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

A loan at the right time can make a big difference in your financial situation. Whether you need  to cover unexpected medical costs or pay for a big purchase, access to a personal loan can be a game-changer. If you have less-than-ideal credit, it’s more challenging to get a personal loan. But luckily, it’s far from impossible to get a loan with bad credit.

What Is Considered Bad Credit?

Bad credit can stem from any number of financial mishaps. While some cases of bad credit grow from a pattern of irresponsible credit usage, that’s not always the case. Maybe you have avoided credit entirely, or you experienced unemployment that meant you couldn’t pay your bills. Whatever the reason, it’s possible to get back on track.

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.

The good news is that it’s never too late to improve your credit score. And even with a relatively poor credit score, you still have loan options.

How Much More Will I Pay With Bad Credit?

It’s possible to get a loan with bad credit. But in most cases, borrowers with bad credit will typically get higher interest rates than those with good credit. Even a slightly higher interest rate could mean thousands of dollars in interest payments over the life of the loan.

For example, let’s say Ray is a borrower with good credit. They obtain a personal loan with a 5-year term for $10,000 with an interest rate of 11%. Over the course of 5 years, Ray would pay $3,045.45 in interest.

In contrast, Alex is a borrower with bad credit. They obtain a 5-year personal loan for $10,000 with an interest rate of 18%. Throughout the loan term, Alex would pay $5,236.06 in interest.

Average Personal Loan APRs Over The Last Few Years

According to data recently released by the Federal Reserve, the average APR for 24-month personal loans has been increasing since Q3 2022:

While these rates are just an average of APRs, we can imagine the increase would translate proportionally to any personal loan depending on your credit score.

How To Get A Personal Loan With Bad Credit

While the process of getting a personal loan with bad credit comes with challenges, it’s not impossible. Even if you have less-than-ideal credit, you can find plenty of lenders willing to work with you.

Below are some steps you can take to obtain the funds you need.

1. Check Your Credit

A quick look at your credit can help you see where you stand. Take advantage of free resources, like the Rocket Money^SM app, to find out what your credit score is.

From there, take a deeper dive by obtaining a free copy of your credit report through AnnualCreditReport.com. When you examine your credit report, look for any errors. Mistakes or a stolen identity could lead to a string of negative credit actions on your report.

Luckily, it’s possible to remove mistakes from your credit report. If you spot a mistake, reach out to the credit bureau as soon as possible. Depending on your situation, removing this negative information could have a positive impact on your credit score.

2. Research Lenders

With a clear understanding of your credit score, it’s time to find some lenders who might be willing to work with you. The good news is that many lenders are able to work with borrowers who have bad credit scores.

If you already have a good relationship with your financial institution, reach out to see what their personal loan options are. Additionally, local lenders and credit unions represent potential opportunities for borrowers with bad credit.

3. Compare Loan Offers

When you’ve found a few promising lenders, it’s time to compare your loan offers. Below are some of the details worth considering when weighing your loan options.

• Annual percentage rate (APR): Take a look at both the interest rate and APR to get a more accurate assessment of what you may pay in interest over the life of the loan.
• 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 if 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. A longer loan term can equate to more interest costs. Be sure to do your research and find a term that suits your situation best.
• Available discounts: Some lenders offer discounts for select tasks. For example, some lenders offer discounts for setting up automatic payments or having an account with the financial institution.
• Fund distribution: The lender you choose will impact how and when you receive the funds. If you need the funds quickly, that may eliminate some of the lenders.

4. Learn The Difference Between Prequalification Vs. Preapproval

Preapproval – different from prequalification – is a process that can give the borrower more insight on whether a lender will work with them. For personal loans, you’re more likely to see prequalification than preapproval.

Prequalification can help you get an idea of how much a lender might be willing to lend you. You’ll likely need to fill out a form that asks for

• Name
• Social Security number
• Estimated income
• Address
• Phone Number
• Birthday
• Employment status
• Credit score
• Debts
• Loan purpose and desired amount

In general, prequalification is useful when exploring your options.

If you decide to work with a lender that offers preapproval, know that they may perform a hard credit pull and look more in depth at your finances. Preapproval is typically more applicable to mortgage loans than personal loans.

5. Enhance Your Application

You can help your application stand out by bolstering it with additional information. Below are a few ways you might use to improve your chances of getting approved.

