Can I Get a Personal Loan With Bad or No Credit?
Personal loans can be helpful in a variety of situations.
They generally come with a fixed interest rate and a fixed repayment period, and they can be used to consolidate debt or to handle big expenses such as home improvements. They are also generally unsecured, which means the lender cannot take your home, car or other property if you fail to repay the loan.
But what if you have poor credit or little to no credit history? Can you still take out a personal loan? Is a personal loan even a good idea?
This article will answer those questions, explain how to get a personal loan with poor or no credit and share some alternative options to consider.
Can you qualify for a personal loan with poor credit?
The short answer is yes. You can qualify for a personal loan even with poor or no credit, but there are some drawbacks to doing so.
According to Experian, a credit score of 579 or below is considered to be poor credit, while a credit score from 580 to 669 is considered below average or subprime. (If you’re unsure about your credit score, you could check it for free with My LendingTree.)
In both cases, lenders will assume that you are more likely to default on any loan you take out and are thus more likely to deny you that credit. And if they do offer a loan, it will often come with a higher interest rate to compensate for the additional risk.
“If you have a very low credit rating, it’s not likely that you will be approved for the most affordable financing options, and in some cases you could just be rejected outright,” said Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “You may end up in a situation where you have to shop among second-tier lenders who borrow money at a higher rate than banks and pass that higher interest rate on to you.”
Besides a personal loan likely being more expensive when you have poor credit, McClary cautioned that taking on more debt may not be the best decision for your financial situation.
“The first question you should be asking yourself is, ‘Should you be borrowing at all?’” he said. “If you have unresolved financial issues, such as lingering unpaid balances on accounts that are past due, you really have to take a step back and ask yourself if you might be better served by putting those issues behind you before you put yourself deeper in debt.”
But if those past issues have since been resolved, or if you don’t have much of a credit history, a personal loan may be a good way to start building positive credit.
“If your poor credit score is just the lingering effect of some issues that were resolved and you’re looking to re-establish your credit history, that may be a more appropriate time to borrow money,” McClary said. “Borrowing at that point can actually help you get your credit rating back to where you want it if you manage your situation correctly.”
How to find and apply for a personal loan when you have a low credit score
If you have poor or no credit, the key to getting an affordable personal loan is shopping around.
“It’s really about shopping competitively,” McClary said. “The more lenders you apply to, the better your odds of getting a loan and getting a lower interest rate on that loan.”
Online lenders can make the process of comparison shopping easy by allowing you to submit one application and see offers from multiple companies. They sometimes also use a soft pull to check your credit history, which doesn’t ding your credit score. That is especially helpful when you can’t afford for your score to go any lower.
LendingTree’s personal loan tool could be a great way to start your search, allowing you to potentially see personalized rates and compare offers from up to five differen lenders within minutes. Local credit unions can also be a good place to look, especially if you’re already a member, as they can offer lower interest rates than traditional banks.
McClary also advised that consumers can increase their odds of securing a loan if their loan request is reasonable compared to their income.
“I always tell people to follow the 20% rule,” he said. “You don’t want the total amount of your monthly payments on your unsecured debt to exceed 20% of your overall monthly net income.”
If you don’t have much of a credit history, finding a cosigner may be the best way to secure a personal loan.
“If you can get someone to cosign with you, that can help you get your foot in the door, and it can also help you qualify for a much better interest rate,” McClary said. “It could mean the difference between getting the loan and not getting the loan.”
Why you should improve your score before applying for a loan
One of the big questions if you have poor or no credit is whether you should apply for a personal loan at all or if you’d be better off waiting and working to improve your credit score.
According to McClary, there are some benefits to improving your credit score before applying for a personal loan.
“You might be better served by talking to a nonprofit credit counseling agency that can offer guidance with any lingering issues with past-due accounts, debt collectors, etc.,” McClary said. “Once you see your way past those issues, your credit score will naturally lift, which improves your position as a borrower to go to these lenders and qualify for a loan and also qualify for more affordable rates.”
