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How to get a personal loan with bad credit

29.06.2021
986
9 min.

Obtaining a loan for applicants who have bad credit reputation may seem impossible but it may be issued in case monthly payments are made on time.

How to get a personal loan with bad credit

A bad reputation is a status in which no one wants to be voluntarily. But sometimes it happens even to the best customers. This can be due to sheer financial inefficiency but can just easily be the result of life's hardships. Divorce, a serious illness or a career crisis can quickly turn a good credit history into a bad one.

But you may still have loan options available if you have poor creditworthiness. They won't offer the best conditions but can be a real catch when absolutely necessary.

The best sources of credit for people with bad credit

Loan aggregators

This is a great source of funding when you have bad credit reputation.

Note! Loan aggregators are not direct lenders but a large number of creditors are involved in the platforms.

Since they serve all levels of credit history, it is possible to obtain a borrowing even with bad credit. You need to fill in an application, after that lenders check your credit report and make offers.

Once you fill out a loan application potentially dozens of lenders and their offers become available. You can choose the one you like best.

Lenders for individuals

Another option is to take a personal loan from a lender who has flexible credit rating requirements. Here are some of the best.

  • OppLoans does not require a minimum credit rating, instead it considers a variety of factors. These include bank details and information from alternative credit bureaus. Best of all, OppLoans shares an applicant's payment records with the 3 main credit bureaus to help boost the amount.
  • Upstart specializes in undergraduate and recent alumni who are still working on building their credit history. It is possible to apply for a loan of $1,000 to $50,000 for every purpose from school to vacation expenses. Instead of a credit rating, Upstart uses artificial intelligence to approve loan applications and it gives the company a 27% higher approval rate than traditional methods.
  • Monevo allows to apply for 30 lenders with a single app within a couple minutes. Lending amounts range from $500 to $100,000 and interest rates start at the level of 1.99% per annum. Monevo checks applicants' credit scores but some of its lenders accept the scores of 450 or higher.

Peer-to-peer (P2P) lenders

Attention! These can be the best sources of funding for bad credit history.

They typically require paying high percentage rates, sometimes up to 36%. But they offer loans with fixed rates for limited term that do not require collateral.

Perhaps best of all, loans can be borrowed for almost any purpose. You can use them to consolidate debt, start a business or even buy a car.

The most popular P2P lenders are LendingTree, Prosper.

  • LendingTree lets you compare rates for nearly every loan type you can imagine, from personal loans to mortgages and educational loans. With its help you have an opportunity to compare diverse offers in one place to be sure you are getting the best deal.
  • Prosper specializes in retail lending. Application submission takes only a few minutes and you can get approved for loans up to $40,000. Prosper offers several terms so you can choose the one that suits your budget.

Loan sources to beware of

Banks and credit unions

Decisions of these institutions are highly influenced by credit ratings.

Important! If your credit rating is below 580, most of them will not issue you a loan.

Credit unions are the best of the two especially if you have money on deposit. They can provide a loan if you have a cosigner but this depends on the credit union. Most of them apply a limited credit rating and will not lend below that level.

Payday loans

These are predatory loans designed specifically for clients with bad credit reputation. This is why they are better to be avoided.

Attention! Basically, they provide a loan against your next paycheck. The interest rate can be over 300% and they will need access to your bank account to withdraw funds when the next paycheck is accrued.

Things can get seriously ugly if you don't get paid and have to redeem a payday loan.

The worst thing about a payday loan is that upon getting one you are practically doomed to get another and another one. Most people having payday loans fall into the trap of a cycle that does not end until they will announce debt repudiation. And when that happens, payday loan companies can become your adversaries.

Subprime loans

This mainly applies to car loans. If you are not eligible for a loan issued by a bank or credit union then car dealerships will offer you one of these lenders. This may be necessary in case you absolutely need a car and there is no other loan option available. But the cost can be a surprise.

Important! Subprime auto loans are known for ridiculously high percentage rates (20% or more) and extended lending terms (up to 84 months).

This is the main reason why customers with bad creditworthiness are more likely to owe more in the end than their vehicles cost.