• Find a co-signer or co-applicant: Adding a co-signer or co-applicant with a good credit score can help a lender feel more comfortable about working with you. But you’ll need to get permission from someone before adding them to your loan application.
• Include all sources of income: Beyond your paycheck, you might have other sources of income to list on your application. For example, you might add sources of income like alimony, child support, retirement, investment accounts or Social Security payments.
• Include collateral: A collateral loan involves putting an asset on the line. If you cannot keep up with the payments, the lender has the right to take possession of the pledged asset. Some assets you might pledge include a home, car, jewelry, art or collectibles.
• Add personal details: Information about your career trajectory, education, or professional references could tip the scales in your favor.

Best Bad Credit Loan Options

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

If you’ve already tried out the options in this section, check out the alternatives in the next section.

Personal Loans

An unsecured 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. However, bad credit borrowers may find higher interest rates and other limitations.

Get A Co-Applicant, Co-Borrower Or A Joint Personal Loan

If you know someone with good credit who is willing to sign as a co-applicant or co-borrower, that can open up your personal loan options. With their better credit score, the lender might be more willing to overlook your poor credit score.

The catch is that both parties are responsible for the loan. If you don’t keep up with the payments, that could impact the other borrower’s financial situation. With that, it’s not always easy to find a co-applicant.

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 than a traditional payday loan. 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.

Home Equity Loans

A homeowner with significant equity could obtain a home equity loan or home equity line of credit (HELOC) with bad credit. While you might find access to the cash you need, bad credit borrowers should expect to pay higher interest rates than borrowers with good credit.

Second-Best Loan Options For Bad Credit

If none of the options above suit your needs, the options below are worth considering. But keep in mind that these loans often come with higher interest, fewer protections for borrowers and greater risk.

Secured Personal Loan

A secured personal loan involves pledging a valuable asset as collateral for the loan. For example, you might pledge your vehicle or collectibles as collateral.

Typically, this type of loan allows you to get your hands on the funds you need quickly. The downside is that the lender can seize these items if you don’t keep up with your monthly payments.

Family Loans

Borrowing from family or friends can help you obtain the funding you need. However, loans from relatives may put a strain on your relationship. Before moving forward with a family loan, consider nailing out an agreement in writing to make sure everyone is on the same page.

Peer-To-Peer Lending

Peer-to-peer lending is a way to borrow money from another person without a go-between. While these loans may be a way to get money quickly, they can come with high fees and interest rates.

Loan Options To Avoid

If you are shopping for a loan with bad credit, do your best to avoid the following options. High interest rates can set you up for more financial pressure down the line.

Payday Loans

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.

Credit Card 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.

Bad Credit Loans: FAQs

You have questions about bad credit loans. We have answers.

Can I get a personal loan without a credit check?

Legitimate personal loans require a credit check. If you find a “no-credit-check” opportunity, it’s likely you’ll face a very high interest rate or a scam.

What if I need money due to a financial hardship?

If you are facing financial hardship, reach out to your current lenders. Some may be willing to offer temporary debt relief. If you need more help, state and local hardship assistance programs do exist. In certain situations, it may be possible to access funds from a retirement account, but this should be used as an absolute last resort. And remember, it’s important to review all opportunities closely to avoid falling for a scam.

What If I need a loan to buy something?

If you need a loan to buy something that you can get by without, consider holding off until you improve your credit score. Take action to improve your credit score by making on-time payments and paying off credit card debt. With a better credit score, you can tap into more affordable financing options. If you cannot wait to buy the item, consider asking the seller for financing or using a buy now pay later option.

What if I need money to pay off medical debt?

An unexpected medical bill can push you into medical debt. If you are trying to cover a major medical bill, ask the provider if you can get on a payment plan. Additionally, research medical debt relief programs to find out if you qualify for any.

What if I can’t qualify for a bad credit loan?

If you cannot qualify for a bad credit loan, you may have a significant financial problem on your hands. For example, you might have a large amount of debt that makes lenders unwilling to provide a loan. Consider talking to a nonprofit credit counselor or taking action to build your credit.

The Bottom Line

It’s possible to get a loan with bad credit. Before you jump in, make sure that you are comfortable with the interest rate you face.

If you want to explore your options without any obligation, consider getting prequalified for a personal loan from Rocket Loans^SM to see what kind of interest rate they may be able to get based on their current credit score.