How to get a personal loan with bad credit, and how to improve your odds of approval

While it’s more challenging (and expensive) to get a loan with bad credit, some lenders work with borrowers of all credit profiles.

To get a personal loan with bad credit, consider applying with a creditworthy cosigner (or co-borrower) or backing your loan with collateral. Getting pre-qualified with multiple lenders can also help you weed out those that require higher credit scores and help you find the most cost-effective loan. Before beginning your search for a bad-credit loan, consider taking the time to improve your credit scores — you’ll have an easier time qualifying and are more likely to receive affordable rates.

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9 steps to get a bad credit loan

1. Check your credit scores and reports

Lenders use your credit scores as a measure of your creditworthiness and to predict how likely you are to repay the loan. Higher credit scores signal a history of on-time payments and responsible credit usage. Conversely, bad credit scores indicate that you may be a risky borrower and might not repay the loan on time (or at all).

Start by checking your credit scores — your bank or credit card issuer may offer free access to your scores, or you can pay for them through a third-party service. Most lenders look for borrowers with good credit (670 and above, according to FICO), but some reputable lenders may approve you with scores in the 500s.

To look for ways to boost your scores, visit AnnualCreditReport.com and pull free copies of your credit reports from Equifax, Experian and TransUnion. Review each report carefully and dispute any errors with the appropriate bureau. The information in your reports can give you clues on improving your scores. For example, if you have multiple credit accounts with high balances, paying down debt will give your scores a boost by improving your credit utilization ratio and reducing the amount you owe.

Related >> What factors affect your credit score?

2. Understand your budget and the cost of borrowing

Before borrowing, it’s always a good practice to ensure you have a reasonable plan for repayment. If you can’t pay back what you owe, your credit will suffer.

Examine your budget and calculate how large of a monthly loan payment you can afford without stretching your finances to the max.

Next, consider how much you need to borrow. Use a personal loan calculator (like Calculator.net’s) to estimate how much your loan might cost each month. Keep in mind that if you have bad credit, you may have to settle for a higher interest rate, which will increase your overall cost of borrowing. (More on how your credit scores impact your interest rate, below.)

3. Apply with a second person

You may struggle to get approved for a personal loan if you have bad credit, or you might have to settle for interest rates as high as 36%. Adding a creditworthy cosigner or co-borrower can help you qualify and receive a favorable rate because a second person agrees to take responsibility for repayment if you default.

“If a friend or family member has better credit, adding them as a co-borrower or cosigner could help you qualify, said Dan Casey, a Michigan-based registered investment advisor. “However, you and the co-borrower or cosigner need to know that missed or late payments will impact their credit as well.”

Make a plan with your co-applicant about what will happen if you can’t make the payments — clear communication can help avoid a strained relationship.

Cosigner vs. co-borrower: What’s the difference? Both cosigners and co-borrowers are on the hook for repayment, but co-borrowers also share equal access to loan funds. A personal loan with a co-borrower is often called a joint loan.

4. Consider adding collateral

Most personal loans are unsecured (meaning they don’t require collateral), but if you have bad credit, it might be easier to qualify for a secured loan instead. By pledging collateral, like a car or savings account, you reduce the risk to the lender — if you default on the loan, your lender can seize your collateral to recoup its losses.

Many of the best secured personal loans require a savings account or CD as collateral, but Upgrade (vehicles)and Best Egg (vehicles, home fixtures) are examples of lenders that accept other forms.

Remember: If you pledge collateral to back your loan, you risk losing the asset if you fall behind on loan payments.

5. Get pre-qualified with multiple lenders

Many lenders allow you to pre-qualify for a personal loan online so you can check potential rates without negatively impacting your credit scores. Note that your rate might change after you formally apply, as pre-qualification offers are estimates rather than final terms.

By getting pre-qualified with more than one lender, you can compare options and zero in on the most cost-effective loan. You might start your search with CNN Underscored Money’s best bad credit loans.

Tip: If your bad credit is holding you back, look for lenders that consider alternative credit data, like your utility payment history or education level. For example, if you don’t have enough credit history to generate a score, Upstart will consider you for a loan if you’re employed and have a bank account.

6. Compare loan offers

Once you pre-qualify with at least three lenders, compare your offers by focusing on the factors below. And if you were denied pre-qualification, skip down below for guidance on improving your application.

• APRs: Annual percentage rates reveal how much you’ll pay in interest and fees every year. A lower APR can save you hundreds or even thousands of dollars over the life of your loan.
• Repayment terms: A longer repayment term means smaller monthly payments. However, it costs more in interest over the life of the loan, so it’s important to find a good balance. Typical personal loan terms range from one to seven years.
• Lender reputation: Not all lenders are created equally. Read consumer reviews and research each lender on sites like the Better Business Bureau (BBB) to get an idea of its reputation.
• Credit bureau reporting: “Always seek a loan from a lender that requires credit and reports to credit bureaus so you can improve your credit,” said Chad Prashad, president and CEO of lender World Finance. “A better credit score is the key driver to greater access to capital and lower interest rates.”

