Looking for a Loan with Bad Credit?

Trying to get a loan with bad credit is like solving a Rubik's Cube. It can be frustrating, and at times you may be tempted to give up. Don’t surrender. Like any tricky puzzle life throws your way, it's a good feeling when you find a solution. 

The bottom line is, if you're looking to cover an emergency expense or pay off high-interest debt, it’s possible to land a personal loan—even with bad credit. A bad credit personal loan allows you to get the money you need without putting up any collateral. And since you could pay off these loans over two to five years, it could take some financial pressure off of you. 

Before you set off to find a bad credit personal loan, take the time to learn what it involves and whether it's the best solution.

What Is a Bad Credit Loan?

Simply put, bad credit or poor credit loans are any loan given to someone with a bad credit score. Different lenders have different definitions of “bad credit,” but some lenders consider a credit score below 670 bad.

A bad credit score could be to blame if you recently made a loan request and were denied. Here’s how credit scores are broken down according to FICO, one of the largest credit scoring companies in the U.S.:

While some lenders may turn down your loan application based on your credit score, others are open to providing personal loans to people with lower  credit scores. Because lenders take a more significant risk in loaning money to those with a low credit score, they may adjust the amount they'll lend and almost always charge more. Still, depending on how you plan to use the loan, it could save you money in the long run. .

Related: How to get a poor credit loan.

Where Can You Get a Loan with Bad Credit? 

When it comes to personal loans for people with bad credit, you have several options. Two solid options are your home bank and reputable personal loan lenders. 

Payday and title loans are nearly always a bad idea, although they make it easy for you to walk away with money. 

Let's take a closer look at these options:

• Home bank or credit union. Regardless of your credit score, no lender knows you like your own financial institution. They might look at factors other than credit score, like whether your checking account regularly remains in good standing and how long you've been banking with them. If you're a credit union member, you may be in luck. Credit unions are owned by their members and may have more wiggle room regarding credit decisions. Another benefit is that credit unions often offer a lower loan interest rate than other traditional lenders. 

• Legitimate lender. Legitimate lenders don’t use predatory lending practices. Whether they have a brick-and-mortar office or operate solely online, legitimate lenders are upfront about their fees and the actual cost of the loan.  

• Payday lender or title loan. Payday lenders and title loan companies are usually considered predatory lenders because they prey on vulnerable populations. For example, it's no secret that people who borrow from a payday lender or title loan company do so because they don't feel they have other options. A short-term loan from either type of lender can carry an actual annual percentage rate (APR) of over 400%, making it nearly impossible for most borrowers to repay the loan when it's due. Borrowers often must take out another payday loan to pay off the first. In fact, the average payday loan is renewed eight times. The Consumer Financial Protection Bureau (CFPB) estimates that 80% of payday loans are rolled over into a new loan, and 20% of payday loans default. 

Related: What is predatory lending? 

I Need a Loan with Bad Credit: Steps to Take

• Since you realize you'll pay more interest with bad credit, use this time to boost your credit score. Check your credit report to ensure there are no mistakes. If there are, dispute them with the credit bureau in question. 

• Decide how much you need to borrow. Let's say you're using the loans to pay off the $10,000 you owe on high-interest credit cards. You know you'll need to borrow at least that much. However tempting it may be to take out a little extra for other things, keep your loan request as low as possible. The less you borrow, the shorter the path to approval and the lower the total cost.  

• Shop around for the personal loan that best fits your needs, just as you would if you had a perfect credit score. 

• Once you've found the right lender, pre-qualify for a loan. While applying for a loan typically requires the lender to run a hard credit check, most lenders can tell you if you're pre-qualified with only a soft check. A soft credit check does not impact your credit score, but a hard credit check could cause your credit score to drop by up to five points. 

• When a lender says you prequalify for a loan, they'll also let you know the details, including the size of the loan, the interest rate, any fees they charge, and the term (length) of the loan. Take another look at your household budget to ensure you can easily repay the loan. 

• At this point, gather the documents you'll need to apply for a personal loan. These generally include your personal identification, Social Security number, pay stubs, employer contact information, and most recent bank statements.

• If the monthly payment appears to fit comfortably within your budget, formally apply for the loan. At this point, the lender will run a hard credit check, and your credit score will dip. Don't sweat it, though. As long as you make regular, on-time payments, your credit score won't take long to recover. Your credit score will continue to improve as you faithfully pay the loan. 

• Once approved, read every word of the contract. Look for clauses you don't understand and ask what they mean. Do not sign on the dotted line until you know precisely what you're expected to pay. 

• Wait for funding. Funding times vary by lender but typically take no more than a few days.

