If you want to get a loan with bad credit, you do have options. There are banks and other financial companies who offer loans to people with bad credit scores. There are also peer to peer lending companies who offer this as well. Typically, the trade off is that these loans often come with high interest rates.
So, before applying for a loan with bad credit, first learn if your score is actually a bad credit score. Then, take some of the quick steps listed below to make sure your credit report is accurate just in case your score should actually be higher. Improving your credit score takes time, but it’s also a relatively simple process that rewards good financial decisions over time.
So, if you have a bad credit score, don’t be discouraged. Your score doesn’t have to define you for the rest of your life. You can apply for a loan even with a low score, and you can learn how to improve your score in just a few months.
What is Bad Credit?
Let’s start with the basics. When you have bad credit, it’s difficult to get approved for any type of loan. You probably already know this if you’re reading this article. Although different companies have different opinions of what qualifies as a bad credit score, most are in agreement that if your FICO credit score is below 620, you have a bad credit score.
Why Does a Bad Credit Score Matter?
A bad credit score can make it difficult not only to get a loan but to rent an apartment or buy a phone. Once you have bad credit, you don’t get the benefit of the lowest interest rates available. It’s more expensive to borrow money because lenders consider you more of a risk as a borrower.
For example, if you want to get a car loan, the interest rate for someone with an excellent credit score might be 3% but the interest rate for someone with a bad credit score might be 15%. Over a five year car loan, the monthly payments might not seem too different between these two borrowers. However, the borrower with the 15% interest rate will likely pay thousands more dollars for the same car over the same time frame.
Luckily, credit scores aren’t permanent, and just as your score went down, it can also go up again. One of the easiest ways to start improving your score is to check your credit report.
Check Your Credit Report
Before you go through the process of applying for a loan with bad credit, make sure your credit report is accurate. The reason is that credit reports often have wrong information on them.
Sometimes credit reports have inaccuracies like an old address. However, sometimes they might have a loan on file that doesn’t belong to you. They might have accounts in collections that shouldn’t be in your name. Or, they might show you a delinquent account you didn’t know you had. You can get reported to collections for something as simple as not returning a library book (true story). So, make sure you know exactly why you have a low credit score.
If you’ve never checked your credit report before, you might not realize that you’re entitled to three free credit reports every year, one from each of the three main credit bureaus. You can access these reports at www.AnnualCreditReport.com. After answering a few questions to prove your identity, you should be able to open your credit report right away.
Fix Adverse Accounts if Possible
When you access your credit report, look for adverse accounts first. These are often near the top of your credit report. Adverse accounts are accounts that are in collections that are contributing to your poor credit score.
When you see your adverse accounts, is there a small loan that you can pay off today to improve your credit score? Is there an adverse account that’s more than 7 years old and should be removed from your report? Do you see something easy, like paying a library fine, that can be removed from your adverse accounts quickly?
Your adverse accounts should have phone numbers next to them. You can call the collections company and arrange for a payment plan to hopefully put your account in good standing. As a word of caution, never give a collections company access to your checking account, and feel free to negotiate with them to lower the debt you owe them. Get any negotiation agreement in writing before sending a check to pay your bill.
If you give yourself some time, approximately one month, to handle adverse accounts on your credit report, you might be surprised to see your credit score jump once your accounts in collections turn into accounts in good standing. If that’s the case then you could be well on your way to qualifying for a loan as a person with good credit, not bad credit.
Where to Apply for a Loan With Bad Credit
If you need a loan for something urgent, you might not have time to take the steps above to improve your credit score before applying. If that’s the case, first talk to friends and family who might be willing to loan you money.
Keep in mind that it’s never a good feeling to owe a family member or a good friend money, so this option is only for extreme circumstances. After they let you borrow money, make it a priority to pay them back quickly so it doesn’t negatively affect your relationship.
If you don’t want to ask friends and family for money, you can try to apply for a loan with a peer-to-peer lending site. These sites are different from banks because you’re asking to borrow money from other people, not financial institutions. Make sure the peer-to-peer lending site you use has high ratings and a good track record.
If you want to apply for a loan from a bank or lending company, research companies that offer loans to borrowers with credit scores under 620. Some companies are built on helping people with bad credit scores get the loans they need. You want to find a lender who treats you with respect over the phone and walks you through the process. If you don’t have a good experience with a lender, move on to another one.
What to Watch Out For
While you are comparing lenders, make sure you watch out for payday lenders. These are predatory lenders who offer to give you a loan before your next payday. These lenders have come under fire in recent years because the interest rates they give can be well over 100%. These loans can keep you in a bad debt cycle and can be extremely difficult to pay off due to the high fees and interest rates.
Also, avoid auto title loans. These loans might seem tempting because you can bring the title of your car, leave it as collateral, and get a loan. However, the loan is usually only for a percentage of what your car is worth. Then, if you’re unable to pay the loan back in the agreed upon amount of time, the lender could have the right to sell your car. After all, if they have legal possession of your title, they might be able to legally sell it and make a profit.
Payday loans and auto title loans aren’t worth it. The fees and risk of working with them are simply too high. Instead, take the time to seek out reputable lenders who are honest about the interest rates they charge and when they expect repayment. These lenders do exist, and even though their interest rates may be high, they shouldn’t be as high as payday lenders.
Ultimately, it can feel hopeless to have a bad credit score, but that feeling doesn’t have to be permanent. In fact, with some time and focus, you might be able to improve your score quicker than you think.
Remember, the more you know about why you have bad credit, the better. Fix adverse accounts that you see on your credit report, but also try to understand what caused your financial problems. Take responsibility for your past mistakes and promise yourself to do better from now on.
Once you improve your credit score, you should be able to apply for secured credit cards. These are a stepping stone to being approved for credit cards with more benefits in the future.
Also, if you do get approved for a loan with bad credit, be sure to make your payments on time every time. Your payment history actually makes up 35% of your credit score. So, even if you start your journey with a bad credit score, paying back a loan on time every month without missing a payment could actually help your score improve in the future.