Example: Suppose you need a $20,000 personal loan, and you receive the following three offers:

The best loan depends on your needs: If you need the lowest possible monthly payment, Loan 2 could be a good option. But it comes at a cost — you’ll pay more than $5,000 in additional interest charges because of the longer loan term and higher APR. If you want to minimize your overall costs and can afford a slightly higher monthly payment, Loan 3 is the best choice.

7. Gather financial documents

After you decide on a loan, gather the documents you’ll need to apply. While requirements vary by lender, you’ll likely need the following:

• Personal contact information, such as your mailing address and phone number
• A government-issued ID, such as a driver’s license or passport
• Social Security number
• Proof of income, including tax returns, W-2s and pay stubs
• Proof of address, including a recent mortgage statement or utility bill
• Loan details, including how you plan to use the funds and how much you need to borrow

8. Submit an application

Most lenders allow you to apply for a personal loan online, though some smaller banks or credit unions may require that you visit a branch to complete the process. After submitting your application and verification documents, the lender will perform a hard credit check and review your credit history. This hard inquiry will appear on your credit reports and can cause your scores to drop by about five points, according to FICO.

The timeline for approval varies by lender — some claim to provide instant loan decisions, while others may take several business days or longer to review your application.

9. Repay the loan as agreed

If your loan application is approved, review the loan documents carefully to ensure the rate and terms match your expectations. Then, you can sign the loan contract and wait for your funds to be disbursed, which can take anywhere from a few hours to a week or more, depending on the lender.

Once you’ve received the loan, your repayment term begins. Review your loan contract to confirm your first payment due date, and repay the loan as agreed. By making your monthly payments on time, every time, you can boost your credit scores and open the doors to better rates and terms in the future. On the flip side, late or missed payments will take a further toll on your credit.

How to improve your chances of getting approved

If your loan was denied or you want to be sure you’ll qualify (or for a lower interest rate), employ these strategies:

• Improve your credit scores. The higher your credit scores, the greater your chances of approval. To increase your credit scores, pay your bills on time, reduce your credit card balances and only apply for new credit when necessary.
• Check your credit reports for errors. Inaccuracies on your credit reports can lower your scores, and unfortunately, mistakes are common. Check your reports regularly and dispute any errors with the appropriate credit bureau.
• Pay down debt. A common personal loan requirement is a low debt-to-income (DTI) ratio, or a low amount of debt compared to your income. The less debt you have, the lower your DTI, which shows lenders that you have room in your budget to accommodate a loan payment. To calculate your DTI, divide your monthly debt payments by your pre-tax monthly income — a DTI of 36% or lower is ideal, but some lenders will accept ratios as high as 43%.
• Get a co-applicant. Enlisting a creditworthy cosigner or co-borrower can help you meet a lender’s approval requirements. Your co-applicant’s good credit reduces the lender’s risk since another person agrees to be responsible for the debt. But remember: If you fail to pay the loan as agreed, your cosigner or co-borrower will be on the hook for repayment, and their credit (along with your own) will be tarnished.
• Consider a secured loan. Loans backed by collateral are less risky for the lender — if you default, the lender can seize your pledged asset to recoup their losses. This reduced risk makes a secured loan more attainable. Depending on the lender, you may be able to pledge a vehicle, savings account or home fixtures.
• Apply for a smaller loan amount or shorter term. Lenders are more likely to approve these types of loan requests. Only borrow what you truly need and choose the shortest repayment term you can reasonably afford. Bonus: Small personal loans and shorter terms also translate to lower borrowing costs.
• Enroll in credit counseling. A certified credit counselor can help you get out of debt and teach you how to improve your credit scores, putting you in a better borrowing position for the future. To find a certified credit counselor near you, review this list of approved providers from the Department of Justice.

Related >> How to repair bad credit

Alternatives to personal loans with bad credit

Bad credit loans come with higher rates and fees, lower borrowing amounts and shorter repayment terms than loans for borrowers with better credit. If a bad credit personal loan won’t meet your needs or would be too costly, consider these alternatives instead:

Mobile loan apps

Best for: Small-dollar loans

If you need $1,000 or less to make it to your next paycheck, some of the best loan apps can help you bridge the gap. Most apps require repayment from your next paycheck, but rates and fees are typically much lower than payday loans, making mobile apps a safer option. Before borrowing, be sure you understand the cost of repayment.

