How To Get a Personal Loan With Bad Credit

A credit score is a number between 300 and 850 assigned by credit ratings agencies to reflect your ability to pay your bills and debt. 

A score of 670 or above is generally considered to be good and means you’re more likely to have plenty of options for a personal loan. A score below 580 is considered “bad” or “poor,” and is likely to hurt your chances of qualifying for a loan.

However, not all lenders have the same requirements, and it is possible to qualify for a loan even with bad credit if you plan ahead. Next, we’ll go through some steps you should consider taking when applying for a personal loan with bad credit. 

Check Your Credit Score

Before you begin, it’s vital to first know where you stand. While many financial institutions offer credit score reports and monitoring, you can use a site like AnnualCreditReport.com to receive one free credit report every year from each of the three main credit bureaus: Equifax, Experian and TransUnion.

Review your credit report and score and note any inconsistencies, anomalies or inaccurate data points. Identity theft or incorrect balances on old debts could harm your credit score, but thankfully, most people can correct these issues by contacting their lenders or financial institutions. 

Understand the Costs

With a personal loan, you typically have a fixed monthly payment. Before considering a personal loan, take a look at your budget to decide what monthly payment you can comfortably afford.

Consider how much you would like to borrow. Then, you can use a personal loan calculator to see how that translates into a monthly payment. But keep in mind that, between interest rates and origination fees, your monthly payments can vary significantly from lender to lender. You may want to use a variety of different interest rates in the calculator to see how that impacts your monthly payment.

Finally, review your expenses against your monthly income. If your loan is $200 monthly, for example, you should ensure you have at least that much available in your budget to guarantee you can make every payment.

Gather Necessary Documents

Lenders often request documents to verify your identity and income. This can include your: 

• Social Security number
• Photo IDs
• Bank statements
• Pay stubs
• Utility bills
• Rent or mortgage statements

Collecting this information ahead of time can speed your application along and give you a chance to make the strongest case possible to your lender that you’ll be able to repay your loan.

If you’re applying with a cosigner, make sure they have all of their documents collected, as well. And if your lender asks for any additional documents, try to respond promptly to keep the process moving forward smoothly. 

Compare Lenders and Get Prequalified

Personal loans vary significantly between lenders since each has different requirements and interest rates. Shopping around for quotes can allow you to see your options and find the best deal you qualify for.

Generally, there are three options for a personal loan: banks, credit unions and online lenders. Once you’ve found a few lenders that could work for your situation, you can check your rate or  prequalify with each one. In most cases, you can do this directly on a lender’s website by filling out a short form with your contact information, personal details and your Social Security number. 

With that information, your lender will typically let you know the interest rate and terms you’re likely to qualify for – allowing you to compare loan offers between lenders.

Every lender has different steps and requirements before approving a loan. But there are some common steps you can take to increase your chances of being approved with bad credit.

Add a Co-Signer

A co-signer can help bolster your likelihood of getting approved for a personal loan even if you have a bad credit score. A co-signer is typically a family member who agrees to be equally responsible for the loan.

Be careful when considering a co-signer and only request to use a co-signer if you are confident that you can repay the loan. If you miss a payment on your loan, it can impact both of your credit scores as well – hurting the ability to borrow in the future.

Add a Co-Borrower

A co-borrower is similar to a cosigner, except co-borrowers typically have access to the loan money while co-signers do not. Applying jointly with someone with good credit can help your chances of being approved for the loan. 

However, the same risks apply. Late payments can impact both applicants’ credit scores.

Look Into Secured Loans

Personal loans are generally unsecured, meaning your lender cannot seize your property if you fail to make your payments. Conversely, a secured loan is backed by collateral – like your car or house. The loan is essentially backed by the value of your collateral rather than just your credit score and history. For people with a bad credit history, a secured loan may be easier to qualify for. 

However, secured loans are more risky for you, the borrower. Make sure you can afford to repay the loan so you don’t lose the collateral. If you fail to repay the loan, the lender may sell off your collateral – like your home or car – to pay off the debt.

