Getting a Loan with Bad Credit: Tips and Strategies

Understanding credit and loan approval

What does 'bad credit' mean?

The Federal Trade Commission (FTC) explains that "bad" credit is when you have a low credit score, which means it will be harder for you to get more credit. Also, if you do get credit, you'll likely pay higher interest rates on it.

A number of elements can impact your overall credit score. According to the Consumer Financial Protection Bureau (CFPB), the following factors are usually taken into consideration when determining your credit score:

• Outstanding debts
• History of bill-paying
• The length of time you have had loan or credit accounts open
• Total number of loan or credit accounts you have
• Type of loan or credit accounts you have
• Your credit utilization ratio
• Any new credit applications
• History of debt sent to collections, foreclosures, or bankruptcies, including how long ago.

The role of credit in loan decisions

Getting a loan with bad credit can be challenging, but it's not impossible. There are several ways to boost your chances of being approved for bad credit personal loans. We've asked experts how to get the loan you need, even if you have bad credit.

Generally, a credit score is the most important factor in deciding what interest rate a lender will offer you.

"Although many lenders offer personal loans to borrowers with only fair credit, you can expect to pay higher interest rates," says Jamie Young, personal financial expert with Credible, an online loan marketplace.

Types of loans available for bad credit

Personal loans

You can get bad credit personal loans from many banks, credit unions, and online lenders. While each lender will have its own requirements, it's possible to get a loan with a very low credit score or even no credit at all under some circumstances.

However, remember that the lower your credit score, the higher the interest rate you're likely to be offered by any lender. Getting prequalified for a personal loan is usually fast and easy, and it doesn't affect your credit score. Doing so will enable you to get an idea of the kind of rates a lender will offer you before you apply.

Remember that credit union interest rates are capped at 18% by the National Credit Union Administration (NCUA). So, if your credit isn't in the best shape, you may get a lower rate from a credit union than a bank or online lender.

Debt consolidation loans

Another option is to take out a debt consolidation loan. This is a type of personal loan that allows you to combine multiple debts into one loan. Debt consolidation is a way to streamline your debt payments into one monthly payment, which should make managing payments easier and increase your likelihood of making payments on time.

While applying for a debt consolidation loan can initially lower your credit score, over time, it should improve when you continue to make on-time payments and lower your credit utilization ratio.

How to get a loan with bad credit

Step by step: Applying for a loan with a low credit score

1. Check your credit report. Even if you already know your credit score is bad, it's good to have an exact idea of where you stand. Many credit card companies and lenders let their customers check their credit scores for free. You'll also want to check for any errors on your credit report that could be hurting your credit score. If you find an error, be sure to dispute it with each credit bureau that's reporting the mistake.
2. Find lenders that offer prequalification. When looking for loans for bad credit, this will allow you to compare multiple interest rates and terms available without further injuring your credit score.
3. Compare offers. Once you've been prequalified, compare the offers and choose the one from the lender that best suits your financial needs.
4. Complete the full loan application. To submit the formal application, you'll likely have to provide documentation, such as pay stubs, W-2 forms or tax returns, photo ID, record of 401(k)s and other financial accounts, and proof of collateral (if you're applying for a secured loan).
5. Once you're approved for the loan, the lender will send you final loan documents to sign. Read everything carefully to ensure you understand exactly how much you'll be paying in total for the loan and be totally certain you can afford the monthly payments.
6. Work the loan payments into your budget. Making sure you include the payments in your monthly budget will help prevent you from falling behind.

Strategies for securing a loan with bad credit

Finding the right lender

No matter what your credit score is, it's important to check rates with multiple lenders to see who will offer you the best rate and terms. "If your credit score is low, don't assume that if you're turned down by one lender, you can't get a loan. You may have to apply to several lenders before you'll get an offer," Young says.

If you have bad credit, you can still get a loan by searching beyond your bank.

Priyanka Prakash, a lending and credit expert with Fundera, says online loan lenders will work with individuals who have a score as low as 550 FICO. Popular personal loan lenders include SoFi personal loans, Happy Money personal loans, and LendingClub personal loans. Sites like Fiona allow borrowers to compare offers from multiple lenders side by side.

Banks face more regulations, so "as a result, they have the strictest lending standards, so if you fall below a certain credit bracket, you're out of luck," says Prakash. "Online lenders are a lot more flexible. They place less importance on credit and more importance on your ability to pay back a loan. That means income is paramount."

If the borrower can show you have sufficient income from your job or your business or assets to draw on to pay back your loan, then you can get approved even with a bad credit score.

Bad credit tips to improve loan approval odds

It's one thing to suspect you have bad credit and another to know exactly how bad it is. Credit scoring company FICO issues five categories of credit score:

• poor: 300-579
• fair: 580-669
• good: 670-739
• very good: 740-799
• excellent: 800-850

It's always a good idea to have a sense of your credit status before you apply for any loan. Companies like Credit Karma issue a close approximation of your score for free, and there's no limit on how many times you can check it.

