Let’s face it: Nobody likes to be judged. But when it comes to loans, it’s going to happen. Creditors are going to look deep into your credit history and make a decision about whether or not to lend to you. Lenders need to determine how risky it would be to lend money to a borrower. And if you’ve got bad credit, you might expect to be shown the door right away.
But don’t panic! Even if you have bad credit, it’s still possible to get a loan. Here’s how.
Small loans to avoid
Unfortunately, borrowers of small-dollar loans are often in dire need of financing and have few other options for borrowing cash. Because of this, small loans are the bread and butter of predatory lenders.
Skip payday loans
When shopping for small unsecured personal loans, it’s best to skip options like payday loans, car title loans, cash-advance loans, or similar products. These often carry high interest rates up to 500% APR or more and pile on fees that are often buried in the fine print.
Watch for hidden fees
Affordable loans are usually defined as those that keep rates under 36% APR, according to the Consumer Financial Protection Bureau (CFPB). However, you might find yourself paying a much higher effective APR than your stated interest rate through unclear fees and shady terms hidden in the fine print.
Lenders might advertise a nominal interest rate, counting on borrowers to mistake it for an annual percentage rate. Or there could be add-on costs like origination fees, extension charges, or even prepayment fees that add to the cost.
The good news is that the CFPB is currently working on lending regulations that would protect borrowers from these hidden fees. In the meantime, make sure you read your loan’s fine print and understand the costs. Failing to do so is a major personal loan mistake.
Get a smart repayment plan
To keep small loans affordable, you also need to pick a repayment plan you can keep up with. Make sure your lender offers minimum repayment periods of 90 days. Less than that is a sign of predatory lending practices in the vein of a payday lender.
Avoid balloon payments, which start small and get bigger as you go. These are another sign of predatory lending. Instead, get an installment loan with fixed payments. This way you’ll always know what you owe each month.
Overall, small personal loans can be a smart way to finance gaps in your monthly budget. In many cases, they’re more affordable than other borrowing options like credit cards.
Whether you choose an online lender, credit union, or major bank, make sure your small loans provider is reputable and provides favorable and affordable terms.
Forget filling out tons of forms. Finding the best personal loan rate is now easier than ever.
Disclaimer: Student Loan Hero is a subsidiary of LendingTree.Lendingtree allows you to compare rates from multiple lenders by filling out one easy form. Advertiser Disclosure
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.
|Lender||RATES (APR)||loan amount|
|7.73% – 29.99%||$1,000 to $50,000|
|6.26% – 14.87%1||$5,000 to $100,000|
|6.99% – 35.97%*||$1,000 to $50,000|
|56.00% – 199.00%2||$500 to $4,000|
|5.99% – 24.99%3||$5,000 to $35,000|
|4.99% – 29.99%4||$10,000 to $35,000|
|compare rates on Lendingtree nowDisclaimer: Student Loan Hero is a subsidiary of LendingTree|
|1 Includes AutoPay discount. Important Disclosures for SoFi. 2 Important Disclosures for Opploans. 3 Includes AutoPay discount. Important Disclosures for Payoff. 4 Important Disclosures for FreedomPlus. * Important Disclosures for Upgrade Bank.|
What Is a Bad Credit Score?
Credit scores are an attempt to gauge the likelihood you will repay a loan. They range from 300-850. The higher your number, the more likely you will repay.
Bad credit scores start at 650 and go down from there. People in this category are considered a high risk and pay the highest interest rates. They are prime candidates for bad credit loans.
The definition of a “good” and “bad” credit score does vary from lender to lender. Some won’t touch anyone with a credit score under 650, some actually market to consumers with a sub-650 score.
So it’s hard to say what makes you “good” or “bad” on the credit scoreboard, but the accepted range looks something like this:
- 760-850 – Excellent
- 700-759 – Very good
- 660-699 – Fair
- 620-659 – Poor
- Scores under 620 – Extremely poor
How Bad Credit Scores Affect Borrowing
Consumers in the good-to-excellent credit score category receive the lowest interest rates and best loan terms. Consumers in the poor and extremely poor categories are burdened with high rates and may not be approved for a loan at all.
Many consumers get that message and that is why the average credit score for U.S. consumers in 2018 is 700, an 11-point jump over the last decade. However, the real numbers worth paying attention to are the combination of score and age, which say a lot about how our economy operates.
