Your Guide to Getting Loans with Bad Credit

Having a bad credit score doesn’t mean you’re out of options when it comes to getting a loan. While a low credit score can make the loan process more difficult, there are still plenty of loans for bad credit available from various lenders.

What is Considered Bad Credit?

Credit scores generally range from 300 to 850. Here’s how the three major credit bureaus define bad credit scores:

A bad credit score is often the result of:

• Late or missed payments on loans, credit cards, or other bills
• High credit card balances relative to credit limits
• Recent bankruptcy or foreclosure
• Errors or mistakes on your credit report

While it’s certainly possible to get approved for a loan with bad credit, you’ll generally face higher interest rates and less favorable terms than someone with good or excellent credit.

Types of Loans for Bad Credit

If you have bad credit, here are some of the most common loan options to consider:

Personal Loans for Bad Credit

Personal loans for bad credit are unsecured loans that don’t require collateral. They can be used for a variety of purposes, including debt consolidation, medical expenses, home improvements, and more.

Interest rates on personal loans for bad credit can range from 20% to 36% APR, and loan amounts generally max out at around $50,000. Be prepared for relatively short repayment terms of 1 to 5 years.

Bad Credit Auto Loans

Auto loans are a type of secured loan where your vehicle serves as collateral. While having bad credit can make it harder to get approved for an auto loan, many lenders offer loans for bad credit specifically for purchasing cars, trucks, or SUVs.

Bad credit auto loans have higher interest rates than conventional auto loans, sometimes exceeding 20% APR. Down payments of 10% or more are also common requirements.

Secured Bad Credit Loans

A secured bad credit loan requires you to put up some form of collateral, such as a vehicle, real estate, savings account, or other asset. Secured loans are less risky for lenders, so you may get approved more easily and potentially qualify for a lower interest rate than an unsecured loan.

However, defaulting on a secured loan means the lender can seize your collateral, so these loans come with significant risk for borrowers.

Bad Credit Home Loans

It’s extremely difficult to get approved for a conventional mortgage with bad credit, but some lenders offer loans for bad credit like Federal Housing Administration (FHA) loans and Department of Veterans Affairs (VA) loans that have more lenient credit requirements.

Home loans for bad credit typically require a minimum credit score around 580, as well as a down payment between 3.5% and 10%. You’ll also have to pay mortgage insurance premiums, which increase your overall borrowing costs.

Finding Lenders that Offer Loans for Bad Credit

Not all lenders are willing to work with borrowers who have bad credit. Here are some tips for finding lenders that offer loans for bad credit:

• Check with credit unions: Credit unions are nonprofit organizations that often have more flexible lending criteria than major banks. Many will consider applicants with less-than-perfect credit.
• Look for online lenders: A number of newer online lenders have emerged that specifically cater to borrowers with subprime credit. They use alternative data like income and employment to evaluate applicants.
• Consider peer-to-peer lending: Peer-to-peer lending platforms like LendingClub and Prosper connect borrowers with individual investors who may be more open to funding loans for bad credit.
• Use a loan broker: Loan brokers have relationships with multiple lenders and can shop your loan scenario around to find potential matches.

How to Get Loans for Bad Credit Approved

If you have bad credit, lenders will scrutinize other aspects of your financial profile when evaluating you for a loan. Here are some tips to improve your chances of getting approved:

1. Maintain steady income: Having a reliable source of income is crucial when applying for any loan, but especially loans for bad credit. Provide documentation like pay stubs, tax returns, and bank statements.
2. Have a low debt-to-income ratio: Lenders want to see that you can comfortably afford the new loan payment on top of your existing debts. Keep your total debt load below 40% of your gross monthly income.
3. Explain any issues: If there are legitimate reasons behind your bad credit like unemployment, divorce, or medical issues, provide a written explanation to the lender.
4. Offer collateral: Putting up an asset like a car, home, investments, etc. as collateral can help get your loan application approved by reducing the lender's risk.
5. Apply with a co-signer: Having a co-signer with good credit who agrees to be equally responsible for the loan repayment can significantly boost your approval odds.

The Drawbacks of Loans for Bad Credit

While loans for bad credit can provide needed funding, they come with some significant downsides compared to loans for people with good credit:

• Higher interest rates: Expect to pay interest rates that are 5-10 percentage points higher than rates on prime loans, which amounts to thousands more in interest.
• More fees: Lenders commonly charge origination fees, administration fees, or other upfront costs on loans for bad credit to offset risk.
• Lower loan amounts: Due to the increased risk, many lenders cap the maximum loan amount they'll provide to bad credit borrowers.
• Shorter repayment terms: Lenders want to reduce their risk exposure, so loans for bad credit often have repayment periods of just 1-5 years.
• Collateral required: Secured loans require putting up collateral that the lender can seize if you default, putting your asset at risk.

The bottom line is that loans for bad credit should only be used as a last resort after exhausting other options like increasing income, paying down debt, and working on improving your credit score.

Alternatives to Loans for Bad Credit

Due to the high costs and risks of loans for bad credit, it’s worth exploring some alternative options first:

• Get a co-signer: Applying with a trusted friend or family member who has good credit can help you qualify for better rates and terms.
• Borrow from family or friends: Ask loved ones if they'd be willing to lend you the money at an interest rate lower than what a lender would charge.
• Sell assets: Consider selling items like jewelry, electronics, or old cars for cash instead of borrowing it. You keep more in your pocket this way.
• Pick up a side gig: Temp work, freelance projects, pet-sitting, and other part-time jobs can generate extra income to help cover expenses without debt.

In summary, while it’s possible to get approved for loans with bad credit, these loans come with higher costs and risks. Weigh your options carefully before taking on more debt.