You don't need to have excellent credit to get a loan, but as your score creeps down through "very good" and "good" into "fair" and "poor," you'll see a change in the rates and offers lenders are willing to give you — if they're willing to give you a loan at all. See the best personal loans for bad credit and the best loans for fair credit.

Alternatives for borrowers with bad credit

Credit unions

Credit unions are a great option for those looking into how to get a loan with bad credit. They are more flexible, and they cap out their interest rates at 18%, says Nathalie Noisette, founder of CreditConversion.

According to Experian, not-for-profit status means credit unions are exempt from paying taxes and may be willing to accept riskier borrowers than banks would, and they can charge lower interest rates and fees than banks. Experian also says that poor credit may not be a dealbreaker at a credit union, as a credit union considers the applicant's entire financial application and history.

Secured loans

Since consumers with bad credit are seen as a default risk, secured loans are issued with a caveat — collateral, says Noisette. "If a consumer is willing to put a house, car, watch, or just about anything up against the amount of the loan, they will be able to qualify more easily," she says.

Mortgages, home equity loans, and auto loans are considered secured loans since you're putting up collateral. However, a secured credit card may also be considered a secured loan.

Remember that if you take out a secured loan using your home, your car, or something else as collateral, you run the risk of losing that collateral should you become unable to pay your loans — in plain language, if you agree to offer your car as collateral and become unable to pay the money you owe, the lender could seize your car.

Most lenders that offer unsecured loans, including banks and credit unions, will also offer secured loans.

Home equity loans

If you have a home that has equity, consider using the equity. That money is available and can be used without leaning on a poor credit history.

"Your credit score will not be factored into the decision to use a home equity loan," says Noisette. "As long as there is equity, you can use it to your advantage."

Home equity loans have a fixed interest rate and fixed repayment term, Holly Johnson reports for Business Insider. "You can borrow money for up to 30 years," writes Johnson, "and the interest may be tax deductible if you itemize your taxes and use the money to make substantial improvements to your home."

However, she writes, bear in mind that there are some downsides to a home equity loan: primarily, you're putting your home up as collateral, so you could lose your home if you fail to repay. Plus, some home equity loans do have fees, and you need considerable home equity to qualify. If you do decide to pursue a home equity loan as an option, make sure to do your research and compare multiple offers from lenders.

Cosigners

If you're able to bring in a cosigner who adds enough strength to your application to get approved, it could make the difference between buying a home now and waiting until you can rebuild your credit. Lenders such as Achieve personal loans let you add a co-borrower.

"Cosigners give lenders peace of mind, because they provide lenders with an extra layer of security if the primary borrower becomes unable to make the payments," says Josh Goodwin, mortgage loan expert with Goodwin Mortgage Group. "In this event, the cosigner must take over payments until the primary borrower gets back on his or her feet. That said, if the primary borrower defaults, the lender can pursue remedies from the cosigner, even if they also end up unable to pay."

If you're considering bringing on a cosigner, make sure that person understands that they're liable for your loan payments should you be unable to pay.

Credit card cash advances

If you're having trouble getting approved with a low credit score, you may consider a credit card cash advance. Credit card cash advances are short-term loans that you borrow from your credit card's credit limit. Keep in mind that many credit card companies have a separate credit limit for cash advances. These limits can usually be found on your credit card statement.

Since you're borrowing from the credit you already have, you won't have to worry about an application process or improving credit before applying for a loan.

It's a way to get cash fast. However, credit card cash advances often come with high interest rates, and the interest begins accruing the moment you make the withdrawal. These bad credit loans also frequently come with additional fees, such as ATM fees.

Credit card cash advances should be used as a last resort as they are an easy way to get yourself into a long-term cycle of debt.

Improving your credit for future borrowing

Building a better credit profile

Going forward, you'll want to try and increase your credit score to make it easier to get a loan next time or perhaps to refinance the ones you have. The first step in increasing your credit score is to understand it, and the way to do that is by getting your credit report.

Your credit report spells out everything being counted in your credit — every loan, every credit card, every debt. You'll want to take a look to make sure everything is correct — it's not uncommon, nor unfixable, for there to be mistakes — and to see where you might be able to make a big difference fast, like paying off an old utility bill that went into collections without your knowledge. (It happens!)

You're entitled to one free copy of your credit report every week from each of the three nationwide credit reporting companies: Experian, Equifax, and TransUnion. Order it online from annualcreditreport.com, or call 1-877-322-8228.

Your credit score is calculated approximately with the following five factors:

• Payment history (35%)
• Current debt balances (30%)
• Length of credit history (15%)
• New credit (10%)
• Credit mix (10%)

Some of those factors are difficult to change, like the length of your credit history. However, others can make a big impact in a relatively short time.

"The biggest factor in your credit score is your on-time payment history, so you should start by making sure that is perfect going forward," writes Eric Rosenberg for Business Insider. "The easiest way to ensure you never miss a payment due date is to turn on automatic billing and payments using your bank's bill pay or your credit card billing website."

Note that improving your credit is a marathon, not a sprint. If you're taking steps in the right direction, you'll see it pay off — and the next time you want to apply for a loan, you'll be in a better position.

Get prequalified for a personal loan with bad credit

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