Need a loan with bad credit? 6 things to know.

Man with bad credit, seeking a loan and sitting on couch in unfinished roomImage: Man with bad credit, seeking a loan and sitting on couch in unfinished room

In a Nutshell

Having bad credit can hold you back from getting a loan at the best rates. But that doesn’t mean you have to resort to costly sources of credit. Here are some things to know about getting a loan for bad credit.
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If you need to get a loan with bad credit, you might be feeling discouraged.

Having bad credit or credit reports with derogatory marks isn’t uncommon. About one in 10 people has a FICO® Score 8 below 550, according to April 2018 data from FICO, which is considered poor credit. And 23% of people have one or more accounts with a collection agency, according to FICO — another factor that could influence your credit scores.

Your credit history is your track record of how well you use and repay credit. If good credit makes it easier to get loans at good rates, bad credit can have the opposite effect. So what should you do if you want to get a loan for bad credit?

Before you resort to expensive forms of borrowing, like payday loans, let’s look at some things to know about applying for a loan with bad credit.

  1. What exactly is bad credit?
  2. Credit scores: Your credit GPA
  3. Who will give loans with bad credit?
  4. Can I apply for a loan with bad credit?
  5. How much can loans with bad credit cost?
  6. Bad credit? You’re not stuck.

1. What exactly is bad credit?

Different companies generate credit scores based on their own credit-scoring models. FICO offers many go-to scoring models that lenders can use when evaluating credit applications. Base FICO® scores range between 300 and 850. Here’s how FICO defines the credit ranges based on FICO® 8 credit scores.

  • Poor: 579 and lower
  • Fair: 580–669
  • Good: 670–739
  • Very good: 740–799
  • Exceptional: 800+

In September 2019, the average national FICO® score was 706, according to FICO. But people with credit scores in the fair to poor ranges (i.e., credit scores less than 670) may have trouble getting approved for some types of loans.

People can have bad credit for many different reasons. For example, if you miss payments, max out your credit cards or have derogatory marks on your credit reports, such as a bankruptcy or a foreclosure, your credit scores could drop.

What factors affect your credit scores?

2. Credit scores: Your credit GPA

Here’s a comparison to help you understand how your credit scores work vs. how to read your credit reports.

In school, you probably studied different subjects like history, math, economics and English. You received individual grades for each assignment and a grade for your overall performance at the end of the course. At the end of the semester, you’d receive one single score — your GPA — based on all the work you’d done in all your classes.

That’s the idea behind your credit reports and your credit scores.

Your credit reports contain a list of the money you owe, the details of how you owe the money, and your history in paying it off as agreed. Your credit scores, on the other hand, are more like your GPA. They are calculated based on the information in your credit reports and they help lenders understand how well you’ve managed credit in the past.

When people refer to “credit” as a whole, they often mean both your credit reports and your credit scores. That’s because lenders generally look at both when deciding whether to approve you for a loan. Lenders often look at your credit scores first as a simple snapshot of your borrowing habits.

3. Who will give loans with bad credit?

Lenders can have their own cutoff credit scores. If your scores fall below this cutoff, the lender may be less likely to approve you for a loan. But if your scores are above that mark, the lender may be more likely to open up your credit reports to see your credit history. The lender may then factor in other things, like your debt-to-income ratio, to decide whether to offer you a loan and at what interest rate (here’s how to calculate your debt-to-income ratio).

Different types of lenders can have different score requirements for various types of financial products. For example, to get an FHA mortgage with the lowest down payment requirement (3.5%), you’ll need credit scores of 580 or better. Financial institutions like banks or credit unions might want you to have credit scores in the 600s to get a conventional mortgage.

Qualifying for a personal loan with credit scores in the 500s may be difficult or costly. But some alternative lenders, like payday lenders, might not look at your credit scores at all, but can charge very high fees and interest rates.

4. Can I apply for a loan with bad credit?

You may think that low credit scores mean your only option is to use an alternative type of loan, like payday or a car title loans. These short-term loans typically don’t require a credit check, which could make them appear attractive if you don’t think you’ll qualify for a traditional personal loan or credit card.

But these types of loans can be extremely expensive in the long run.

These loans can have fees that equate to APRs, or annual percentage rates, of around 400%. Compare that to a typical credit card, which may have an APR around 30% at the high end of the scale.

Instead, a better option may be to look for lenders that will work with people with bad credit. Just make sure your loan amount fits your budget and read your loan terms to understand if you’re facing any fees, such as an origination fee.

And if you can possibly swing it, try saving up for big purchases and emergencies before they happen. That way, you don’t need to worry about taking on debt until it’s absolutely necessary and can instead focus on improving your credit.

5. How much can loans with bad credit cost?

While you may be able to get a personal loan with bad credit, be aware that you’ll likely have to pay a higher interest rate.

Here’s an example of how you could pay more.

Say your car breaks down and you need a personal loan of $2,500 to pay for the repair. If your credit is good (say, you’ve got base FICO® scores of 740), you might qualify for a three-year personal loan at a 9.33% interest rate — with a monthly payment of $79.88. At that rate, you’ll pay a total of $375.82 in interest over the life of the loan.

But let’s say your credit is poor (base FICO® scores below 580) and you get approved for an interest rate of 35.89%. Now your monthly payment will be $114.35, and you’ll pay $1,616.70 in interest over the life of the three-year loan.

For this $2,500 three-year personal loan, having bad credit would cost you an extra $1,240.88.

6. Bad credit? You’re not stuck.

The first thing you should know about having bad credit is that it doesn’t have to be permanent. Most derogatory marks, such as late payments, foreclosures and even bankruptcies, will fall off your reports after seven to 10 years.

This means that even if you file for bankruptcy, it’s still possible for you to work toward better credit. Here are some steps you can take toward that goal.

First, check your credit reports. Finding errors — and successfully disputing them so they are removed from your credit reports — is an easy thing you can do to improve your credit.

How to dispute an error on your credit report

Next, learn what factors go into calculating your credit scores. By working to improve these factors, your overall credit health may improve, including both your credit history and your credit scores. For example, making your payments on time and paying down your debt (especially credit card debt) can go a long way toward improving your credit.

Bottom line

Trying to get a bad credit loan can be frustrating. But it can be possible to find reputable lenders who will work with you, even if you have bad credit.

In fact, taking out a personal loan with bad credit and making payments on time may help to improve your credit scores. That way, if you ever need to make a larger purchase like a house, you can have better credit in place.

About the author: Lindsay VanSomeren is a freelance writer living in Kirkland, Washington. She has been a professional dogsled racer, a wildlife researcher, and a participant in the National Spelling Bee. She writes for websites such a… Read more.