Can I get a personal loan with bad credit?

Sunday, September 15th

Can I Get a Personal Loan with Bad Credit?

Bad credit scores are often associated with financial irresponsibility, but even people who are diligent about properly managing their finances can find themselves dealing with a bad credit rating. After all, matters like a serious illness, property damage, job loss, divorce and other factors can wreak havoc on anyone's finances.

If you find yourself burdened with a bad credit score, you may assume that obtaining funds from a personal loan would be out of the question. However, even people who have a credit score below 620 could qualify for the financing they need. It is more challenging to obtain loan approval with a lower credit score, so you should know what to expect before you start searching for a personal loan online.

Why Your Credit Scores Matter to Lenders

Your credit scores reflect your credit history over the last few years. To a lender, the best way to determine how responsible you are with your finances and what type of borrower you will be is by looking at your established, recent history. If you have recent late payments, lenders believe that you are likely to continue on that path. If you carry high loan balances, lenders may assume that you are struggling to manage your debt level properly. Even if you have not made any late payments yet, higher debt balances indicate financial stress.

Lenders look at credit scores to determine how likely you are to repay the money that you borrowed versus how likely you are to default on the debt. Often, lenders review your credit report to look at more than the scores. For example, they look at your ratio between debt and available credit, your payment history and other factors. Because your credit score takes these relevant factors into consideration, a lower credit score indicates an increased likelihood of late payments and default. As a result, most lenders have a minimum credit score requirement for their loan programs, but they may have other credit-related requirements as well. For example, they may require applicants to have an on-time payment history for the last 12 months.

Ways to Get a Personal Loan with Bad Credit

Before you apply for a personal loan with bad credit, it is important to know exactly what your credit scores are. You can pull a free credit report from the three primary credit reporting bureaus to determine what your scores are today. Keep in mind that different lenders have different minimum credit score requirements. For example, some may entertain loan requests from applicants with a credit score of 550, and others may have a firm minimum credit score requirement of 650. When you know what your credit scores are upfront, you can better determine which lenders you should spend your time focusing on.

Because lenders who accept lower credit scores are assuming a greater level of risk by lending to you, they often want some added security so that their risk is minimized. There are a few different ways that lenders will attempt to reduce their exposure to risk. When you are agreeable to their added requirements, you may be more likely to get approved for a personal loan with a bad credit score.

Use Collateral

Lenders who make loans to applicants with bad credit scores often will require applicants to pledge collateral. For example, if you are using the loan proceeds to buy an asset of value, the lender may ask you to pledge that asset as collateral. This means that if you default on your loan obligation, the lender has the right to seize that asset. By doing so, the lender will experience less financial loss in the event of a default. Even if you are not using the loan to buy something specific, collateral may still be required. For example, you may not qualify for an unsecured debt consolidation loan, but you may qualify for a home equity loan that you can use for debt consolidation purposes.

Get a Cosigner

Regardless of whether you take out a secured or unsecured personal loan, the lender may require you to have a cosigner with good credit scores. A cosigner is typically a family member who is willing to accept some of the responsibility for the debt that you are about to take on. In the event of a default, the lender can pursue recourse through both you and the co-signer. Because the co-signer may have better credit scores than you, he or she may be in a better financial position than you to cover the debt at a critical time.

Accept a Higher Interest Rate

Generally, the risk to a lender correlates to the interest rate that the lender is willing to offer. Another way to look at this is that a lender needs to see a greater financial return for making a riskier loan. Applicants with excellent credit scores may be far less likely to default on their loan, so the lender is willing to earn less money in interest charges on the loan. Because applicants with lower credit scores expose the lender to greater risk for financial loss, they want their return on the loan to be properly aligned with their risk. If you are applying for a personal loan with a lower credit score, you should be prepared to pay a higher interest rate than you otherwise would pay if you have a better credit score.

Opt for a Lower Loan Amount

Another way for lenders to moderate their exposure to risk is through a lower loan amount. A lender may advertise that it offers loans up to $25,000, for example, but this loan amount may be reserved for those with excellent credit scores. For someone with a lower credit score, the maximum loan amount available may be much lower than the advertised amount. This is because the lender wants to minimize its exposure to financial loss if the borrower defaults on the loan.

Plan to Refinance in the Future

You can see that there are several ways for lenders to get comfortable with lending money to an applicant with a lower credit score. While you may be agreeable to the lender's terms, you understandably may not want to stick with those terms for years on end. For many borrowers with a lower credit score, their bad credit loan offers the opportunity to improve their credit rating. By making regular, timely payments on the debt for the next few years, your credit scores could improve dramatically. As a result, you may qualify for better financing terms in a few years if you refinance your loan.

Is your long-term financial plan to refinance your bad credit loan in a few years. If this is the case for you, you should ensure that you can comfortably make the required payments on time before you take out the loan. Making late payments or defaulting on your new loan could actually make your credit scores drop further. This is also a great time to review other aspects of your financial situation. Remember that all of your debts can impact your credit rating. It may be necessary to consolidate debts, get a second job or take other steps to ensure that you can cover all of your debts while your credit rating improves.

Explore Your Options Today

While there are a variety of loan programs available for applicants with bad credit scores, it can still be challenging to find loan terms that work well for your situation. For the best results, keep your options open, and be flexible to using a co-signer or structuring the loan in another way. While you could shop around for a loan by calling banks and lenders individually, you may have better luck exploring your options online. Many lenders publish their credit score requirements and loan terms, so this makes it easy to get familiar with the options available to you without hassle.