7 nonscore factors that could count in your favor when applying for a loan with low credit

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In a Nutshell

Having bad credit doesn’t mean you’re automatically disqualified from getting a personal loan. A personal loan with low credit might cost you more, but if other factors are strong, you might still be able to get approved.

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You might think poor credit means you can’t get a personal loan.

If that’s you, here’s some good news: While your credit scores are indeed an important factor that lenders consider, that’s not all they look at.

Lenders may realize that your credit scores only tell one part of your financial story. That’s why they typically look at multiple factors when deciding whether to approve you for a personal loan. Let’s look at some other factors that lenders may consider and what you can do to try to  increase your odds of getting a personal loan with low credit.


What are personal loans?

First, let’s talk about what personal loans actually are.

People commonly take out installment loans — a loan for a fixed amount of money that you pay back with interest in monthly payments over the life of the loan — to buy certain big-ticket items, like a home or a vehicle. These loans are generally secured, with the item you want to buy acting as collateral for the mortgage or auto loan.

But it’s possible you might need financing to pay for things that you can’t use as collateral for the loan. That’s where personal loans can come into play.

Personal loans are a type of installment loan that can be used to pay for things like …

  • Home remodeling or repair
  • Debt consolidation
  • Moving expenses
  • Vacations
  • Weddings

You could use credit cards to pay for these items. But even though unsecured personal loans can have higher interest rates than secured loans, they can be cheaper than the interest on credit cards or other types of alternative borrowing such as payday loans.

As with any type of loan, it’s important to shop around for the best deal and make sure you understand all the loan’s terms before you sign a loan agreement. Sources for personal loans include banks, credit unions and online lenders.

What happens if I apply for a personal loan with low credit?

Having good credit can make it easier to get approved for any type of loan, plus it can also mean better interest rates. Lower credit scores could make it more difficult to get approved for credit or play a factor in a lender charging you a higher interest rate if the lender approves your credit application.

If you apply for a loan, the lender will almost certainly check your credit scores — and if you have bad credit, a few things could happen.

You could be denied

Many lenders set minimum credit scores that applicants must have in order to qualify for a loan. For example, if you apply for a personal loan with online lender Upstart, you’ll need minimum FICO® or VantageScore® credit scores of 620. Not all lenders publicize whether they require minimum credit scores, while others provide recommended credit scores.

You could end up paying more

Generally, people with low credit scores are often assumed to have higher rates of defaulting on credit. A lender may approve you for a loan with low credit but at a higher interest rate to make up for the risk that you might default on the loan.

You may have to put up collateral

Another way that lenders can get their money back if you default is by requiring you to put up some form of collateral that they can take if you fail to repay the loan. In this case, the loan would be considered secured. Car loans and home equity loans are two common types of secured loans.

You may need a co-signer

Some lenders will offer you the chance to add a co-signer if you don’t qualify for a personal loan on your own. This isn’t something to be entered into lightly; if you can’t pay back the loan, your co-signer will be on the hook for the loan instead. You risk burning bridges with friends or family members who you ask to be a co-signer. That’s why it’s important to consider other options first.

What other factors do lenders consider?

Your credit scores are definitely one of the most important factors lenders look at when deciding whether to approve you for a personal loan, but not the only one. Lenders may also look at a number of other factors, including your income, expenses and current debts as well as your credit history.

Some of these factors also appear on your credit reports, though lenders may require you to provide additional documentation to support your application.

Here are seven nonscore factors that lenders may consider when you apply for a personal loan.

1. Where you live

Not all lenders operate in every state. When researching lenders, check whether the lender offers loan in your state. If you happen to apply for a personal loan from a lender that doesn’t offer loans in your state, it won’t be able to approve you for a loan. Instead, consider shopping around with other lenders.

2. The length of your credit history

If you have a limited credit history — if your oldest account is only two months old, for example — lenders may view you as risky. That’s why some lenders will look not only at whether you make your payments on time but also how many credit accounts you have and how long you’ve had them.

3. Your employment history and income

Have you been working at the same Fortune 500 company for 10 years, or did you just quit your job (again) to run a hot new alligator ranch in Maine?

Lenders often check your employment status and income (whether it’s from a job, government benefits, child support, alimony or other source) because your income is usually how you’ll get the money you need to repay your loan.

If you’re employed, demonstrating income should be easy. You should be able to just provide your bank statements, pay stubs and/or tax returns. For the self-employed, this can be a little more complicated. For example, the online lender Upstart will require you to have worked for at least a full calendar year as self-employed before it will consider this income.

If you earn money from other sources, such as government benefits, child support, or alimony, lenders may want to see proof of this income as well.

4. Your expenses

Your income is important, but so are your expenses. After all, you could be earning $10,000 a month, but if you spend $9,750 per month, there’s not a lot of extra room to go toward the monthly payment on a personal loan. As a result, lenders may ask for your bank statements to see how much you’re spending each month.

5. Your payment history

Your payment history is one of the most important factors that goes into your credit scores, and frequent late payments can lead to lower scores. Still, 65% of your FICO® credit scores are made up of other things. So it’s possible that you could have a spotless payment history but have other credit factors that are holding your credit scores down.

If that’s the case, take heart: Lenders may look closely to see whether you have a history of on-time payments, which could indicate you’re more likely to pay them back.

6. Your other debt

Along the lines of your monthly expenses, lenders may also look at any other debt you owe. In fact, many lenders will scrutinize how much your monthly debt payments are relative to your income, known as your debt-to-income ratio, or DTI ratio.

LendingClub, a popular peer-to-peer lender, for example, states that it does not approve people for loans if their DTI ratio is more than 30%. This means that if you earn $3,000 per month, you can’t be making more than $900 a month in debt payments and still be approved for a personal loan with LendingClub.

7. What you’ll be using the personal loan for

Lenders may want to know what you’ll be using the loan for, and your intentions for the money could affect their willingness to give you a loan or how much they’ll loan you.

Some lenders (LendingClub, for example) offer a blanket “personal loan” for any expense. Others offer specific loans for specific purchases, such as wedding expenses or vacations. Lenders that offer personal loans for specific purchases might limit the loan amount depending on what you want to buy with it. For example, Marcus by Goldman Sachs® states that their maximum loan amount can depend in part on the purpose of the loan, among other factors.

It’s important to note that you often can’t use personal loans to pay for your college education. For that, you may have to take out student loans. However, you may be able to use a personal loan to refinance an existing student loan.


Bottom line

Having bad credit scores doesn’t mean you can’t qualify for a personal loan. Generally, lenders look at multiple factors when considering a personal loan application. While your credit scores are important, other factors, like a steady income and low debt-to-income ratio, could count in your favor.

Ideally, you should save the money you need to make a big purchase and have an emergency fund to cover unforeseen expenses. But that’s not always possible. Sometimes a personal loan can be a wise decision, even if you have low credit.

And even though qualifying for a personal loan with bad credit can be difficult and expensive, it’s not necessarily impossible. By taking out a personal loan and paying it off in full and on time (or even early), you may be able to improve your credit health.