Everyone needs extra money from time to time, and this doesn’t change when you have bad credit. Unfortunately, your options become much more limited when you have bad credit. This makes it difficult to qualify for a loan, even when you need it to cover a financial emergency.
Whether you’re wondering how to get a car loan with bad credit, pay hospital bills, or even qualify for a mortgage with bad credit, we’ll show you how to improve your credit score and get your finances back on track.
Not only will you find out how improving your credit score can save you money on your next loan, you’ll also learn steps you can start taking today to start building your credit.
How does bad credit affect your ability to get a loan?
Before you start looking for a loan, it’s important to get an accurate understanding of your credit score. Most lenders use the FICO scores, which ranges from a low of 300 to a high of 850. A “bad” credit score is typically defined as lower than 629.
If you want to know your exact number, you’ll have to purchase that information from FICO. But if you simply want to see what kind of derogatory items are on your credit report (and potentially fix them), you can request a free copy of each of your three credit reports.
It’s a good idea to take advantage of this free service every 12 months to check your reports for accuracy even if you’re not actively looking for a loan.
Once you’ve established whether or not your credit score is low, find out the exact impact bad credit can have on your life. Bad credit affects you both financially and emotionally, but the most expensive effect is the type of loan you’re able to get.
Higher Interest Rates
When applying for a loan, the lender will charge you higher interest rates for a poor credit score. That’s because your lender sees you as a greater financial risk, so they charge higher rates in case you default on the loan.
Higher interest rates can really add up over the life of the loan. Keep reading to find out exactly how much.
Even worse than getting a high interest loan, you may not qualify for a loan at all if your credit score is too low. If the loan is for something non-essential, then this may not be that big of a deal.
But it can significantly affect your well-being if you have serious financial needs, like car repairs or medical bills. At this point, some people decide to turn to “no credit check” lenders who offer predatory products like payday loans.
Though short-term, these loans have extraordinarily high APRs and often lead people into a cycle of never-ending fees for what started off as just borrowing a few hundred dollars. Luckily, there are many ways to avoid ending up in this situation.
Where can you get a loan if you have bad credit?
If you do have a poor credit history, some reputable lenders might be willing to offer you a loan. Just remember, you’re going to be paying a lot of interest on top of the amount you borrow.
Check Out Our Top Picks:
Best Personal Loans for Bad Credit
It’s always good to check with your local bank or credit union, although they are likely to have stricter lending standards and a slower origination process. If you have an existing relationship with a bank or credit union, they may be willing to help you out.
Many online lenders offer quick approval and funding, even for borrowers with a low credit score. Just be sure to do your research to make sure the company operates a legitimate business.
Before taking out a personal loan from anyone, check to see what kind of reviews that company has received and what its Better Business Bureau rating is.
Bad Credit Lenders
Here are a few bad credit lenders that could be a good option for you:
- Avant is a major online lender that only requires a minimum credit score of 580.
- MoneyMutual is a lending aggregator that offers short-term loans to borrowers with low credit. You do need to have a consistent monthly income of at least $800 to apply.
- CashUSA partners with companies offering loans between $500 and $10,000. The credit and income requirements are flexible, but the interest rate could be pretty high.
- BadCreditLoans.com is a lending marketplace for borrowers with bad credit who need quick access to cash. You could receive up to $5,000 with loan terms up to 60 months.
- PersonalLoans.com is another lending marketplace that offers loans to borrowers with poor credit. You will need to prove that you have a monthly income of at least $2,000 to qualify.
- OneMain has physical locations in addition to its online presence and actually has no credit score minimum. The company says its average customer has a credit score between 600 and 650. Don’t get too excited, though – your APR could be as high as 35.99%.
Things to Know About Applying for a Bad Credit Loan
If you do decide on getting a bad credit personal loan, keep a few things in mind so you don’t damage your score even further. First, limit your number of loan applications.
Every time you apply for a loan, the lender makes an inquiry on your credit report. This lowers your credit score anywhere between one and five points depending on your situation.
That might not seem like a lot, but it could affect your interest rate if you’re on the border between “bad” and “fair” credit. Plus, many lenders view a large number of inquiries as a risk factor, especially if they’re all made within a short period of time.
Thoroughly research potential lenders in advance and see if they offer to make a soft pull on your credit rather than a hard one. That way you can compare interest rates without hurting your credit even more.
Going through a lending marketplace is a good way to limit your credit inquiries as well. With just one application, you’ll receive quotes from multiple lenders that are willing to work with you.
How much extra interest should you expect to pay on a loan with bad credit?
Even after getting approved for bad credit loans, there’s no getting around the fact that it’s going to be an expensive decision. Just how expensive depends on the terms and conditions of the loan.
On top of your interest rate, your lender may also charge an origination fee. Unfortunately, this is a pretty universal concept, so there’s not much you can do to avoid paying it.
The origination fee is usually charged as a percentage of your loan amount, so – just like interest – the more you borrow, the more you pay. You don’t have to come up with the cash upfront; instead, the fee is deducted from your loan.
Make sure you account for this deduction in your loan request. For example, if you need a $20,000 loan and there is a 3% origination fee, be sure to request $20,600 because 3% of $20,000 is $600.
Annual Percentage Rate
A helpful tool in determining the best interest rate and applicable fees is the loan’s annual percentage rate or APR. This number helps you compare offers that have different rates and fees to see which is better on an annual basis.
However, APR does not account for the loan term, which is the amount of time it will take you to pay off your loan. A loan may have an extremely low interest rate, but if it takes 10 years to pay off, you might actually end up paying a lot more in interest.
