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A personal loan can be a helpful financial tool when you’re dealing with unexpected expenses—whether it’s a car repair, a medical bill, or consolidating high-interest credit card debt. But if you have bad credit, qualifying for a loan can be challenging. Fortunately, having a poor credit score doesn’t make it impossible. Here’s how you can improve your chances and avoid potential pitfalls.
What Credit Score Is Needed for a Personal Loan?
Most lenders use FICO scores, ranging from 300 to 850. Here’s how those scores are generally categorized:
- Poor credit: Below 580
- Fair credit: 580–669
- Good credit: 670–739
- Very good: 740–799
- Excellent: 800+
While many lenders prefer applicants with at least “fair” credit, recent data shows that over one-third of personal loans went to borrowers with scores under 600, showing that subprime lending is still active—though it comes at a cost.
Expect higher interest rates and potentially smaller loan amounts if your score is under 670.
Steps to Get a Personal Loan with Bad Credit
1. Check Your Credit Reports and Scores
Start by reviewing your credit reports. You can get free weekly reports from many trsuted websites. While these reports don’t show your score, they do reveal your credit history, which lenders will examine closely.
To check your score, you can use free tools from credit card companies or services. For the most accurate info, consider FICO’s official site, myFICO.com.
2. Compare Lenders That Work with Bad Credit
Some lenders specialize in working with borrowers with lower scores. Consider these options:
- Credit Unions: These member-owned institutions often have more flexible requirements and lower rates.
- Community Banks: Long-term relationships might increase your approval odds.
- Online Lenders: Some fintech lenders cater specifically to subprime borrowers—just be sure to read the fine print.
Prioritize lenders that report payments to all three major credit bureaus—this can help you build or improve your credit.
3. Prequalify Without Hurting Your Score
Many lenders allow you to prequalify for a loan using a soft credit inquiry, which doesn’t affect your credit score. You’ll get an estimate of rates, loan terms, and potential amounts based on your financial profile. This is a smart way to compare offers before committing.
4. Use a Loan Calculator
Once you’ve shortlisted lenders, use a personal loan calculator to estimate monthly payments. This helps ensure the loan fits your budget before applying.
5. Apply for the Loan
When ready, submit your formal application. You’ll typically need to provide:
- Government-issued ID
- Social Security Number (or ITIN)
- Proof of income (pay stubs, tax returns)
- Employment details
- Recent bank statements
Make sure you understand the total cost of borrowing, including any origination or late payment fees.
If You’re Denied: Alternatives to Explore
If your loan application is rejected, don’t panic. Here are some workarounds that could help:
- Apply for a Secured Personal Loan: By pledging collateral—like a savings account or a vehicle—you may get better terms and improve your approval odds. Just be aware that if you default, the lender can claim the asset.
- Use a Co-Signer: A co-signer with good credit can boost your application. But they’ll be on the hook if you miss payments, so be upfront and responsible.
- Borrow from Friends or Family: While not always ideal, a personal loan from someone you trust could tide you over. Put the agreement in writing to avoid misunderstandings.
- Increase Your Income First: A side hustle or a raise can improve your debt-to-income ratio and make you more attractive to lenders. Even an extra few hundred dollars a month can make a difference.
Stay Away from Predatory Loans
Desperation can lead to risky decisions. Watch out for these red flags:
- Payday Loans: Extremely high APRs, short repayment windows, and massive rollover fees make these loans difficult to repay.
- No-Credit-Check Loans: While tempting, these loans often come with hidden fees and outrageous terms.
- Car Title Loans: You risk losing your vehicle if you default, often after paying steep interest.
Stick with regulated lenders and avoid any deal that sounds too good to be true.
Also read: Understanding the Hidden Algorithms Behind Modern Credit Scoring
Final Thoughts
Getting a personal loan with bad credit is harder—but not impossible. Start by checking your credit, researching the right lenders, and prequalifying to find the best fit. If your application is rejected, look into secured loans, a co-signer, or improving your income.
Avoid predatory lending at all costs. A personal loan should provide relief—not push you further into debt.
