How to Get a Loan If You Have Bad Credit
Having bad credit doesn’t necessarily mean you’re unable to get a loan. In many cases, you’ll just need to search for a non-traditional approach to get the money you need. Talking to lenders about your situation, shopping for loans tailored to people with bad credit or finding a cosigner could be the answer.
How bad credit affects your ability to get loans
Your credit score offers a snapshot of your financial health. The lower yours is, the greater a risk you’ll be viewed as by lenders when applying for a personal loan, mortgage, auto loan or credit card. This could cause your application to be denied or lenders to approve you with a higher interest rate.
A high interest rate can significantly increase the total cost of the loan. For example, if you took out a $15,000 loan with a 36-month term at a 4.5% interest rate, you’d pay $1,063.34 in total interest fees. However, if the interest rate was 6%, the interest charges on the same loan would be $1,427.85. The better interest rate would save you $364.51 over the life of the loan.
Here are a few tips to help you get a personal loan if you have a low credit score.
- Talk to the lender. An increasing number of lenders are starting to use alternative data — i.e., information not found in your credit report — to assess borrowers, according to Experian. Your chances of being approved with good terms could increase if lenders also consider factors such as your income, employment and a bank account in good standing.
- Shop around online. Some online lenders are willing to grant personal loans to borrowers with bad credit. For example, LendingTree has an online marketplace for personal loans where you can fill out an online form and potentially be matched with offers from up to five lenders, based on your creditworthiness.
- Try a credit union. If you belong to a credit union, you might be able to get a loan from it without a credit check. Information beyond your credit score could be considered, allowing you to access favorable terms.
Be on the lookout for predatory lenders. Deceptive practices might include charging excessive interest rates and fees, “packing” (meaning services you didn’t request are added to the loan) and bait-and-switch schemes in which you’re promised one type of loan or interest rate but receive a different one.
The median credit score of newly originating mortgage borrowers in the fourth quarter of 2018 was 758, according to the Federal Reserve Bank of New York. Don’t panic if your credit score is nowhere near that number because you still have options.
- Budget for a higher interest rate. If your credit score falls below 640, you’ll probably be considered a subprime borrower, according to Experian. This doesn’t necessarily mean you won’t be able to get a traditional mortgage loan, but lenders will likely offer higher rates because they consider you a high-risk borrower.
- Consider an FHA loan. Backed by the Federal Housing Administration, FHA loans are available to qualifying individuals with a credit score of 580 or higher and may require down payments as low as 3.5%. Eligible consumers with a credit score of 500 to 579 can get a loan by putting 10% down.
- Talk to the lender. No two borrowers have the same credit history. If there’s a good explanation for the negative — yet accurate — information in your credit report, the U.S. Department of Housing and Urban Development (HUD) recommends talking to the lender about your situation.
There are plenty of auto loan options for borrowers with less-than-ideal credit.
- Shop around for the right lender. If conventional lenders aren’t willing to give you an auto loan, you can seek out those that primarily serve borrowers with poor credit. Some dealerships also advertise their willingness to work with people who have low credit scores, as they have partnerships with lenders that serve this market or finance loans themselves.
- Save for a down payment. Having money for a down payment can increase your chances of loan approval, according to Experian. This could cause the lender to view you as less of a risk and even offer a better rate.
- Find a cosigner. If you can find a cosigner with good credit, this can increase your chances of getting the loan. Because the lender has another person to collect from if you default on the loan, you’re deemed a lower risk.
If your credit isn’t great, you might think getting a credit card isn’t an option, but here are a few alternative approaches to try.
- Seek out credit cards for bad credit. Many lenders offer credit cards specifically tailored to borrowers with bad credit. Do note, it’s not uncommon for these cards to come with annual fees and high interest rates.
- Consider a secured credit card. This type of credit card requires you to put down a security deposit, which serves as the basis for your credit limit. Additionally, many issuers report usage to the credit bureaus, so this can help increase your credit score.
- Find a cosigner. If you can find someone with good credit to serve as a cosigner, this can increase your chances of being approved for a credit card. This allows you to take advantage of your cosigner’s good credit score and payment history because your cosigner is responsible for your debt if you don’t pay.
How to improve your credit
You might be able to get that loan or credit card with a low score, but if you can delay the process by a few months or years, you could qualify for a better rate or avoid annual fees. Here are a few tips to help repair your credit and improve your score.
- Make consistent on-time payments. Your payment history accounts for about 35% of your FICO credit score, so paying your bills on time can make a big difference.
- Keep old accounts open. Length of credit history accounts for 15% of your FICO Score. It’s typically best to leave unused accounts open because closing them can negatively affect your credit.
- Lower your credit utilization ratio. Credit utilization — the amount of credit you’re using versus your available credit — may account for up to 30% of your FICO Score. This is another reason not to close accounts you no longer use.
The bottom line
Having bad credit isn’t a terminal diagnosis. If you’re willing to put in the effort, you can change your credit score for the better. In the meantime, a little creativity can help you get the loan you need, despite your current credit situation. If one lender denies your application, that doesn’t mean you won’t find one willing to take a chance on you.