There are a lot of variables to consider when figuring out how much interest you’ll be paying. Let’s look at an example to help put these facts and numbers into context.
Auto Loan Calculator
Let’s say you want to figure out how to get a new car loan with bad credit. By using an online calculator, you can determine if making the purchase now is worth paying the extra interest compared to fixing your credit first.
According to Experian, the average length of a new car loan is 67 months and the average loan amount is $28,711. For simplicity’s sake, let’s say you get a 60-month (five year) loan for $28,000. Here is how MyFICO estimates different credit scores to stack up in the same scenario.
The differences in the amount of interest paid over the life of the loan are jaw-dropping: a person in the lowest range pays nearly $9,500 more than someone in the highest range. So you wouldn’t be paying $28,000 for that new car, you’d actually end up paying almost $37,500.
Bumping your score up just 31 points from a 589 to a 620 could save over $4,600 in this scenario. Think of how many paychecks that adds up to before you decide on getting a loan with a bad credit score.
|Fico Score||APR||Monthly payment||Total interest paid|
|720 – 850||3.312%||$507||$2,421|
|690 – 719||4.636%||$524||$3,424|
|660 – 689||6.751%||$551||$5,069|
|620 – 659||9.474%||$588||$7,262|
|590 – 619||13.848%||$649||$10,958|
|500 – 589||14.944%||$665||$11,918|
Should you fix your credit before applying for a loan?
If you want to potentially save thousands of dollars on your next loan, then yes, you should consider fixing your credit before you apply. While some credit components take time to improve, there are many actionable steps you can take right now to increase your score.
It’s always better to get a head start on the process rather than waiting for a financial emergency. If you don’t need the money right away, take the time to fix your credit now so you can save big when you are ready to borrow.
Here are five steps you can take right away to fix bad credit:
1. Dispute any errors on your credit report
Before you attempt to improve your credit score, you want to know what you’re dealing with first. So the first place to start is by reviewing and disputing any errors on your credit report. And checking your report will give you a good idea of where you can begin making improvements.
2. Start making your payments on time
One of the easiest ways to improve your credit score is by making your monthly payments on time. Your payment history counts for a significant portion of your credit report, so if you struggle to make your monthly payments on time, your score will take a hit.
And you may be surprised to learn that this applies to more than just lending products. It also includes credit cards, personal loans, home loans, utilities, and even your cell phone bill. Once you have that under control, start paying down any existing credit card debt.
3. Lower your credit utilization ratio
Your credit utilization ratio accounts for 30% of your credit score, meaning you’re not just judged on the amount you owe, but also on the amount you have borrowed compared to the amount you are allowed to borrow.
If your credit cards let you borrow up to $10,000 and your balance is $4,000, your credit utilization ratio is 40%. Ideally, your credit utilization ratio should be below 30%, so try to make extra payments until you can reach that ideal range.
4. Consider using a credit repair service
If you’ve already taken the steps we outlined above with minimal success, then you may want to consider hiring a professional. A credit repair service can dispute any negative items on your account and help you raise your score faster than if you’re doing it on your own. Here is our top choice for a credit repair service.
By law, an item must be removed from your report if the creditor can’t verify it within 30 days. By having a tireless advocate on your side, you’ll make sure your current and past creditors are following the law. They will help you make sure your credit history has been updated to accurately reflect your financial history.
5. Show a lender can you repay the loan
Once you’ve put in the work to improve your credit score, it can help to look for ways to show an online lender, bank, or credit union that you’re able to repay the loan. Providing proof of income can give a lender more peace of mind and demonstrate that you’re financially capable of repaying the loan.
If you don’t have any proof of income and your credit score is still lower than you’d like, you can consider applying with a creditworthy cosigner. Ideally, this will be someone who has a good credit history and can vouch for you with your lender.
However, you should only use a cosigner if you’re certain you can repay the loan. If you default on a loan, the bank will go after your cosigner, which will put their financial future at risk.
How can you maintain your credit score once it’s fixed?
After taking the time and effort to raise your credit score, make sure you do everything in your power to keep it up — or get it even higher!
You might not be looking for another loan or line of credit at the moment, but you never know what your financial future will look like. Perhaps you rent an apartment now, but want to buy a house further down the road.
Getting a Mortgage
It’s hard to figure out how to get a mortgage with bad credit, so do your best to make sure you take care of your credit now. That means paying all your bills on time, setting aside cash for emergency savings, and not racking up unnecessary debt.
Remember, most infractions stay on your credit report for up to seven years, so the financial decisions you make now stick with you for a long time.
Renting an Apartment
Plus, think of all the ways poor credit affects your life outside of getting a loan. Many landlords run credit checks on prospective tenants, so it can be difficult to rent an apartment with bad credit.
Potential employers also sometimes run credit checks on job applicants to see how they handle their money. Why? They think that if you’re not responsible in your personal life, you probably won’t be responsible in your work life.
So bad credit not only affects your spending power, it affects your earning potential as well. Keep every door open by making a conscious effort to continually improve your credit. It would be a huge waste of time and effort to give up on all the progress you just made. Do yourself a favor and consciously manage your money going forward.
It certainly is possible for people with bad credit to get a loan, but that doesn’t mean it’s the best decision for you. Analyze just how urgent your financial needs are. Then, decide if you can wait a while to improve your credit before taking out a high-interest loan.
A reputable credit repair service can help you aggressively put your credit score on the fast track to improvement. Check out our credit repair reviews page for a list of reputable credit repair companies that can get you started today.