According to FICO, people ages 60-and-above have an average credit score of 743, while those in the 18-29-year-old bracket average just 652. It’s one of the few places in life where being old pays off.
Still, that’s a 91-point difference, which is very costly when you are shopping for home and auto loans as the graphic below demonstrates.
|Score||Interest Rate||Monthly Payment||Total interest paid|
|Score||Interest Rate||Monthly Payment||Total interest paid|
How to Get a Loan with Bad Credit
If this is not an emergency, the first step to get a loan with a bad credit is to improve your credit score so you can comfortably afford the loan you need.
Start by making on-time payments, especially on credit cards; and reduce the balance on cards to under 30% of the credit limit allowed. Finally, don’t apply for any new credit.
The combination of those three factors – on-time payment; low credit utilization; no new credit applications – account for 75% of your credit score. It’s not unrealistic to think that making an effort on those three fronts could raise your score by 100 points in as little as 3-6 months.
If, however, this is an emergency and your application for a loan has been turned down repeatedly due to poor credit or no credit, it might help to ask a bank or credit union loan officer for an in-person interview to convince them you are creditworthy.
If you get that interview, be sure you are prepared with documents that prove you’re a good risk. Lending institutions love stability. If you can show them that you’ve lived in the same house (or city) and worked the same job (preferably for the same employer) for several years, it definitely helps your case.
Common things to bring that prove your credit worthiness include:
- Tax returns, W-2s and 1099 forms from at least the last two years
- Details of your job history, including salary and pay stubs
- List of assets such as home, car, property and where you stand on paying them off
- List of unsecured debts such as credit cards and medical bills
- Whether you pay or receive alimony or child support
- Bank statements for checking, savings and CDs
Not all of these documents are required, but if you have a poor credit history, anything you can produce that demonstrates you have become responsible with your money will be considered a plus. You should also expect the lender to ask questions about your credit history that may reflect negatively on you. Things like:
- Have you been involved in any lawsuits?
- Do you have any judgments against your or items in collection?
- Have you declared bankruptcy or had a foreclosure judgment against you?
- What is your ethnic background?
The last question would seem to violate anti-discrimination laws, but it is required by the government so that it can keep data on lending to minorities and make sure they aren’t routinely turned down or charged excessive fees.
The purpose of an in-person interview is to convince the lender that if you receive a loan, you can comfortably make payments. Any evidence you have that can support that fact – especially proof that you paid off loans on assets like a car, motorcycle or boat in the past – are going to work in your favor.
Pros and Cons of Bad Credit Loans
It makes sense to use caution when taking on any loan, but if you have bad credit, things aren’t good. Don’t make it worse.
Be careful who do you do business with on a bad credit loan. If the lender doesn’t require a credit check, doesn’t check your income; guarantees you’ll be approved; can’t be found for customer reviews or a Better Business Bureau ranking, it might be time to look elsewhere. Those are red-flag warnings that you might get scammed.
Closely examine the pros and cons of the situation before making a final decision.
The pros for a bad credit loan are obvious:
- Most loan applications are available online and only take a few hours to get a response. At some places, you can have the money in your account within a day.
- If you are able to get a bad credit loan, it likely would come at a lower interest rate than you pay on your credit card debt.
- The number of peer-to-peer lending businesses seems to double every year. If you’re patient, and make lenders compete for your business, you might find a loan with an interest rate that you can afford.
- Depending on who the lender is, repayment terms could stretch anywhere from one to five years.
- If you commit to making on-time payments, your credit score will improve and make you a more desirable candidate next time you need a loan.
The cons for bad credit loans are just as obvious:
- High interest rates. You’re a risk so the lender wants a reward; sometimes a huge reward.
- Fees and penalties. Read the fine print. Is there a loan origination fee? What is the late fee? You may have to pay a fee for making payments by check.
- Collateral sometimes required. You may have to put a house or car at risk to get the loan. If you miss payments, you could lose that house or car.
- Not every online lender is licensed in every state. Be sure the company you choose is certified in your state before you start paying for their service.
Be sure you have multiple offers before making a final decision. The competition gives you a chance to compare and research the company you eventually choose.
