How To Get A Loan With Bad Credit: Tips To Maximize Your Chance Of Approval

Life happens. Whether your car breaks down or you have some unexpected medical costs, there may be a time when you need a loan to help cover an emergency. If you have less-than-perfect credit, you might think your options are limited. That’s where bad-credit loans come in. 

Don’t let the name scare you off – if you have poor credit, that doesn’t automatically take away all your options. While bad credit can make it more challenging to secure a loan, it’s not impossible. In this article we’ll explore different bad-credit loan options, so that you can find one best suited for getting you back on your feet. 

There are two models for measuring a borrower’s credit score: FICO^®  and VantageScore^® which, as of March 2022, both range from 300 to 850. Generally, a credit score between 580 and 669 is considered fair, while a credit score between 300 and 579 is seen as poor. 

Borrowers with a credit score under 670 will likely face more difficulties securing a loan than borrowers with a strong credit history – but don’t get discouraged, you still have options.

A good credit score usually indicates to potential lenders that an applicant is a good borrower, with a history of repaying loans. On the flip side, most lenders see a poor credit score as indication that a borrower is more of a risk. A history of missed payments signals to lenders that the borrower may not be able to repay the loan.

While you should always try your best to responsibly bolster your credit before applying for a loan, doing so takes time and it’s easy to feel powerless with bad credit. That’s when bad-credit loans may be an option worth exploring. Although they do typically come with higher interest rates, a bad-credit loan could be what you need to bounce back from a financial emergency. 

While it can be challenging to secure a loan with bad credit, you’re likely to face similar roadblocks with no credit history. But if you’re a borrower who has yet to build up sufficient credit, don’t worry – there are still plenty of lenders out there who may be open to working with you. 

Compare Lenders 

Shopping around for a lender can be difficult in normal circumstances, but for borrowers without a strong credit history it can feel downright precarious. Despite having fewer options, you should still shop around to make sure you’re working with the right lender for you.

Here are a few things to look for in a lender: 

• Interest rates: With bad credit or no credit, you can expect substantially higher interest rates, but you should still try to find the lowest rates you can
• Fees: Some lenders will have fees and others won’t. Find out what lenders have origination or late fees before working with them, and be aware of which lenders have penalties should you pay off your balance early
• Loan amounts: Just how much a lender is willing to grant you varies greatly, but only take out what you need to avoid paying lofty interest longer than necessary
• Term lengths: Personal loans are typically offered in 30- to 60-month terms but can be as long as 84 months in some cases. Be sure to do your research and find a term that suits your situation best 

Though it may seem unimportant right now, features like autopay discounts or online or mobile accessibility could be a big convenience or perk down the road. You should also know how your funds are distributed and how quickly you can secure them before settling on a lender. 

Get Preapproved 

Preapproval – different from prequalification – is a process that can give the borrower more insight on whether a lender will work with them. Since preapproval calls for detailed information about a borrower’s financial history, more than with prequalification, you’re able to gain specific insight on what your loan’s terms will look like before applying. This includes factors like loan amount, interest rate and any fees.

Although preapproval does require a hard credit check – also called a hard inquiry – which can bump your credit score down by a few points, the effects are typically short-lived and will be wiped off your credit report after 2 years.

Find A Co-Signer 

Having a co-signer, or a co-applicant, is likely your best shot at better loan terms and a wider array of lending options. The ideal co-signer should be someone you trust – and vice versa – who has a higher credit score and income than you. 

Co-signers are financially responsible for the loan should you default on your payments, which makes you less risky as a borrower, and can get you lower interest rates or better terms. 

Submit Your Application

Whether you’ll need to submit your loan application online or in-person at a financial institution can vary based on your lender. Regardless, you should be prepared with the appropriate documentation on hand. This can include:

• Photo identification
• Proof of income – for example, pay stubs, tax returns
• Employment history and contact information
• Recent bank statements
• Education history
• Personal and professional references

Figuring out how to get a loan with bad credit can feel disheartening at times, but there are still ways to solve your cash flow problem. Here are some of them. 

Personal Loan 

A personal loan is an installment loan typically offered in 2 - 5 year terms, though this varies by lender. Many borrowers favor personal loans because even with bad credit, you’ll have a good amount of time for repayment. 

Credit Union Payday Alternative Loan 

If you’re a member of a credit union, you may have access to this option. Generally, payday alternative loans (PALs) come with more affordable interest rates and longer loan terms. Although the loan amounts for PALs are usually on the smaller side – ranging from $200 to $1,000 – these loans are a far safer option than a regular payday loan. 

As you research bad-credit loan options, you’re likely to encounter predatory lenders that don’t care about the long-term financial success of their borrowers. Predatory lenders will offer loans to desperate people with bad credit – loans that have outrageously high rates and unfavorable terms.

These loans can cause borrowers to slip even further into debt, so do your best to avoid them at all costs. Here are some bad credit loan options to steer clear of: 

Payday Loan 

A payday loan is a short-term loan with an extremely high interest rate. In most cases, the loan amount is $500 or less, and as the name suggests, borrowers are expected to repay the loan on their next payday. Notoriously risky with sky-high rates, if you’re unable to make the payment, a payday loan can quickly rack up even more debt. 

Hard Money Loan 

A hard money loan is a short-term loan in which the borrower offers up tangible asset(s) as collateral – usually property. Though the application process is fast – sometimes just a few days – since the lender is a private company or individual, there’s far less regulation than with a traditional lender. 

Cash Advance 

A cash advance is another short-term loan taken out with your credit card or, in some cases, through online services. Remember, if you choose to use a cash advance, you may have to repay the funds with an extremely high interest rate down the road. 

If possible, it’s best to responsibly build up your credit score before applying for a loan. Here are some ways to do just that:

• Make payments on time
• Pay down high balances
• Use a prepaid credit card 
• Become an authorized user on a loved one’s account 

• Temporarily avoid additional hard credit checks
• Try to increase or diversify your income
• Pay down debts
• Try to bring all your credit balances below 30% of your available credit limit

If you’re getting denied for loans right now it may be worth it to focus your energies on improving your financial health. Here are some actions you can take to improve your credit and increase your chances of securing a loan down the line. 

Reduce Expenses 

It sounds simple but sometimes we don't realize how much our spending adds up. Take a good look at your spending habits and cut down where you can. Eliminating things like eating out or subscription services could give you the wiggle room you need with a tight budget. 

Sign Up For A Payment Plan 

You don’t always need a new loan to help cover your debts. Some lenders may be willing to help you reduce your monthly payments or set up a long-term payment plan for a large bill. Most hospitals, for example, are amenable to payment plans. 

Ask Family And Friends 

It can feel impossible to ask for help, but your loved ones may be the answer to securing an interest-free loan until you’re back on your feet. Just make sure to repay the loan as quickly as you can and prioritize your relationships. 

Sell Unneeded Items 

We all have extra items lying around – instead of letting them collect dust, turn them into cash. You may be able to raise enough funds to cover your budgetary crisis. 

Getting a loan approval with no credit or bad credit can be difficult, though not impossible. Remember that there are many ways you can get out of a financial bind. For more tips and help with personal finance matters, continue reading on our financial Learning Center.

Still not sure where to start? Read our other tips for first-time home buyers.