Through December 31, 2023, Experian, TransUnion and Equifax will offer all U.S. consumers free weekly credit reports through AnnualCreditReport.com to help you protect your financial health during the sudden and unprecedented hardship caused by COVID-19.
Having a low credit score can make it challenging to get a loan. Bad credit could limit your options and lead to more expensive loan offers. However, many reputable lenders have lower minimum credit score requirements and may also consider other factors besides your credit score, including your income, debts, collateral and credit history.
A FICO® Score☉ lower than 670 could be considered a bad credit score by some lenders. More specifically, a credit score below 670 falls in the "fair" or "poor" credit scoring ranges. Bad credit may mean you don't have as many options, but it's still possible to be approved for a loan. Here's how.
1. Check Your Credit Score and Credit Reports
Before you begin the process, it's essential to know where your credit stands. You can get free copies of your credit report from all three credit bureaus (Experian, TransUnion and Equifax) at AnnualCreditReport.com, or access a copy of your credit report and credit score for free from Experian.
Check your credit report to review the information lenders see when they evaluate your loan application. Look for any patterns or issues in your credit history, including multiple missed payments or closed accounts. Then, take the necessary steps to change your credit habits for the future.
For example, if you spot any information you believe to be in error (or a result of fraud), you have the right to dispute the credit report entries with the applicable credit bureaus. Bureaus will work with your creditor to investigate and verify the disputed information. Depending on the outcome of the verification process, the disputed information may be updated or removed entirely. If it's found to be accurate, the disputed entry on your credit report will remain.
2. Understand the Costs of Getting a Loan With Bad Credit
Generally, loans are more costly for borrowers with bad credit. Lenders that offer bad credit loans may offset their risk by charging a higher origination fee and interest rate, resulting in a higher annual percentage rate (APR).
For example, say you want to borrow $10,000 and repay the loan over three years.
- If you have bad credit, you might receive a loan offer with a 5% origination fee and 29% interest rate. You'd wind up paying about $419 each month and $5,086 in interest by the time the loan is paid off.
- If you have good credit, you might get a loan offer with a 1% origination fee and a 10% interest rate. You'll pay about $323 each month and $1,616 in total interest over the life of the loan.
A loan's APR takes its interest rate, fees and repayment term into account, which is why comparing APRs for different loan offers can help you determine which loan is cheapest overall. Lenders often advertise an APR range with their loans, and the rates you're offered can depend on your creditworthiness, the loan amounts and the repayment terms.
Before you take out a loan, make sure you understand the costs involved and that you can make the loan payments on time. You can use Experian's personal loan calculator below to get an estimate of your monthly payments, depending on the interest rate and loan term.
Personal Loan Calculator
†The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
Try the full Personal Loan Calculator Opens a new window with more features.
3. Shop Around for Personal Loans
Loan requirements vary by the lender, so it makes sense to shop multiple loans and compare terms. By comparing different personal loans, you can identify a loan with the lowest APR and fees. Many lenders specialize in bad credit loans and may even offer credit-building tools, fast funding and other valuable features.
Consider using a helpful tool like Experian CreditMatch™ that matches you with personalized loan offers based on your location, FICO® Score and your desired loan terms. Some lenders and lending platforms have low minimum credit score requirements, while others don't have minimum credit score requirements at all.
4. Consider a Cosigner
Adding a cosigner with excellent credit to your loan application can improve your approval odds with a lower interest rate or more favorable terms. Of course, your cosigner must agree to take on the responsibility of repaying the loan if you can't make the payments.
Many borrowers enlist a close friend or family member to cosign their loans. Like you, your cosigner must complete the application process, including submitting their personal information, such as their income, credit history and credit score.
Getting a loan with a cosigner can strain even a close relationship, especially if something happens and you can't repay the loan. Maintaining clear and consistent communication is a good habit to keep your cosigner in the loop until your loan is paid in full.
5. Check Out Secured Loans
A secured loan is a loan in which you pledge an asset like your home or car as collateral for the loan. Having an asset secure the loan lowers the lender's risk and enables them to offer better rates than unsecured loans. If you have bad credit, a secured loan may be your best option to get a loan with a lower interest rate.
Of course, the main downside to secured loans is that the lender can seize your collateral if you're unable to repay the loan. As such, only consider taking out a secured loan if you can comfortably afford to make monthly on-time loan payments.
6. Get Prequalified for a Loan
Many personal loan lenders let you submit a prequalification online to find out if you're likely to qualify for a loan and see your estimated loan offers without hurting your credit.
But rather than going lender by lender, you can log in to your Experian account and use the CreditMatch tool. Experian will then display available loan offers from multiple partner lenders so you can compare the loan offers to see which is best for you.
What to Do if You're Denied for a Loan
If you're denied a loan, you should receive an adverse action letter from the lender explaining their decision. Go over this letter to review why the lender didn't approve your loan and take the necessary steps to resolve the issue before applying again. Alternatively, you can look for another lender who is willing to work with you.
For example, most lenders want to see how much of your monthly gross income goes toward making your monthly debt payments, which is known as your debt-to-income ratio (DTI). If your ratio is too high—many personal loan lenders prefer a DTI to be below 40%—then take steps to lower your DTI, such as by increasing your income or paying down other debts.
Additionally, a loan rejection due to unsatisfactory credit entitles you to a free copy of your credit report within 60 days. You'll also need to decide if you want to apply for a loan elsewhere.
While getting denied for a loan doesn't hurt your credit, each new application could result in a hard inquiry that could ding your score temporarily. With this in mind, try to get prequalified with a soft inquiry before submitting more applications.
Alternatives to Loans When You Have Bad Credit
If you're having trouble getting approved for a loan and need money right away, you could also look for alternative options.
Ask a Friend or Family Member for a Loan
No one wants to ask a loved one for money for fear of damaging the relationship. However unpleasant it is to make the request, it may be your best financial option. Even if your friend or relative charges interest on the loan, the rate will likely be less than you'd find with a lender.
Signing up for a credit card designed for bad credit may help to pay a medical bill or another expense, but you may have better options. Credit cards usually have higher interest rates than personal loans, but you may qualify for a lower interest rate than what a bad credit lender offers.
If you're dealing with a high level of debt, reconsider whether getting a new loan is the best solution. Perhaps you'd be better served with credit counseling from a certified nonprofit agency that could help you pay down debt faster. An accredited counselor can help you design a monthly spending budget and take control of your debt and steer clear of future debt issues.
Consider Improving Your Credit Before Applying for a Loan
While getting a loan with bad credit is possible, be aware the loan will be more costly. Unless you're looking for an emergency loan, you may want to focus on improving your credit before borrowing money. Moving from a bad to an excellent credit score could take months or years. But even moving up within the fair credit range could give you more options and better offers.
One option to build your credit score is to get credit for your phone, utility and other eligible service payments for free with Experian Boost®ø. Boost links to your bank account, quickly examines two years of payment history and gives you credit for any eligible bills. With Boost, you could see an immediate increase in your FICO® Score powered by Experian.