Visit a Credit Union
A credit union – especially one affiliated with your employer or one that is community-based – may be willing to look beyond a poor credit history and make a judgment about whether it will loan you money based on your character and your promise to repay. Think of credit unions the way you would a small community bank from years ago.
The most promising aspect of a credit union loan is the interest rate ceiling of 18%, which applies to anyone, regardless of their credit score. A similar loan from a bank could run you as much as 36% interest.
That can make a huge difference in the payout you make on a bad credit loan. Let’s say you have a three-year, $10,000 loan. Here is the total repayment:
- 18% — $13,014.
- 36% — $16,489.
The chance to save more than $3,000 makes it worth looking into enrolling in a credit union. Almost all credit unions are actively looking for borrowers. If you can afford terms that match your credit history, you are likely to find a credit union somewhere willing to work with you.
If you are a veteran of the armed forces, you might want to approach the Navy Federal Credit Union or PenFed Credit Union. If you are a teacher or government worker, you might check out State Employees Credit Union or Schoolsfirst Credit Union.
Almost every consumer could qualify for some credit union. By joining, you could position yourself for much more favorable loan terms, regardless of your credit score.
Peer-to-peer lending, also known as P2P lending, has only been around since 2005. It’s an online platform that allows you to get a bad credit loan directly from another individual or group of individuals rather than from an institution. Potential borrowers post a loan listing on various peer-to-peer websites, indicating the amount needed and what it’s for. Investors review the loan listings and choose borrowers they wish to fund.
Your credit score is still a factor, but since an individual investor has much greater leeway in how factors are weighted, these loans are often more readily available for people with bad credit. Lending standards are significantly more lenient and interest rates are usually lower than those offered by traditional lenders. In addition, peer-to-peer websites help evaluate risk for the lender, while verifying the lender’s credentials for the borrower.
Here are some examples of peer-to-peer lending institutions:
|Lender Name||Borrowing Levels||Loan Terms||Minimum Credit Score||Interest Ranges||Origination Fee||Time to Receive Funds|
|Lending Club||$1,000 to $35,000||3 years or 5 years||600||5.98% to 35.89%||1% to 6% of loan amount||One week|
|Peerform||$4,000 to $35,000||3 years or 5 years||600||5.99% to 29.99%||1% to 6% of loan amount||Up to two weeks|
|Prosper Marketplace||$2,000 to $35,000||3 years or 5 years||640||5.99% to 35.99%||1% to 5% of loan amount||One to three business days|
|SoFi||$5,000 to $100,000||3 years to 7 years||660||5% to 15%||None||One week|
|Upstart||$1,000 to $50,000||3 years to 5 years||620||7.43% to 29.99%||1% to 8% of loan amount||One day|
Online Personal Loans
Technology and a wide gap in the marketplace have opened the door for Personal Loan Lenders, a new industry that has created an option for people with low credit scores.
These lenders are essentially banks that don’t have offices. They do their work online and offer bad credit loans for things like credit card debt consolidation and home repairs. Their primary appeal is they work fast. They can make decisions in minutes and deposit funds in an account in a few hours or days. Many have no application fee or pre-payment penalty.
Online personal loan applications are simple and easy to fill out. Credit scores are only a part of the decision-making process so this could be an appealing option if you have bad credit or no credit. In fact, some personal loan lenders have their own credit-score model and don’t use FICO scores. Other factors considered include whether you have a college degree, the school your degree came from and your employment history.
|Lender Name||Borrowing Levels||Loan Terms||Minimum Credit Score||Interest Ranges||Origination Fee||Time to Receive Funds|
|Avant||$2,000 to $35,000||2 years to 5 years||580||9.95% to 35.99%||4.75% of loan amount||Two days|
|Best Egg||$2,000 to $35,000||3 years or 5 years||640||5.99% to 29.99%||0.99% to 5.99% of loan amount||Next day|
|Earnest||$2,000 to $50,000||1 years to 3 years||720||5.25% to 14.24%||None||One week|
|One Main||$1,500 to $25,000||1 years to 5 years||None||17.59% to 35.99%||Varies by state||Same day|
Drawbacks to Debt Consolidation
There’s risk involved with any method you choose for debt consolidation so do your homework. Here is a look at some of the drawbacks for each plan.
