Having poor credit doesn’t mean that all doors remain closed, it just means that some doors are open and others are closed and that some doors are expensive to walk through while others are free. The positive is that personal loans for bad credit are a very real facet of the lending industry, and not some anomaly. The number of people who are approved with scores lower than 580 is in the tens of thousands annually. The important thing is to know what to expect, and then to face it in a strategic way.

Here’s a true and honest description of what it is.

What does it mean to have “Bad Credit”?

Most lenders deem credit scores of 629 and below to be bad credit, while those between 630 and 689 are considered fair credit. At levels below 580, it’s where options tend to become most limited but even that’s not a deal breaker.

There are typical reasons for poor credit that people find themselves with: not paying your bills on time, carrying a large balance on your credit cards that exceeds your credit limits, having a relatively short credit history, or having a large negative event, such as a defaulted loan or collections account. It’s important to know which one of these is affecting your score because it will let you know what you need to actually change.

What Rates Actually Look Like

This is what most people are not ready for. If you have poor credit – a FICO score of less than 580 – and you do obtain a loan for a specific thing, according to recent lending statistics, the average rate you will receive is close to or greater than 30%. That same loan could be closer to the 15% to 20% range if your credit is fair to good.

This does not mean you should not take out a loan if you need one, but you certainly need to read all of the offers thoroughly and understand the complete cost before you agree to anything! The total interest on a three-year $5,000 loan at 30% APR is significantly higher, possibly more than twice, than on the same loan at 15%.

Step 1: Check Your Actual Credit Report, Not Just Your Score

Before sending out any applications, obtain a free copy of your credit report and thoroughly read the report, line by line. There are more mistakes on credit reports than you’d expect and old accounts that weren’t closed, late payments that weren’t made or payments that were made and weren’t included. Challenging and correcting an error may sometimes be the only action taken to gain a meaningful score.

Having a clear view of what’s in your report also provides an idea of what a lender will see, meaning you can ask the right questions and apply with realistic expectations, rather than making a guess.

Step 2: Check Out Lenders That Work With Bad Credit

Not all lenders are doing this lending and applying to everyone who doesn’t do the good-credit lending is a waste of time and may result in unnecessary “hard inquiries”. There are several online lenders that specialize in bad credit personal loans, where they may not have a minimum credit score requirement, but instead look at your income and employment history.

These lenders are more likely to take a detailed look at your employment status and income, because they don’t have the benefit of your credit history that a traditional bank does. In such applications, stable jobs and a genuine capacity to pay the mortgage installments are more significant.

Step 3: Think about a Cosigner

A cosigner is a person with good credit, typically a relative or close friend, that agrees to make the loan payments if the person cannot. A cosigner will lower the risk to the lender dramatically, and may make the difference between qualifying for a loan when you do not by yourself and qualify at all. Also, it may be possible to get a significantly lower interest rate than you would be able to get on your own.

It’s not a decision you take lightly as the cosigner’s credit is truly at risk if the payments are not made on time, but for the right relationship and the right loan, it is one of the best ways to enhance your terms.

Step 4: Explore Secured Loan Alternatives

If you are unable to get an unsecured loan, some lenders will give you a secured loan that will use something such as a savings account or vehicle as collateral. Secured loans are easier to obtain with poor credit because the lender does have an asset from which to recover if the borrower defaults and are typically a much lower rate than an unsecured loan with bad credit.
Step 5: Do a comparison before signing up for one.
Typically, lenders will allow you to view your estimated rate via a soft credit check, which is not a hard check. It’s better to take a couple of looks at two or three offers before you formally apply, versus the first one that comes along out of a sense of urgency. Even borrowers who have the same credit profile may find different interest rates and fees with different lenders.

Watch Out for Predatory Lending

Unfortunately, it seems that people with bad credit are a favorite of the predatory lenders, the payday loan operation, and offers that are too good to be true based on your credit profile. Sometimes, there are warning signs, such as promising to approve you without running a credit check, pushing you to make a decision within a short period of time, failing to clarify costs, or making loan rates that appear way too high compared to other lenders with poor credit. Don’t give out any personal information before you check if the lender is legit, as the issue is far worse than high interest.

When it comes to investing, if You Can Wait, Improving Your Score First Can Save Real Money

Even if you’re not in dire need of a loan, 60 to 90 days of laser-like focus on your credit score can make a tangible difference on your terms. Sometimes the best way to boost your credit utilization ratio is to pay off credit card balances. The most important component over time in most scoring models is making all payments on time, every time. As was said before, challenging any report errors can sometimes yield a fast win.

A 580 score to a 650 score, even in a few months, is a significant reduction in the same loan amount, resulting in a significantly lower APR.

The Bottom Line

Bad credit makes borrowing more expensive and narrows your options, but it doesn’t eliminate them. Lenders who specialise in bad credit borrowers exist precisely because this is a common, well-understood part of the market. Checking your credit report for errors, considering a cosigner or secured loan, comparing multiple offers, and watching for predatory terms all genuinely improve your odds of getting a fair deal, even with a less-than-perfect score.

Frequently Asked Questions

What credit score is considered bad for a personal loan?

Most lenders consider a FICO score of 629 or below to be bad credit, with scores below 580 facing the most limited options and highest rates.

Can I get a personal loan with a 500 credit score?

It’s possible with certain lenders that don’t set a formal minimum score, though approval will depend heavily on your income and employment stability, and rates will be on the higher end.

Does a cosigner help me get approved with bad credit?

Yes. A cosigner with good credit reduces the lender’s risk, which can improve your approval odds, increase the loan amount you qualify for, and often secure a lower interest rate.

Disclaimer:

This article is for general informational purposes only and does not constitute financial advice. For guidance specific to your situation, consult a licensed financial adviser.