Not only that, but working to improve your credit score and resolve past credit issues can help you build financial skills and stabilize your financial foundation, both of which can make it easier for you to handle that personal loan once you’re ready to apply.
4 quick ways to improve your credit score
While your credit score isn’t going to jump overnight, there are several steps you can take to improve it over the long term.
1. Pay your bills on time
Your payment history is the most important part of your credit score, which means that making on-time payments for your existing debts and other bills can go a long way toward improving your score.
Setting up automatic payments can be a good way to make sure these bills are paid on time. Or you can set calendar reminders for each of your payments.
2. Pay down other debt
The second most important factor in your credit score is your credit utilization ratio, which is calculated by dividing your total debt outstanding by the total credit available to you. For example, if you have a $10,000 credit limit and your outstanding balance is $5,000, your credit utilization ratio is 50%.
Experts suggest that it’s a good idea to keep your credit utilization ratio below 30%, and paying off debt can help you get there. Continuing the example above, paying off $2,000 of that credit card debt would get you to a 30% credit utilization ratio, which may improve your odds of securing a personal loan.
3. Review and report errors on your credit report
The last thing you want is for an error on your credit report to lower your score and make it harder or more expensive to get a loan. By checking your credit report for errors and reporting any errors you find, you may be able to improve your credit score quickly.
4. Open a secured credit card
A secured credit card requires you to put down a cash deposit equal to the credit limit you wish to take out. For example, if you put down a $500 deposit, you can get a card with a $500 credit limit.
“First, there is a guarantee when you apply for a secured card that you will qualify for the account as long as you are able to come up with the security deposit,” he said. “Second, your payment activity will be reported to the credit bureaus, so it will help you re-establish a positive payment history.”
4 alternatives to personal loans for bad credit
A personal loan isn’t your only option when it comes to securing credit with a poor or no credit history. Here are four other options.
1. Secured credit card
Secured credit cards don’t typically have high credit limits and require a cash down payment, but they offer revolving credit no matter your credit history. They can be a good way to both have credit available as needed and improve your credit score.
2. Home equity loan
Because they are secured by your home, home equity loans typically have lower interest rates than personal loans. But McClary warns that these loans come with a significant downside.
“The problem with a home equity loan is that you are putting your home on the line,” McClary said. “I would caution people to be very aware of what is at risk.”
3. Loan from family or friends
Borrowing from friends or family can sometimes be the easiest and cheapest way to get the money you need since there is no credit check. But there are downsides to this approach as well.
“A lot of relationships sour when you bring money into the picture,” McClary said. “And the repayment activity doesn’t show up on your credit report, so it doesn’t help you with the process of restoring a better credit rating.”
4. Auto title loan
If you’re desperate, an auto title loan or another secured loan in which you put a personal property up as collateral can decrease the lender’s risk and increase your odds of getting the loan. But McClary warns that this is generally something you should avoid if possible.
“Car title loans are notorious for coming with very high-interest rates and very challenging repayment schedules,” he said. “You certainly don’t want to put yourself in a position where you can lose your transportation for a missed payment.”
Why you shouldn’t consider a payday loan
Payday loans are an option when you have poor credit, but the fees can be exorbitant and they should generally be avoided at all costs.
“Payday lenders are covered by an entirely different set of regulations than traditional lenders,” McClary said. “In some states, I’ve seen examples of people who have been charged 600% interest on a loan, and it’s on a very short repayment schedule.”
“It’s just not a very wise choice for most people,” he concluded.
Consider your financial situation before taking out debt
The right move depends on your personal needs and the details of your entire financial situation.
If your poor credit is due to outstanding issues with other debts, fixing those issues before applying for a personal loan may be the right move. If it’s instead due to past issues that have been resolved or a lack of credit history, you may be in a better position to secure a loan and start building a positive payment history.
And no matter what, it always pays to be diligent, do your research and ask plenty of questions along the way.