- Debt Management Program — It always sounds good to take the payments from several credit cards (let’s say a total of $1,000 per month) and reduce it to one lower payment (let’s say, $800 per month). But be careful. Be sure the nonprofit credit counseling agency you choose has a good track record with consumers. They should present you with a plan that lowers your interest rate and monthly payment and eliminates all debt within 3-5 years. If that doesn’t happen, back away.
- New Lines Of Credit/Second Mortgages — The major problem is that your home is used as collateral and if you miss payments, it could be foreclosed. The other thing to look for is fees for anything and everything the lender can think of. Make them spell out if you’re paying an origination fee, appraisal or any other cost.
- 0% Interest Rate Credit Cards — The risk is not paying off the debt during the introductory 0% interest rate period (usually 12-18 months). When that period is over, you could be facing interest rates of 18% or higher. You must be disciplined.
- Personal Loans — Depends on who loans you the money. If it’s a relative or friend, the relationship can sour quickly if you fail to make on-time payments and/or default on the loan. If you get it from a bank or credit union, you will pay a higher interest rate because it’s an unsecured loan, meaning no collateral to back it up.
2018 FHA Credit Requirements
Because FHA home loans are insured they are much less risky for lenders. They are able to lower their minimum requirements for a loan.
No longer do you need to have a 620 credit score, people with poor credit can get approved. These “bad credit home loans” are known as a sub-prime mortgage.
FHA loans allow for poor credit scores as low as 500 with 10% down and 580 score with 3.5% down.
See if you qualify for an FHA loan
Compensating Factors for Bad Credit
If you have a poor credit rating then you will need to show some compensating factors that help make up for it.
You will also need to show a financial hardship was the reason you fell behind on your monthly bills and you have since recovered and have re-established credit. Usually if you have poor credit your loan will go through manual underwriting.
These compensating factors reduce the risk to the lender and increase your odds of getting approved with a poor credit history.
- Large downpayment (10% down or more)
- Low debt-to-income ratio
- High income
- No outstanding debt
- Large amount of cash reserves
- Significant amount of time with current employer
- Paying comparable rent payments – No payment shock
How much house can you afford? Use our calculator
Where to find the best bad credit lenders?
Each lender sets their own credit score requirements. Finding a subprime mortgage lender who can work with a 580 credit score is not always as easy as you may think.
If you google 580 credit score lenders many results will pop up.
You should be careful about giving up your personal information to just anyone. Make sure you are applying with reputable lenders.
There are many online lenders out there that offer home loans to people with bad credit. You need to make sure you find the best mortgage company for your situation.
Search Bad Credit Home Loans – Get Approved Now
Get Your Free Credit Score
First you should review your credit history and find out how bad your score really is. If it’s too low then you should work on improving it before applying for a home loan.
You can get your free credit score and report from these trustworthy websites.
- Credit Karma
- Credit Sesame
How to Increase your Score to Improve Your Chances of Getting Approved
Before trying to get a home loan with bad credit you should work on getting your score as high as it can be. The higher your score the better odds you have of getting approved for a mortgage. If you have a significant amount of negative accounts you should use our free DIY credit repair guide.
If you have a lot of debt then a debt consolidation program may be a good option to help you pay off your debt quicker and at a lower interest rate.
Tips to raising your score for a home loan
- Pay down the balances on your credit cards
- Do not miss any credit card or loan payments
- Do not have too many credit inquiries
- Dispute negative information
- Contact creditors to delete collection accounts if you pay them
- Get added as an authorized user
- Get a secured credit card
Read our article for more information on raising your credit scores in a hurry
Get a Mortgage Now, or Wait Increase my Scores?
If you are debating whether or not you should apply for a home loan now, or wait until you have a higher FICO score, there are a few things to consider.
Home prices are on the rise, so the longer you wait the more you’re going to pay and the higher your monthly payment will be.
Interest rates are still at historical lows, if you are able to get a mortgage, you probably should.
The rate you get with bad credit will have a higher interest rate, however that rate may still be lower than the rate you would receive when rates increase.
Not all mortgage companies will have the same credit score requirements. If one lender denies your loan, don’t lose hope. Keep on applying with different lenders until you find one that you approve your loan.
RATE SEARCH: Compare loan offers and rates
The Lenders Network has the largest network of mortgage lenders that specialize in home loans for borrowers with all types of credit scores. We will match you will the best lender based on your specific situation.