, that person could help you get a better loan. By piggybacking off their credit score, you might qualify for more favorable terms, like a lower APR or lower fees. 

Keep in mind that co-signers put their own credit at risk when joining your application for a loan. Make sure your co-signer is aware of the potential pitfalls. And commit to keeping up your obligations to the loan, so your co-signer can limit any adverse consequences. 

How to choose your lender 

There’s no shortage of options when it comes to lenders. Banks, credit unions, and online lenders all offer a variety of loans. 

If you already have a bank or credit union, you may be able to leverage that existing relationship to get a loan. But these financial institutions often require strong credit scores for borrowers. Online lenders, meanwhile, may offer more loan options than your neighborhood bank — including loans for people with bad credit. 

So how do you choose the right lender for you? 

Step 1: Ensure that a lender actually does business in your state. 

And check their financial terms, as you may have different loans available to you, depending on where you live. 

Step 2: Review qualification information on a lender’s site. 

Most lenders’ websites state upfront the minimum credit score, minimum monthly income, and maximum debt-to-income ratio you need to get loan approval. If you don’t meet their criteria, move on to another lender. 

Step 3: Complete the prequalification process

Many lenders allow you to complete a quick form to ensure you qualify for a loan. It’s an easy way to see the financing options available to you before submitting a full application and running a hard credit check

Step 4: Review your loan options. 

If you prequalify, a lender will present you with one or more loan options. The terms of your loan will depend on the lender itself, your personal credit history, and other financial information you provide. 

Look carefully at all the details — APR, length of loan, monthly payment amount, fees, and any fine print. Avoid prepayment penalties, which charge a fee if you pay off your loan faster. And check that your lender reports to the credit bureaus, so your payment record will help boost your score. 

How to apply for a bad credit loan 

So, you’ve been prequalified, you’ve reviewed your loan options, and you’re ready to apply. Now’s the time to gather the financial records you’ll need to complete the process. 

Your lender will let you know which documents are required, but you’ll likely need tax records, proof of employment, and pay stubs. If your loan requires a co-signer, round up your co-signer’s financial details as well. 

Depending on your lender, you may need to wait up to a week for approval and funding. However, some lenders provide rapid funding in as little as 24 hours. 

Once you’ve received your loan, ensure that you’re set up to make monthly payments. Your lender will typically deduct your payments automatically from your bank account. 

So, establish recurring automatic transfers with your bank. You want the money to be there for withdrawal each month when your payment is due. With this one-time setup, you won’t need to worry about fees for late payments. 

Don’t make these mistakes 

Before you commit to financing, steer clear of these common pitfalls and lending scams: 

First, avoid payday loans whenever possible. The National Association of Consumer Advocates asserts that most payday loans are “predatory in nature.” Offering just a few hundred dollars in cash with short repayment periods and interest rates upward of 600%, these loans almost always have a better alternative you should explore. 

Second, look out for lenders who insist you pay upfront fees through unusual means. You’ll want to bypass businesses that request payment through cash apps, prepaid credit cards, or cryptocurrency. 

Third, protect your personal information before entering it online. Ensure a company’s website uses an SSL certificate to encrypt your data. (You can check this easily by seeing if the site’s name includes https.) 

Finally, confirm that you’re working with a reputable company. Make sure the business is licensed in your state. Look for a physical address, customer service phone number, and E-mail contact information displayed prominently on the website. Read reviews from existing borrowers, and check out the company’s rating with the Better Business Bureau

Bad credit can present its challenges. But it doesn’t have to hold you back from getting a loan with terms that fit your needs. And, with the right bad credit loan, you can manage your money while improving your credit and building a strong financial future. 

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