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Even with bad credit, you may be able to get a small loan from traditional and online lenders. However, the options you'll have—and the cost of fees and interest—will depend on where exactly your credit falls. Read on to find out how to get a small loan if you have less-than-perfect credit.
Where Can You Apply For a Small Loan?
You may be able to find small personal loans from a variety of financial institutions, including banks, credit unions, online lenders and peer-to-peer lenders. While lenders often have minimum loan amounts for their personal loans, loan limits may start around $500 to $3,000, which could squarely fit into the "small loan" category.
There are also subprime lenders that may offer small loans without any credit check, including pawn, auto title and payday loans. While bad credit won't hold you back from these loans, the exorbitant fees and interest rates they typically charge make them choices to avoid if at all possible.
Generally, you can find the minimum loan amount, along with lenders' interest rate ranges and repayment terms, on the lenders' websites or by asking a company representative.
How Does Bad Credit Affect Lending Decisions?
Lower credit scores correspond with a higher statistical likelihood that a person will miss a payment in the future. To account for the risk of lending to someone who might not repay their loan, lenders may charge higher origination fees and interest rates. They may also have a minimum credit score requirement, and you could be denied outright if your score doesn't make the cutoff.
Credit scores generally range from 300 to 850, and a score in the mid-600s or lower may be considered a bad credit score. Once your score is around 670 or higher, you could find yourself in the "good" score range.
Lenders often consider more than your credit score on its own when reviewing a loan application, however. Other factors they may look for include your income, outstanding debt and history with the lender. In general, the worse your credit, the better your other qualifications may need to be to qualify for a loan or low interest rate.
Tips for Getting a Small Loan When You Have Bad Credit
While it can be more difficult to qualify a loan when you have bad credit, there are ways to increase your chances of getting approved and receiving a good rate.
- Check your credit. Before shopping for a loan, check your credit to see where you stand. Experian offers a free credit score and can help you understand which factors are impacting your score.
- Look for lenders that cater to applicants with bad credit. Some lenders, not including the no-credit-check options, focus on lending money to people who don't have good or excellent credit. There are even online lenders, such as Upstart, that may use alternative data to review applications and place less importance on their scores, although it typically still requires a credit score of at least 580.
- Get a cosigner. If you have a creditworthy friend or relative who is willing to cosign the loan, that could increase your chances of getting approved and receiving a low rate. However, if you miss a payment, their credit could be hurt and the lender may try to collect the debt from your cosigner.
Alternatives to Small Loans If You Have Bad Credit
If you can't get approved for a small loan with favorable terms, you can look for other ways to get an emergency loan, get help with your bills or decrease your expenses. Even a combination of several options may help you make ends meet.
- Ask creditors for help. Contact your current creditors to see if there are any relief options available. You may be able to temporarily lower or skip payments, freeing up money that you would otherwise have to borrow. However, this only helps if you're dealing with a temporary shortfall.
- Borrow from friends or family. While borrowing money from friends or family members has the potential to strain or break relationships, in some cases, it may be a good idea if you're confident you can pay back the loan. Consider writing up a contract for the loan with clear terms that you both agree on.
- Get an advance on your paycheck. Although payday loans can be expensive, some employers and early payday apps will give you an advance on your paycheck for a small—or no—fee.
- Find help from a nonprofit. Local and national nonprofits may offer different types of assistance that could directly address your financial need or help alleviate other expenses. You may be able to get help with the basics, including utility bills, medical bills, rent and food.
While these can all help with short-term setbacks, they might not be a sustainable solution if you find yourself repeatedly seeking small loans. When that's the case, you may need to revise your budget and find ways to cut expenses, or figure out how to increase your income.
How to Improve Your Credit
If you can wait to borrow money, you could first focus on rebuilding your credit to increase the chances of getting approved for a loan with a low rate. While you can't erase negative marks that are part of your credit history, there are a few steps you can take to improve your credit:
- Pay down credit card debt. While rebuilding credit can take time, one of the few things you can do that could quickly improve your credit scores is to pay down credit card debt. The ratio of a card's balance to its credit limit—also known as its utilization rate—is an important scoring factor. A lower utilization rate is better for your credit scores.
- Make future payments on time. Having a history of on-time payments is one of the most important scoring factors. If you have trouble affording all your bills, a hardship option from a creditor may allow you to skip a payment without hurting your credit.
- Add alternative data to your credit reports. Utility and cellphone bills generally don't appear on credit reports, but they can help your credit scores when they do. You can sign up for Experian Boost™† and get credit for your on-time phone and utility bill payments.
Also, be mindful of how many applications you submit while trying to get a small loan. Each application could result in a hard inquiry, which can hurt your credit a little and remain on your credit report for two years. Some lenders offer a prequalification that will let you know if you're likely to get a loan and only requires a soft inquiry, which doesn't impact your credit.
Check Your Credit and Offers Before Applying
In addition to offering free credit reports and scores, Experian has a CreditMatch™ personal loan marketplace that provides information on partner lenders and loan offers. You can view the results based on your credit, desired loan amount and terms, and get prequalified without hurting your credit.