How to Compare Bad Credit Loan Offers

• Limit your loan shopping to 14 to 45 days. As mentioned, a hard credit check dings your credit score. However, the credit bureaus understand that it’s smart to shop around for the right loan. Knowing this, you have some leeway applying for certain types of loans (mortgages, car loans, and student loans). In those cases, they count any hard credit checks run for the same type of loan within that window of time as a single hard credit check. In other words, you could go through the entire application process with five different lenders and still only experience one hit to your score. 

• >> Note that there is no rate-shopping window for personal loans. So do your research, check your rate with a soft credit check, and talk to the loan officer before you apply, so you know in advance that you have a reasonable chance of being approved.

• Compare APRs. It's not enough to look at the lender's advertised interest rates. The interest rate doesn't represent the actual amount you'll pay for a loan. The APR does because it includes all the extras, like fees. Imagine two lenders, each offering a 7% rate, but only one charges high fees. In that case, the APR on the loan with fees would be higher. Checking APRs instead of interest rates is an easy way to determine which lender offers the best deal. 

• Check for sneaky add-ons, like unusual feesIdeallyfees. Ideally, the lender you land on will charge very low (or no) fees. However, applicants with poor credit scores should be prepared to pay more in fees than they will when their credit is stronger. Fees that you may be able to avoid include statement fees, a fee to talk to customer service, and prepayment penalties (a fee for paying off your loan early).

• Ask about funding time. Let's say your car needs a new transmission and it's crucial that you receive loan proceeds quickly. Find out how long each lender takes to fund a loan.

• Focus on details. No matter how many loan offers you receive, go over each with a fine-tooth comb. Say one gives you a discount for setting your loan up on auto-pay. That discount may be enough to convince you it's the better loan for you. If you don't entirely trust the industry you work in, a lender that provides temporary payment deferments to borrowers in emergency situations may be a more attractive option. 

Once you can look at loans side by side, deciding which will work best for you is easier.

Is it a Good Idea to Get a Bad Credit Loan?

Whether getting a bad credit loan is a good idea depends on your current situation. If you have bad credit and are hit with a sudden, unexpected expense, like an expensive car repair or a new roof, you may not have any other choice than to take out a bad credit loan.

You need to weigh the benefits of a bad credit loan with the possible risks. A bad credit loan could cost you a lot of money between the fees and interest you may have to pay. And if you’re in dire financial straits, paying back that loan each month could be challenging.

It’s also important to remember that it could take anywhere from 24 to 60 months to pay off your loan. Can you afford it? If you take out a bad credit loan and default, you may incur penalties, making repayment harder or impossible. Think carefully about the potential for this loan to make your situation worse. 

If you’re already struggling with a significant amount of debt, bad credit loans may not be the right option for you. Consolidating your debt may sound appealing, but a bad credit loan could have an even higher interest rate than what you’re paying now on your credit cards, medical bills, and other kinds of debt. And since these loan repayment terms are not open-ended like your credit card repayments, you may spend a lot more each month on this option. If you’re looking for a faster and more affordable way to get out of massive credit card debt but have bad credit, better options may be available.

How to Make Sure Your Bad Credit Loan Is Legitimate 

After deciding a loan is your best option, it’s time to start getting quotes from multiple lenders to get the best deal for yourself. Before you agree to take out a loan, there are a few questions to consider to make sure that the company you’re planning to work with is legitimate:

• Who are you borrowing from? If you’re borrowing from a lender you’ve never heard of, it’s time to research. A simple internet search of the lender should clue you into some critical details about them. Make sure that your lender has reviews from real clients on reputable, third-party websites like TrustPilot. If they’re highly rated on sites like the Better Business Bureau, that would be even better. You may want to start considering another lender if you can’t find information about them.

• Will they check your credit score before offering you a loan? If you have bad credit, a lender that says they won’t check your score might sound like a great option. But the truth is, any lender who won’t check your credit score before offering you a loan is not working in your best interest. Legitimate lenders need your credit information to determine whether or not to lend you money. If a lender won’t check your credit score, that means they don’t care whether you can repay the loan. Instead, they are more concerned about trapping you into high-interest debt that’s impossible to pay back and taking as much money from you as possible.

• Are there upfront costs? Application fees are legal (although you may be able to find a lender who doesn’t charge this fee). But it should be a reasonable fee, and not based on a percentage of the loan amount. That would be more appropriate for a processing fee or origination fee, which is charged when your loan is approved. 

• Do they guarantee you’ll be approved? If a lender guarantees you’ll be approved for a loan before looking at your application, gathering information about you, and checking your credit score, you shouldn't work with that lender. No legitimate company can guarantee you a loan.

• Are they pressuring you to sign up? Generally, lenders who use scare tactics to get you to sign up for their offer should be avoided. Some scammers may try to rush you through the borrowing process before you read the fine print—which means they could be offering you rates, terms, and hidden fees that will keep you in debt instead of helping you achieve your financial goals.

