Bad credit? Things to know about personal loans from direct lenders

Man with laptop sitting at kitchen table researching personal loans with bad creditImage: Man with laptop sitting at kitchen table researching personal loans with bad credit

In a Nutshell

It’s a good idea to shop around when looking for a personal loan. A direct lender that considers applicants with bad credit could be an option to consider, but such loans don’t always come with favorable terms. There are other options, including loans from peer-to-peer lenders or online lending networks.
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Shopping for a personal loan with bad credit can be especially challenging — but you do have options.

You could apply for a loan through a direct lender, a loan aggregator or a peer-to-peer lending network.

These lenders may be able to provide unsecured loans, which are loans not guaranteed by any assets or collateral. And while it’s possible to get loans from these sources without perfect credit, you may not be able to get the most favorable loan terms.

Direct lenders, loan aggregators and peer-to-peer lending networks work differently, so you need to weigh the pros and cons of each of these loan providers and carefully compare offers to get the best deal for you.

3 types of lenders to consider

Let’s review how direct lenders, loan aggregators and peer-to-peer lending networks operate when you apply for an installment loan.

1. Direct lenders

Direct lenders issue loans directly, and so the money you receive — if you’re approved for a loan — comes from the lender.

Types of direct lenders include local, national and online banks, credit unions and even the federal government. Direct lenders review your loan application and — if you’re approved — lend you funds.

Lenders may consider applicants with bad credit to be riskier borrowers, so some direct lenders may be unwilling to lend these applicants money. But there are direct lenders that offer bad credit loans, so you still have some options — just be aware that they may charge higher interest rates.

When you apply for a loan with a direct lender, you’ll find out the terms that only this particular lender is offering. To compare loan terms, you’d need to apply with multiple direct lenders to see what each has to offer. Many direct lenders allow you to submit your information to get a rate quote without a hard credit inquiry, which means it’s possible to shop around without hurting your credit.

2. Loan aggregators

Loan aggregators don’t directly lend money to approved applicants. Instead they serve as an intermediary for online loans. They take your loan application and connect you with different lenders within their network that might approve you for a loan based on your application. Because loan aggregators handle the legwork of finding potential lenders for you, comparison shopping through an aggregator can be faster and easier.

But your loan application will still have to be reviewed and approved by the actual lender. There’s no guarantee of approval, and the lender you choose may have certain borrowing conditions you’ll have to meet, which could include having an account with the lender.

While a loan aggregator’s wide pool of lenders could mean more options for you, it’s important you use a trusted loan aggregator service. The Federal Trade Commission advises consumers to use caution when sharing personal information online.

3. Peer-to-peer lending networks

Peer-to-peer lending networks also serve as intermediaries between lenders and applicants, but they connect borrowers with investors rather than financial institutions.

Peer-to-peer lending networks — commonly referred to as P2P lending — connect would-be borrowers with investors willing to consider different levels of risk. This could make it easier for people with less-than-perfect credit to get a loan from a P2P lender than from a direct lender. But be aware: You’ll likely pay a higher APR for a P2P loan if your credit is poor.

It’s important to comparison shop and fully understand the loan terms offered.

A word about prequalification

When you apply for any type of credit, a lender may want to run a credit check and look at your credit scores and credit history. There are two types of inquiries: Hard and soft.

A hard inquiry can occur when a lender looks at your file after you apply for credit, and it can affect your credit scores. A soft inquiry can occur when you apply for prequalification through a lender or aggregator. This type of review of your credit files doesn’t negatively affect your credit scores.

When you’re shopping for a loan with bad credit, it may make sense to look for lenders that offer you the opportunity to apply for prequalification, rather than lenders that will initiate a hard inquiry when you apply. And remember, getting prequalified doesn’t mean you’re actually approved for a loan. It just gives you an idea about whether you might be qualified and what your loan rates could be.

Bottom line

When looking for a personal loan — which is a type of installment loan — direct lenders that market loans to those with bad credit might be worth considering. You’ll know exactly what lender you’re dealing with. Plus, a direct lender may offer a lower interest rate if it’s a secured loan, meaning it requires that you secure it with collateral.

Unfortunately, some direct lenders offering reasonable loan terms may be less willing to make personal loans to borrowers with imperfect credit, so it may be more difficult to get approved. Working with a loan source that allows you to apply for prequalification can help you avoid the hard inquiries that come with submitting a formal application.

And be wary of direct lenders that market to borrowers with poor credit. They could be payday loan providers that charge extremely high interest rates (the equivalent of 400% or more in some cases). It’s almost always better to seek alternatives to a payday loan than risk such high interest rates and other high fees.

Each type of lender — direct, aggregator and peer-to-peer — has advantages and disadvantages. It’s important to understand how each lender works and the terms and conditions of any offers they make before you commit to a personal loan.

About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbo… Read more.