Personal Loans for People with Poor Credit
Personal Loans for People with Poor Credit
Personal loans can provide cash for major expenses or consolidate high-interest debt. However, applicants with poor credit scores often struggle to qualify for affordable loan terms. Thankfully, some lenders offer personal loans for borrowers with bad credit.
What is a Bad Credit Score?
Your credit score indicates your creditworthiness to lenders. Most scores fall on a 300-850 scale. Scores below 580 are generally considered poor or bad credit. Issues like late payments, collections, and bankruptcies cause low scores. As a result, borrowers with bad credit tend to represent a higher risk to lenders.
Why Choose a Personal Loan with Bad Credit?
Even if your credit score disqualifies you from low-rate loans from traditional lenders, alternative loans help you:
- Cover emergency costs
- Consolidate higher-interest debts
- Establish positive payment history
- Rebuild your credit reputation
Personal loans offer fixed rates and terms unlike credit cards. This structure helps create an affordable repayment plan.
Bad Credit Personal Loan Options
Personal Loans for People with Poor Credit
Specialized lenders provide personal loans to subprime borrowers who cannot qualify for traditional loans. Make sure to compare multiple offers to find the best bad credit personal loan for your situation.
Online Lenders
–LendingClub and Prosper facilitate personal loans with credit scores as low as 600. While rates are higher than traditional loans, they feature predictable payments. These peer-to-peer lending platforms allow investors to fund loans requested by borrowers.
Banks and Credit Unions
Some banks and credit unions also lend to borrowers with less-than-perfect credit. Local institutions may offer more flexibility than national lenders. For example, they may evaluate other factors beyond your credit reports and FICO scores.
Payday Loans
Payday lenders provide small, short-term loans with minimal eligibility criteria. However, extremely high interest rates – often 400% APR or more – make these loans very expensive.
Personal Loans for Bad Credit: What to Know Before Applying
While more loan options exist for poor credit today, make sure you understand the risks and responsibilities involved when borrowing money.
Interest Rates on Bad Credit Personal Loans
Lenders charge higher interest rates and fees to offset the elevated default risk posed by borrowers with low credit scores.
What APR Can You Expect With Bad Credit?
Personal loan interest rates typically range from 5.99% to 36% APR for bad credit applicants, compared to rates as low as 2.49% APR for excellent credit. For example, while Prosper caps rates at 35.99% APR, applicants with scores below 640 should expect rates above 25% APR.
Higher rates mean you pay more money over the loan’s term. Be sure to calculate the total costs before committing to a loan.
Loan Amounts and Terms
Bad credit borrowers generally have lower loan maximums and shorter repayment terms.
Loan Amount Limits
Personal loan amounts range from $1,000 to $40,000 for bad credit applicants across different lenders. Expect lower maximums than you would with excellent credit, where loans reach up to $100,000.
Loan Repayment Term Lengths
Many lenders cap terms between two and five years for borrowers with low credit scores. Ideally, your monthly payments over a three-year term should not exceed 10% of your take-home pay. Loans with longer terms feature lower payments, but you end up paying more interest overall.
Improving Your Chances
Building a relationship with a community bank or credit union can increase your odds. These institutions may evaluate your entire financial profile instead of just your credit reports.
Steps to Improve Approval Odds on Bad Credit Loans
- Pay down balances – Lowering your credit utilization signals lower risk.
- Check reports for errors – Mistakes can drag down your credit scores.
- Bring a co-signer – A cosigner with good credit lessons the lender’s risk.
- Apply locally – Community banks and credit unions may show more flexibility.
Remember, each loan application triggers a hard inquiry, which can ding your score. Limit applications to avoid extra damage to your credit.
Alternatives to High-Interest Loans
If you want to avoid expensive bad credit loan rates, consider these options instead:
0% Intro APR Credit Cards
Balance transfer cards offer 0% interest for 6-21 months. Create a plan to pay off balances before rates jump back up.
Borrow From Friends and Family
For smaller loan needs, private parties may lend money at little or no interest. Draw up a formal lending contract clearly detailing repayment terms.
Company Sponsored Loans/Advances
Some employers provide low or no-interest loans, especially for debt consolidation. Ask your company’s HR department what programs may be available.
401(k) Loans
If allowed, you can borrow up to 50% of your vested 401(k) balance for five years at low interest. However, missing payments can jeopardize your retirement funds.
Home Equity Loans/Lines of Credit
Tapping available equity on your home generates funds at competitive rates, even for borrowers with bad credit. Just beware, you risk your home if you fail to repay.
Getting a Cosigner
Asking a cosigner with excellent credit to sign your loan lowers the lender’s risk. This opens doors to bigger loans with better rates. Make sure you can handle payments yourself to avoid burdening someone else. Consider rewarding them by authorizing your bank to automatically transfer a “gift” to their account when you make on-time payments.
Who Makes an Ideal Co-signer?
Spouses or domestic partners often co-sign loans without compensation. However, parents, siblings, close friends, or other trusted individuals might also be comfortable co-signing if you agree to certain incentives in return. Outline the details formally in a co-signer agreement.
What to Do After Getting Approved
Congratulations! With your personal loan approved, make sure you spend wisely and budget to repay on time. Paying as agreed boosts your credit standing over time.
Tips for Managing Your Bad Credit Personal Loan
- Automate minimum payments so you never miss one
- Pay more than the minimum when possible
- Avoid taking cash advances on credit cards while repaying your loan
- Limit new credit applications in the 1-2 years after taking the loan
Following sound financial habits ensures your personal loan positively impacts your credit rather than sinking it deeper into bad territory.
Conclusion
A bad credit score makes getting approved for a personal loan more challenging but not necessarily impossible. Specialized subprime lenders offer higher-interest loans to riskier borrowers, providing them a way to cover large expenses despite past credit issues. Carefully comparing loan offers helps identify affordable repayment terms suited to your budget.
While rates prove expensive, paying consistently demonstrates financial responsibility. Before applying, take steps to improve your approval odds and credit standing over time. Once approved, make payments on time and keep credit balances low to build positive credit history. Not only does this promote access to better loan terms in the future, but it also assists all your borrowing needs.
FAQs
How does credit utilization affect loan eligibility?
High credit card balances compared to limits signals higher risk since borrowers tap out more of available credit. Paying down balances before applying often allows access to better loan terms.
Can I get a $40,000 personal loan with bad credit?
Loan amounts up to $40,000 prove possible but unlikely for applicants with low credit scores. Smaller loan requests more frequently win approval from subprime lenders. Expect maximums between $1,000 and $10,000 in most cases.
Should I take a 5-year or 3-year bad credit loan?
The longer 5-year repayment term features smaller monthly payments. However, you pay significantly more interest overall compared to a faster 3-year loan. Unless facing financial hardship, accept higher payments over a shorter term to minimize total loan expenses.
Where is the best place to get a personal loan with bad credit?
Online lenders like Prosper and LendingClub facilitate access to quick loan offers. Additionally, local banks and especially credit unions may approve loans based on individual circumstances instead of just credit reports.
Should I get a 401(k) or payday loan instead?
Payday loans prove predatory and excessively expensive, often creating cycles of long-term debt. 401(k) loans also risk your retirement funds with potentially huge tax penalties if you cannot repay. Bad credit personal loan lenders provide a reasonable middle-ground alternative.