• Did you read the fine print? Before you sign on the dotted line, read your loan contract. If you’re looking for a bad credit loan and money is already tight, the last thing you want is to get blindsided by unexpected fees or balloon payments. Check the rates, fees, and repayment terms the lender is offering. Make sure you understand the fees and what the penalties are for missing a payment or paying late.

Are you sure you couldcan repay the loan? Most lenders won’t approve a loan they don’t think you’ll be able to repay. Still, no one knows your actual monthly budget like you do. Before accepting a loan, make sure you can cover the monthly payment in your budget. If you aren’t sure, it’s best to pass on borrowing for now. Some predatory lenders may offer you a loan, knowing you’ll never be able to repay it. That way, they could make more money by collecting additional interest and fees from you when you miss payments on the loan.

Alternative to Bad Credit Loans

If you’re looking to get out of heavy debt, your first thought might be to take out a debt consolidation loan. But as you have already seen, a consolidation loan may not be the best choice if you have bad credit. Three options you may want to explore instead are credit counseling, debt settlement, and bankruptcy.

Credit Counseling 

Credit counseling agencies are usually non-profits that help people manage debt. A certified counselor could help you create a realistic budget that works for you. They could also set up and manage a debt management plan (DMP) to consolidate your unsecured debts into a single payment. 

There are pros and cons to a DMP. An advantage is that the credit counselor may be able to negotiate lower interest and fees on your accounts. A disadvantage is that you have to give up credit cards while you’re in the program, and your credit report will show that you’re on a negotiated repayment plan. Also, DMPs don’t work for secured debts like car loans or mortgages.

If you could benefit from guidance on setting up and maintaining a budget that works for your income, a certified counselor could provide the know-how to manage your finances moving forward. To locate a reputable counselor, start at the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC). 

Debt Settlement

Debt settlement involves negotiating with your creditors to get them to accept less than the total amount you owe. This is the type of debt relief that Freedom Debt Relief offers.

When you enroll in a debt settlement program, the company you hire sets you up with a dedicated account you deposit money into every month. When you’ve saved enough money in that account, the company approaches your creditors and negotiates with them, one at a time. The goal is to get them to accept a lower amount on your debt and forgive the rest of what you owe. The debt settlement company should then allow you to review and approve the agreement. Once you approve it, payment is made from the dedicated account to the creditor. If the agreement was for a lump sum, the debt is cleared. If the agreement was for a series of payments, the first one has now been made. The company’s fee is also processed from the same account.

Creditors may be willing to negotiate if it’s clear that you have a financial hardship and can’t afford to fully repay your debts. Debt settlement could help you get rid of your unsecured debts for less than the full amount you owe. At the same time, you could get some budget relief immediately. The monthly deposit into your dedicated account could be lower than the total of all the minimum payments you’re making now. 

Debt settlement has some potential downsides. The first is credit score damage. 

Most people pursuing debt settlement choose to stop making payments on their debts. Missing payments is likely to seriously harm your credit score and leave you open to collection calls or debt lawsuits. People skip payments so they can afford to make monthly contributions to their dedicated account. Missing payments is never a requirement for debt settlement, but it does have the effect of letting creditors know that you have a financial hardship and can’t afford to fully repay your debts. Negotiations may be harder if you’re all caught up. 

Bankruptcy

This is a legal process to get rid of debts. When you file for bankruptcy, a court analyzes your financial situation and determines your eligibility. Then, they may liquidate (sell) some of your assets and give the money to your creditors. Or the court may set up a repayment plan. 

There are two main types of bankruptcy:

• Chapter 7. The most common form of bankruptcy, Chapter 7 bankruptcy, is also known as liquidation bankruptcy. It allows you to walk away from your unsecured debts. During this process, the court may sell some of the things you own. Some of what you own is protected, and the list of protected assets varies from state to state.  After your assets are sold and your creditors are satisfied, you no longer owe the debt.

• Chapter 13. If you can afford a monthly payment, you might not qualify for Chapter 7 bankruptcy, and you’ll be directed to Chapter 13 instead. In this form of bankruptcy, your debt is restructured and repaid over three to five years, often through wage garnishment. You get to keep your assets, but your paycheck will take a big hit.

Bankruptcy can affect your credit score for seven to 10 years. If your credit standing is already damaged when you file, your score might not have far to fall. On the other hand, if you have good credit when you file, your score could take a nose dive. The same is true if your accounts go into collections. 

One big difference between bankruptcy and other options is that bankruptcy is a matter of public record. If privacy matters to you, explore other options first. 

If you think bankruptcy might be a good fit for your situation, consult a bankruptcy attorney in your area.

It’s smart to weigh the pros and cons before taking on a new loan. Due to your current credit score, you could expect to pay a higher interest rate on the loan. However, making payments as promised is the best way to help your score recover. 

The bottom line is that you have options. Now, it's a matter of figuring out which one best fits your needs.