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How to Get a Loan With Bad Credit
By Stephanie Colestock MONEY RESEARCH COLLECTIVE
If you have bad credit and have ever tried to take out a loan or apply for any other credit-based financial product, you know how discouraging the process can be. Many of today’s best lenders want their borrowers to have good (if not excellent) credit histories and may not approve applications from borrowers with a credit score that’s fair or worse. This will exclude you from consideration for the best home equity loans, approval by the best mortgage lenders, and other credit products.
Your best bet for getting a competitive loan product is to improve your credit score over time; this will unlock the door to many more lenders, lower interest rates, and better loan terms. Until you can do that, however, here’s a look at how you can still get a loan today even with bad credit and what to expect from the process.
Guide to loans for bad credit
So you know how to repair bad credit and are already working toward a better credit score. Great! But in the meantime, you need to borrow money.
Here are eight steps you can take to evaluate the different types of loans for people with bad credit or a limited credit history.
Step 1: Check your credit
Your creditworthiness will play a notable role in your eligibility for loans and in the types of loan options available to you. Whether you’re looking for a secured loan, credit card, or even an unsecured personal loan, lenders will be looking at everything from your payment history to your current credit card debt to see if you qualify.
Knowing where your credit stands is the first step if you’re looking to take out any loan, but especially if you already know that your credit history is poor, limited or nonexistent.
American adults are able to request a full credit report from each of the three credit bureaus (Experian, Equifax and TransUnion) once a year, free of charge. The easiest way to obtain these is through AnnualCreditReport.com. Just be sure to watch out for lookalike sites and scams, as this is the only federally-approved website that can help you get these free credit reports.
Once you have your credit report(s) in hand, you’ll want to look over them closely. Inspect each one for errors, which could include:
- Reported accounts that don’t actually belong to you
- Inquiries from creditors that you don’t recognize
- Incorrect account balances
- Late payments that were actually made on time
- Paid accounts that erroneously went into collections
- Mistakes in your name, address, or other personal information
Depending on the type of error, this could have the potential to dock your credit score by a handful of points or tens of points. In some cases, a mistake could be all that stands between you and a loan approval.
If you do find any errors, here’s how to remove items from your credit report so your score can improve:
- Reach out to the creditor. Contact the creditor directly to see if it can be fixed. Oftentimes, they can verify that an error has been made and easily update the account.
- File a dispute. If they are unable (or unwilling) to help you correct the issue, you can also submit a dispute online through the reporting credit bureau.
- Wait for a response. After submitting a dispute, the investigation process could take a few weeks. You may also need to provide the bureau with any evidence you have that the report is in error.
- Check for updates. Once the investigation is complete, the report will either be corrected, removed from your credit entirely, or reinstated. You can generally see the file get updated on your credit report right away if it’s the result of a closed dispute; if the creditor is the one to correct the error, you may need to wait a month or so before the report updates on your credit history.
Step 2: Look for bad-credit lenders
Now that you have a good understanding of where your credit stands today — and have had the opportunity to correct any errors that may exist — it’s time to start looking for a lender.
While many of the top lenders prefer to work with good credit borrowers, there are also many poor-credit lenders available.
Some of the best bad credit loans are available from lenders with no minimum credit score requirement, like Upstart. Your credit history will still be factored into their decision and may influence the amount you can borrow, the interest rate you’ll pay, and the repayment terms. You won’t be excluded off the bat, though, just because your credit score is low.
You may also want to try getting preapproved through a personal loan aggregator. These lending platforms allow you to shop around for a loan through multiple online lenders at one time without affecting your credit score. You’ll usually be able to check your potential rates and loan terms before officially applying, too.
Step 3: Compare lenders
Once you have a short list of potential banks, credit unions, and online loan providers, spend some time comparing them.
The best personal loans for you are the ones that:
- Meet your funding needs
- Offer approval with your credit score and history
- Have the most competitive loan terms
- Offer a monthly payment that you can afford
Consider how much your new loan will cost you in the end, factoring in everything from your loan rate to your repayment term. Does the lender offer a lower interest rate if you enroll in autopay? Look into whether that financial institution charges origination fees, which will increase your overall loan cost.
Step 4: Document your source(s) of income
If you don’t have a strong credit score to lean on, lenders will usually rely on other factors when deciding whether or not to approve your loan application. Your income is one of these factors, particularly because it affects your ability to repay the debt as scheduled.
Documenting your income source (or sources) is an important pre-application step. This means pulling together W-2s and/or your most recent pay stubs. If you have additional income streams — such as child support, alimony, investment dividends, rental income, or a side gig — you’ll want to gather that evidence as well. This could mean providing a copy of your divorce decree, recent invoices or payment receipts from clients, or a copy of your tenants’ current lease agreement.
