Best Personal Loans for Bad Credit

Obtaining a personal loan with a low credit score can be next to impossible.

Lenders generally determine APR by looking at a potential borrower's credit history, as an indicator of their ability to repay the loan.

Since personal loans are unsecured by collateral, such as a car or house, lenders can be leery of providing them, unless you have a really good credit score.

However, some lenders do offer loans to people with bad credit, and at rates that aren't predatory, on the strength of a steady income and low debt levels.

What exactly is a bad credit score? 

Your credit score is a measurement or rating of your financial reputation and reliability.

It is based on your financial history, taking into account timeliness of payments, credit inquiries, and types of accounts, among other factors.

Potential lenders use your credit score to determine whether or not you are a credit risk, what kind of interest rates they will give you, and whether or not to approve a loan, among other things.

Carrying around a bad credit score has many negative effects.

Someone with a bad credit score is unlikely to get low-interest rates on credit cards and on loans—they might not even get approved for either of those at all since the lender might consider them a credit risk.

Other bad credit score side effects include difficulty buying a car or getting approved for an apartment or house, higher insurance premiums, and difficulty getting a cell phone plan (all of these require a credit check).

So, what should your score look like?

Credit scores usually range from 300 points to 850 points, with 850 being the best possible score and 300 the worst.

Although most lenders use this same range, the specifics of what the lender considers good or bad might change.

Generally, though, a credit score between 700 and 850 is considered excellent, while a score between 680 and 699 is considered good.

An average score is somewhere between 620-679, and anything below 620 is considered a bad/low score and will probably result in potential lenders considering you a credit risk.

Where does this score even come from?

You’ve probably heard the term “FICO score.”

FICO stands for the Fair Isaac Corporation and they are the ones who calculate credit scores.

The company utilizes information from the three major credit bureaus: Experian, TransUnion, and Equifax, in order to calculate your credit score. 

Fico takes certain factors into account when calculating your score.

The factor that weighs the heaviest on your score is payment history, which constitutes 35% of your score, and tracks whether you made or missed your payments.

This factor is followed by debt/amount owed, which constitutes 30% of your score, and takes into account all of your existing debt (credit cards, bills, mortgages, etc.).

Next up is the age of credit history, which consists of 15% of your score and considers when you first started building credit.

Mix of accounts/types of credit, at 10% of your score consists of how many different accounts you currently have (mortgages, credit cards, etc.).

Finally, we have new credit/inquiries, which constitutes the last 10% of your score, and which considers your recently opened accounts and any new credit inquiries.

How do you fix your credit score?

The best way to improve your credit score is to pay down your credit cards.

If 30% of your FICO score depends on how much of your available credit you’re using, and you’re using all or almost all of it, that’s bad.

Ideally, you want to be using 30% of your overall credit.

FICO also considers how much debt you have on each individual card and again, the ideal percentage is 30%.

Ideally, in these situations, you could request more credit cards, in order to increase your overall credit, and you could request a credit line increase to help with the second situation.

The problem is… if you have bad credit, you might not get approved for either of these, so what can you do?

This is where personal loans come in.

A loan can help you consolidate debt and pay off your credit cards.  Most people with low credit scores go for either personal loans or “payday” loans.

Keep in mind, your credit score will always be checked when looking for a personal loan from a reputable provider.

Lenders that don’t have a credit score requirement are often predatory payday loans that can charge extremely high APRs.

PERSONAL LOANS VS PAYDAY LOANS

We will always recommend getting a personal loan over a payday loan.

People usually go for payday loans when they are desperately in need of money because these types of loans do not require a credit score check, and are available to anyone with a bank account, a steady job, and at least 18 years of age.

Payday loans are high-interest (sometimes reaching over 400% APR), short-term loans, usually for small amounts.

These loans need to be repaid by the person’s next payday (within 30 days).

This is why they’re called “payday” loans.

Although payday loans are supposed to be repaid within 30 days, some lenders offer rollovers, letting borrowers who can’t pay on the due date delay the payment for a fee that has to be paid on the due date.

But remember, these types of loans come with extremely high-interest rates (some exceeding 400%) and hefty fees for missed payments.

Again, we will always recommend a personal loan over a payday loan, but we especially advise you not to go for a payday loan if you are not 100% sure you will be able to pay it back in full by the original due date.

Personal loans usually come from more reputable lenders. Banks generally do not require borrowers to use their assets (home, cars, etc.) as collateral, but they do run a check on your credit score, when applying for a personal loan.

Yes, you will have to provide more documents and more information for a personal loan than for a payday loan, but the security that comes from working with a reputable lender that doesn’t use extremely high-interest rates and other predatory tactics to take advantage of your financial situation is worth the extra effort.

Banks will require borrowers present information and documents regarding credit score and credit history, income, and bank accounts, among other things.

Getting a personal loan from a reputable lender takes longer than a payday loan because the lender has to verify your credit score and look into your accounts and financial history, but these types of loans are safer, more reliable, and come with a much lower interest rate than what’s available through a payday loan.

Personal loans usually involve a larger amount of money as well, which means the repayment terms are longer, but you have a lot more time to pay off your debt than you would with a payday loan.

WHAT KIND OF PERSONAL LOAN?

Some online personal loan providers will work with consumers who have bad/low credit scores as long as they meet certain requirements.

These online lenders will verify that you have an income, the length of your credit history, and how long you’ve been employed.

You can also get personal loans from national banks, regional banks, and other financial institutions (like online lenders).

APRs for personal loans typically range between 4.99% and 35.99% and the amounts offered can range from relatively small amounts up to $1 million.

Even if you get a relatively high APR with your personal loan, keep in mind that it might still be worth it, since you can use this loan to consolidate many payments into one and it might still be a lower APR than the one you’re currently paying on your credit card bills (which are usually tied to high-interest rates) and which in turn would help bring your FICO score up by clearing up credit card debt.