Buy now, pay later apps

Best for: Retail purchases

Buy now, pay later (BNPL) apps typically break up your retail purchases into four installments repaid over a six-week term. These loans are usually interest-free, though you may have to pay fees. Many BNPL providers also offer longer terms, but these loans come with interest charges.

Not all retailers accept BNPL payments, and your on-time payments are unlikely to help you improve your credit scores, as most BNPL apps don’t report to the credit bureaus.

Payday alternative loans

Best for: Small expenses

If you belong to (or don’t mind joining) a federal credit union and need to borrow $2,000 or less, a payday alternative loan (PAL) might fit the bill. As the name suggests, PALs are offered as a more affordable alternative to predatory payday loans, with longer repayment terms (up to 12 months) and an interest rate cap of 28%. However, PALs can be hard to find — not every federal credit union offers them.

To find a credit union near you that offers this product, use the National Credit Union Administration’s locator tool and filter by Payday Alternative Loans under “Additional Search Options.”

Family loans

Best for: Emergency expenses

Borrowing from a friend or family member can allow you to sidestep traditional lenders’ credit requirements and access cash for an emergency expense. If you’re fortunate enough to have a loved one who’s willing and able to lend you money, put the repayment terms in writing and pay back the debt as agreed to avoid straining the relationship.

Credit cards

Best for: Everyday expenses

Having bad credit restricts your options — but there are some credit cards for bad credit to help you cover day-to-day expenses and improve your credit. In many cases, however, you must put down a security deposit that will serve as your credit limit. If you already have a credit card, you can withdraw a cash advance, but this option comes with high rates and additional fees.

Related >> The best credit cards for no credit in April 2024

Hardship programs

Best for: Short-term emergencies

Many lenders and credit card issuers offer hardship assistance if you lose your job, face an illness or experience other (eligible) financial hardship. Depending on the lender, you may be able to pause or reduce your payments for a predetermined period. Interest will likely continue to accrue during payment pauses, but this could give you much-needed breathing room.

If you’re having trouble making your debt payments, contact your creditor as soon as possible.

Bonus: Bad credit loans to avoid

Some borrowing options can do more harm than good. If a loan promises “guaranteed approval” or doesn’t require a credit check, think twice. Avoid the following options when possible:

• Payday loans are quick and easy to get, but they have sky-high fees and short repayment terms, usually between two and four weeks. They can easily steer you into a cycle of debt.
• High-interest installment loans have triple-digit interest rates and can be difficult to repay. Financial experts agree that 36% APR is the dividing line between a potentially affordable loan and an unaffordable one — if your lender charges an interest rate above that mark, think carefully before borrowing.
• Car title loans offer cash in exchange for the title to your car. APRs can be above 100%, and repayment terms are often just 30 days. If you fail to repay these high-cost loans on time, the lender may repossess your vehicle.
• Pawnshop loans are a risky type of collateral loan. If you own something valuable, like a diamond ring or guitar, you may offer it to a pawnshop and receive money in return. However, like the other short-term loans listed above, repayment terms are short — plus, you’ll likely receive a small fraction of the item’s value. And if you don’t repay the loan on time, the pawnshop will likely sell your item.

Refresher course: Understanding credit scores

Your credit score is a three-digit number that represents your creditworthiness. If your FICO Score is 580 or less, you have “bad credit” and may struggle to qualify for a loan. Borrowing rates for borrowers with bad credit tend to be much higher than those offered to excellent-credit borrowers. Here’s a look at current personal loan rates by credit score:

Example: Suppose you need to borrow $15,000 and you want to repay the loan over three years. You have bad credit, so the best loan you qualify for is tagged at 34% APR. Your monthly dues will be $670, and you’ll pay $9,123 in interest charges over the life of the loan.

Now, let’s say you work diligently on your credit and increase your scores into the “good credit” range, or 670 to 719. The same loan at 20% APR would cost $557 each month and $5,068 in total interest. By improving your credit scores, you’d save more than $100 monthly and $4,000 overall.

Frequently asked questions (FAQs)

Can I get a loan with bad credit and no cosigner?

It’s possible to get a loan with bad credit without the help of a cosigner or co-borrower — but if you qualify, you’ll have to settle for a much higher interest rate.

What are the risks of taking a loan with bad credit?

If you have bad credit, a personal loan from a traditional lender (like a bank, credit union or online lender) will have an APR close to 36%. You may not be able to borrow as large of a loan as you need, and you may have to accept shorter repayment terms.

Can I borrow money with a 500 credit score?

Yes, some lenders work all credit profiles, including borrowers with scores of 500 or below. But borrowing with a 500 credit score can be expensive, and you may need to meet additional eligibility requirements, such as having a high income or steady payment history.