If you’re self-employed, you can still take out a personal installment loan; just know that you’ll probably need to jump through a few extra hoops in the application process. Lenders may want to see tax returns from previous years, copies of recent 1099s, current invoices or payment receipts, and even a profit & loss statement for your business.
The actual income requirements will vary by lender, but preemptively having this documentation ready can make applying for your loan faster and easier.
Step 5: Get pre-qualified
Now that you know what you need for your loan and where to apply, it’s time to get pre-qualified.
A pre-qualification allows you to shop for a potential lender and even see the APR range (annual percentage rate or interest rate) and terms available on potential loan offers. The benefit to this is that you aren’t yet “officially” applying, and lenders will only use a soft credit check to get general information about you and your credit history. There is no hit to your credit score and no obligation to move forward with the loan.
Depending on what sort of pre-qualification offers you receive, you can start to get an idea of how much you’ll be able to borrow, whether you’ll need to add a cosigner to your loan (more on that in a minute), and how much this loan is likely going to cost you in the end.
You can get pre-qualified through as many different lenders as you want. This makes it even easier to compare lenders and decide how you want to proceed.
Step 6: Avoid hard-inquiries
When the time comes to move forward with an official loan application, your lender will conduct what’s called a hard pull. This pull, also known as a hard credit inquiry, gives the lender a more precise view of your credit history. From this pull, they can see any negative reports that may be on your credit history, what your debt-to-income ratio (DTI) is and how many new accounts you’ve opened (or tried to open) recently.
Hard inquiries stay on your credit for two years and will affect your credit score for about six months. If you have too many hard inquiries in a short period of time, not only will you drop your credit score, but it can also be a red flag for potential lenders. In many cases, multiple inquiries can signal that you are overextending yourself financially.
Avoid hard inquiries whenever you can. Whittle down your potential lender list with the help of soft pull pre-qualifications, then only apply to your top lender.
Step 7: Agree to shorter loan terms
Once you’ve gotten approved for a loan, you’ve officially cleared the first hurdle to borrowing with a bad credit score. However, even though a lender says they will let you borrow money, it doesn’t mean that your bad credit isn’t going to still affect your loan for years to come.
The lower your credit score, the less competitive you can expect your loan terms to be. If you have a low credit score, you may be:
- Limited in how much you can borrow
- Offered higher interest rates
- Only given shorter loan terms
- Required to add a co-signer to your loan
Each of these can help a lender mitigate their own risk when lending to a bad credit borrower but also can (and likely will) cost you more money.
Agreeing to a small loan period can be one way of improving your terms. That’s because lenders will generally offer lower interest rates if you agree to a shorter repayment term. If you can afford the higher monthly payments each month, shortening your debt term can save you quite a bit of money over the course of the loan.
Step 8: Consider adding a co-signer
In some cases, you simply may not qualify for a loan on your own, either due to a limited credit history or bad credit. In other cases, you may qualify for the loan but not get the repayment terms you want.
Either way, adding a creditworthy co-signer can help you get the loan you want.
A co-signer is someone who agrees to sign for your new loan, stating that they will be legally responsible for the debt. The new loan will be reported on their credit history, as will each monthly payment made. If you fail to make your payments as scheduled or even default on the loan, the lender will go after the co-signer for the debt.
Adding a co-signer, such as a parent or spouse, can be a great way to access a loan for which you might not otherwise qualify. It’s important to remember, though, that the future of your own credit isn’t the only thing at stake: if you fail to manage the debt responsibly, you could also wreck someone else’s credit.
Bottom Line to Getting a Loan with Bad Credit
An excellent credit score will open many financial doors – there’s no doubt about that. If you aren’t rocking a top-flight FICO score, however, you can still get the loans and financial products you need most… you just might have to work a little harder. Getting a loan with bad credit may be more expensive and require you to shop around a bit more in order to find the right lender.
Consider focusing on improving your credit score, either organically (by responsibly managing a variety of accounts and keeping your debt burden low) or by working with a trusted credit repair company. Even if you don’t need to borrow money again anytime soon, having a healthy credit score in your back pocket can ensure that you’re always ready for any need that arises.
Stephanie Colestock is a DC-based personal finance writer with nearly 11 years of freelance writing experience. She covers a wide range of finance-related topics and is currently working toward her CFP®️ certification. Her work appears on sites such as Business Insider, MSN, Fox Business, CNET, Investopedia, and more.