If you’re reading this, you’re probably looking to get a personal loan but have some credit issues.
We have some good news.
It may be possible for you to get a personal loan with bad credit.
What is a Personal Loan
A personal loan is a short-term installment loan from a private lender, online lender, or credit union. The loan amount is usually between $5,000 – $40,000 and comes with a fixed interest rate and monthly payments.
In most cases, the loan term is between 24-60 months but can be as short as 1 year or as long as 8 years.
Types of Personal Loans
Unsecured personal loans – An unsecured loan is a loan that does not require any collateral; most personal loans are unsecured. A financial institution will check your credit report and financial documents to ensure you meet a loan’s requirements.
Secured personal loans – A secured loan is a loan that is secured by collateral, such as a car, house, or another asset. Because an asset secures the loan, they have lower minimum requirements, making them easier to qualify for.
The minimum credit score requirement for a personal loan varies depending on the lender. Most personal loans have a minimum credit requirement of 620-640. However, some lenders offer personal loans with poor credit as low as 580.
Lenders look at more than just your FICO score; your entire credit history is taken into consideration. Someone with poor credit because they have limited credit history is more likely to get approved than someone with multiple late payments and collection accounts.
- No late payments in the last 12 months
- Credit utilization ratio on credit cards below 50%
- No judgments
- At least 2 years since a bankruptcy or foreclosure
- Good payment history over the last 12 months
- 580 credit score or higher
Personal Loans Pros and Cons
Reasons to Get a Personal Loan
People get personal loans for everything, from vacations to paying off bad debt. But using a personal loan for some things isn’t always a great idea.
Debt consolidation is one of the top reasons consumers take out personal loans. Paying off high-interest credit cards with a lower interest rate, a personal loan can save you thousands of dollars in interest.
And since they are unsecured, you are not taking on any additional risk like you would by using a secured loan, such as a home equity loan to pay off debt. Home equity loans and credit lines are loans that are secured by property; if you’re unable to meet the monthly obligations, you could lose your home, which is why we strongly advise against using an equity loan to pay off unsecured credit card debt.
Read more: Bad Credit Consolidation Loans
Medical bills can be very high, causing many people not to be able to afford the payments. In emergencies like this, personal loans are a great way to get the extra cash you need to stay current on medical payments. However, you need to remember that personal loans for bad credit borrowers come with high-interest rates, making them expensive.
First, you should speak to the hospital or service provider about your financial situation. Often they can set you up with an affordable payment plan. If you are behind on your medical payments, they may be willing to accept a settlement. Contact the providers to negotiate a settlement for up to 50% of the balances; you can then use the loan funds to make the payments in full, saving you quite a bit of money.
Loss of Income
If you or someone in your household has lost a job or had income reduced, you may be struggling to keep with up expenses, like mortgage payments, car loans, etc. A loan will help you keep up with your payments until you’re able to find a new job. And since personal loan rates are usually lower than credit cards, they are the better option.
Home Renovations and Repairs
Homeowners who face large repair bills or are interested in renovating their homes can get the money to do so with a personal loan. In some respects, a personal loan makes more sense than a home equity loan because they are unsecured, while your home secures equity loans. However, interest rates on a second mortgage are usually much lower.
Rate Search: Check Home Equity Loan Rates
Alternatives to Personal Loans
Personal loans may not be the best option depending on your situation. If you have poor credit, you are looking at higher rates that may make a loan much riskier. In these cases, there are a few alternatives to consider.
Credit cards are a type of unsecured revolving line of credit. If you get a credit card with a $5,000 credit limit, you can use up to $5,000. You will make monthly payments that will be applied to principal and interest, and as your balance goes down, you can use it again. Credit cards generally have higher interest rates than personal loans do. However, for borrowers with bad credit, that difference in rate will not be too far apart.
A payday loan is a very short term loan that needs to be repaid in full; you cannot make monthly payments. I do not recommend payday loans. However, if someone is in an emergency and needs money quickly, they can do so with these types of loans. You can apply for a payday loan and have the money in your hand within the hour. They would come with extremely high-interest rates, over 300% if you were to annualize the rate. If you do get a payday loan, make sure you pay it back in full as soon as possible and never get another one unless you’re in a dire situation.
If you are looking to consolidate debt, there are other ways to move your credit card debt to a lower rate. A balance transfer credit card is a credit card that allows you to transfer the balance on an existing card to the new card. Usually, these credit cards come with a 0% interest rate for the first 6-18 months. This will allow you to pay off that debt interest-free.
Home Equity Loans
A home equity loan uses the equity you have in your home as collateral for a loan, otherwise known as a second mortgage. Equity loans are only a good idea when you are looking to borrow money to upgrade or repair your property.
How Your Credit Scores are Calculated
Your credit score is calculated using five factors, payment history, credit utilization ratio, a good mix of credit accounts, new credit, and credit length. Before applying for a loan, you should know how your credit is calculated and take some steps to improve it.
Payment History (35%) – Your payment history is the biggest factor in determining your credit score, making up 35% of your overall rating. This includes late payments, collection accounts, and past due accounts. Make sure you pay all your bills on time. Every time is the best way to build excellent credit over time.
Credit Utilization (30%) – Credit utilization ratio is the amount of available credit you’re using. For example, if you have a $10,000 credit limit, and the balance is $5,000, your utilization ratio is 50%, which is very high. Pay down your credit card debt to less than 20% of your score to maximize your FICO score.
Length of Credit Accounts (15%) – The longer length of time you have had credit accounts, the higher your score will be. That is why it’s best not to close any credit cards to keep your open account average age high.
New Credit (10%) – New credit includes recently open credit accounts and credit inquiries. When you apply for a loan or credit card, the lenders will pull a copy of your credit report and history to make sure you qualify. When they do this, a hard credit inquiry is added to your report. Too many credit inquiries can negatively affect your score,
Types of Credit Used (10%) – Lenders like to see a good mix of credit accounts, credit cards, auto loans, lines of credit, etc. It is reflected in your credit score. If you only have one type of credit accounts, i.e., credit cards, you can boost your score by opening an installment loan.
Improve Your Credit Score before Applying
Before you apply for a personal loan, you should make sure your credit is good enough to get approved. Here are a few ways you can increase your score quickly.
- Pay down debt – The more credit card debt you have, the lower your score will be. Try paying down your balances below 20% of the card’s limit.
- Stay current on your bills – You need to be extra careful not to miss a payment, especially when you’re applying for a loan. Set up auto-pay on your accounts the takes away the risk of forgetting to make a payment.
- Dispute collection accounts – Collection accounts significantly impact your credit. If you have collections, you should contact the creditor and see if they will agree to a pay for delete. They delete the account from your report if you pay it off. You want to make sure they will remove it when you pay. Otherwise, if you pay and they don’t remove it, your credit rating will not improve.
Getting a personal loan with bad credit isn’t easy, but lenders offer personal loans for bad credit consumers.
Ensure you’re getting the loan for the right reason, avoid taking out loans to purchase anything unnecessary.
Before you apply, work on increasing your credit score, this not only improves your chances of getting approved, but it will help you get a lower rate.
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