Credit cards for people who have bad credit history

There are several basic options of credit cards for people with bad creditworthiness. Unsecured credit cards with softer credit requirements (they usually don't offer rewards), credit cards specifically created for bad credit and also secured cards can be issued.

Any of these options will have limited benefits. These can include low limits of credit, high rates of interest as well as high fees. They typically lack the usual credit card advantages such as air miles, cash awards or accident insurance for rented cars.

However, they can provide a credit card which is absolutely necessary in certain situations such as when buying airline tickets or booking a car rental. Last but not least, they inform the 3 main credit bureaus about a client's good credit history, thus, giving a real chance to improve a rating.

Getting an auto loan for customers with bad credit

Two main options for obtaining a car loan with a bad credit reputation exist. It is possible to get a subprime loan from a car dealership, a loan from a bank or a credit card with compensating factors.

Note! If you choose the dealership option then you should expect to pay an interest rate in excess of 20%. Usually they provide funding for applicants whose score is of 580 points or more but if it is lower then the probability of being approved is fifty-fifty.

The best option might be to check the loan approval service. By completing the one page application you can get the best deals from various lenders that are competing for providing services to various consumers. With bad credit you will likely to be offered high percentage rates. But at least it will give you the opportunity to take advantage of the lowest rates available. This will probably be better than dealer financing.

Banks and credit unions have much higher rates of interest. Additionally, in order to apply you need a cosigner. These institutions usually need a credit rating of at least 650. The cosigner's score must be at least this level and preferably higher.

They may also require a down payment of 10% to 20% of the purchase price and approve the smaller loan sum than expected.

Getting a mortgage for customers with bad credit

Before the financial crisis of the last decade people with bad credit reputation could receive a mortgage. But it was possible thanks to subprime mortgages that are no longer available. This is not bad either. Subprime loans usually required an initial instalment of 20% or more, were provided with high rates of interest, had a two-year fixed payment that was then adjusted every six months and also charged a heavy penalty if a client tried to repay the loan within the first two or three years.

Afterwards the mortgage industry has tightened lending standards.

Attention! Generally, lenders will not lend to borrowers who have a credit rating below 620. And even if your rating is slightly above 620 you will have to pay a higher rate.

Even now, some mortgage lenders approve FHA mortgages with a credit rating of only 580.

The score of 580 to 620 are considered as "fair" credit category. Bad credit means having a credit rating below 580.

If so, the most proper option is to try an FHA mortgage with a 10% initial instalment. FHA borrowings generally require a payment of 3.5%. But with a higher down payment they can accept a credit rating below 580.

What is considered bad creditworthiness?

There are five levels of credit history - exceptional, very good, good, fair and bad. One of the 3 main credit bureaus considers a credit rating below 580 as a bad one.

Unlike good and fair credit, there isn't much wiggle room when it comes to bad credit. Not only 580 is a pretty strong dividing line but also some lenders even classify applicants with ratings from 581 to 620 as a bad category.

General requirements for documents for applicants with bad credit

When applying for a loan it is necessary to provide certain documents although they can vary from lender to lender and from one type of loan to another. Here are the documents that are usually required when applying for most loans:

  • The most recent paycheck and W-2 proof of income
  • Proof of social security or retirement income
  • The employer's contact information (the lender will verify the work directly)
  • Copies of completed tax returns for the last 2 years provided an applicant is self-employed or works on commission
  • Make, model and value of the vehicle, VIN number in case of applying for a car loan
  • If an applicant pays or receives child support its amount should be indicated
  • Bank or broker statements or even retirement account statements
  • Written explanations of loan problems, including documents proving mitigating circumstances (job loss, medical events, divorce, etc.)

In case of applying for a credit while having bad credit you should be fully prepared to do your best on the last point above.

The idea is to show that your credit problems have appeared due to extenuating circumstances. This could be a job loss, medical event or divorce. You will need to provide both proof of the events and a well-formulated explanation of what happened and why it will not continue in the future. In some credit situations, additional credit documentation can turn a denial into an approval.

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