If you aren’t sure if you can qualify for a personal loan or don’t know if one is right for you, there are other options worth considering. We’ll go through a few of them below.

Of course, sometimes it’s better to work on improving your bad credit score rather than seeking a high-interest loan. A higher credit score will make it more likely that you’ll qualify for a personal loan with the best terms.

Credit Cards

A credit card can be a flexible way to manage your cash flow throughout the month, allowing you to charge a purchase and pay the balance off at the end of the month. 

However, if you’re having trouble qualifying for a personal loan you may also have trouble qualifying for a credit card, as well. Credit cards also often come with hefty interest rates. If you max out your credit card balance and fail to pay it off in full each month, you could end up in a pattern of accumulating debt that’s hard to get out of.

If you have credit card debt, read our review of the best credit card consolidation loans.

Home Equity Loans

With a home equity loan, you borrow money using the value of your property as collateral. The amount you can borrow is based on the equity in your home, or the difference between what you owe on your mortgage and what your home is worth.

Since they are secured loans, home equity loans typically have lower interest rates than a personal loan. However, you risk losing your home to foreclosure if you fail to make your payments.

Cash-Out Refinance

In a cash-out refinance, you take out a new mortgage loan that pays off and replaces your existing mortgage. But your new loan is larger than what you currently owe, and the difference between the two comes to you as cash that you can use as you see fit. 

You’ll often need a significant amount of equity built up in your home to qualify. If interest rates have risen, your new mortgage loan could also come with significantly higher payments than you’re currently making, putting your budget in jeopardy. And if you fail to make your payments, you can lose your home to foreclosure.  

401(k) Loans

A 401(k) loan allows you to borrow from your own retirement account and pay it back with interest. During the repayment period of a 401(k) loan, the money is paid back to yourself rather than to a financial institution. These can be a good option for people with bad credit because they typically do not have minimum credit score requirements.

The downside to this loan type is that borrowing against your retirement fund can impact your retirement goals and timeline. Essentially, you can miss out on years of interest and potential market growth because you’ll need to repay what you owe to yourself. You can also be forced to repay your loan immediately if you leave your current job. 

Cash Advance Apps

Cash advance apps can allow you to get small amounts of money when you need them, repaying the balance when you get your next paycheck. 

Most cash advance apps charge a nominal user fee, membership fees or utilize tips to fund their platform. The main downside of these apps is that they usually only provide small monetary advances. However, they can be a good option if you need a little cash upfront without paying back too much in interest.

Cost is one of the most important things to consider when applying for a personal loan. While the best personal loans can help borrowers out of a tight spot or to fund other personal needs, they can be expensive if you apply with a low credit score.

Loans With Bad Credit Have Higher Interest Rates

One of the biggest deterrents to bad credit loans is the interest rates. If you have bad credit, lenders will typically require you to pay higher interest rates – significantly increasing the amount of money you repay, especially if the loan terms are long.

There May Be Hidden Add-on Costs

Always read the fine print before signing your name on a loan agreement. As mentioned above, the lower your credit score, the more risk you are deemed to pose to the lender. You may be required to pay higher fees as part of the terms of your loan. 

You May Be Targeted By Predatory Lenders

Predatory lenders often target people with poor credit history through email and mail marketing. They may offer low introductory interest rates, but quickly increase the rates after you’ve signed the loan agreement. Make sure you completely understand the terms of the loan before you sign a loan agreement, and vet the lender you’re considering to make sure they are a reputable company.

Bad credit doesn’t necessarily mean you can’t get a personal loan. However, it may be more difficult to find a lender who’ll offer you a personal loan with terms you can afford.

Weigh the pros and cons and the potential costs long term compared with other options. Ask yourself if the personal loan meets an immediate need and if you can afford it.

If the answer is yes, shop around for the best rate and use our list of the best bad credit loans of 2024.

If you have fair credit, check out our best picks for personal loans for fair credit.

Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.