Garnett Jayna
Written by Garnett Jayna
Last updated: May.31,2022

One of the most important numbers in relation to a person' s finances is their credit score. A credit score is a number that can range from 300-850, with the higher end of the spectrum being considered "better". Your credit score can fluctuate based on your credit history, payment history, and many other factors.

When trying to take out a loan, whether that is a loan for a house, car, or just a personal loan for some extra cash, one of the first things any lending institution will look at is your credit score. 16% of Americans have what is considered to be a "bad" credit score, which can make the process of securing loans a bit more complex. Don' t worry, it' s not impossible to get a loan when you need it, but there are a few methods that help with getting a personal loan with bad credit.

What is Bad Credit?

If your credit score falls anywhere between 300-629, you would be categorized as someone with bad credit. Your low score could be a product of making late credit card payments, falling into the collections process on an overdue bill, or even opening too many credit cards at once, making your credit "age" very low. Below are some common reasons someone might have bad credit:

  1. 1. Not upholding credit agreements and failing to pay back loans in the form of mortgages, credit cards, or car loans, can all bring your credit score down.
  2. 2. Declaring bankruptcy makes it very hard to obtain a personal loan because the declaration illustrates that you are unable to pay back your debts, driving your credit score down.
  3. 3. Being irresponsible with credit cards, such as opening too many in a short time period or selecting ones that charge higher fees than you can afford will both threaten your credit score.
  4. 4. Constantly making the "minimum payment" on credit cards. While it is the only amount you are obligated to pay, it could make it very difficult to pay off large balances on credit cards, forcing those balances to remain on the card for long periods of time.

Your credit score can majorly impact whether or not you qualify for a personal loan, can get the funding you need to buy a house, or even limit the number of places you can rent to live in. Bad credit is not only inconvenient, but it can add a lot of stress to your life. The good news is that credit scores can be improved, and bad credit isn' t a life sentence.

How Bad Credit Can Affect a Personal Loan Application?

When it' s time for you to get a personal loan for any reason, you' ll have to work with a lender, such as Credible, Avant, or LendingClub. One of the first things any lender will look at is your credit score. If an applicant has a bad credit score, it signals to these lenders that the applicant might not be able to pay back the loan, raising concerns about whether they should lend money to them at all. 

Even if bad credit doesn' t disqualify a borrower from obtaining a loan, it could impact the loan amount, interest rates, and payback schedule. When borrowing money, it' s best if interest rates are as low as possible, but usually, borrowers with bad credit will have some of the highest interest rates offered, forcing them to pay back more money in the long run than someone with good credit.

Though it is possible to obtain a loan with a low credit score, there are a few added hoops someone with a low credit score may have to jump through in order to get secure the funding:

  • Add a Co-Signer

Applicants with bad credit that can secure a co-signer, such as a family member, will be more likely to get a loan than applicants who don' t have a co-signer. The co-signer is agreeing to pay back the loan if the borrower fails to pay it back themselves. 

  • Apply for a Secured Loan

A secured loan is backed by collateral that the lender gets to have if the borrower fails to pay back a loan. Collateral could be something like a car or house and can help ensure that the lender can trust you as a borrower.

Though the above options are perfectly viable when it comes to applying for a personal loan, keep in mind that there are risks associated with each one. If you ask a loved one to be a co-signer and then fail to pay back the loan, saddling them with your debt, it could ruin your relationship. Additionally, with secured loans, putting your house or car on the line is very serious; losing those items during a tough financial time could make your situation much worse.

Where to Get a Loan with Bad Credit?

If you have bad credit, don' t get discouraged. You can still secure the funding you need by getting a personal loan at a credit union or another online lender. If you do your banking at a credit union, the history you have with that credit union could be a positive factor when applying for a loan. Credit unions, unlike most lenders, cap their interest rates at 18%, so you won' t be paying exorbitant interest fees for years to come.

Online lenders such as Avant, Credible, and LendingClub are great options for borrowers with bad credit. These funds are usually accessible faster than other options, but be sure to do some comparison shopping to secure the lowest rates possible. 

How to Boost Your Credit Score

If you have bad credit and searching for a personal loan has been a frustrating experience, try and do what you can to improve your credit score. If you’re not sure where to start, run a credit check. Many credit card companies offer free credit score reports, or you can use websites Equifax or Experian to get an up-to-date snapshot of your credit score. This report will also show you any debts or reasons that your credit score might be low, giving you a good place to start. Beyond a credit report, try the below.

Refrain from opening new credit cards or taking out more loans than you need, while keeping open your old credit cards as long as possible. Your credit “age” is the average time all of your debt accounts have been open, and the older that age is, the better your credit score will be.

Try to use less than 30% of your available credit. Keeping your credit utilization low will indicate that you aren' t reliant on your credit cards, increasing your credit score.

Automate your bill payments so you are never late on credit payments. 

There are many ways to improve a bad credit score, but these are great places to start.

Smart Borrowing is Key

There' s a stigma that all debt is bad, which is not true. Debt can be used responsibly for very important life investments, and sometimes a personal loan is necessary. Whatever your reasoning for seeking out a personal loan, check your credit score before applying so you know any issues that might arise during the application process. 

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