You may need a personal loan for a number of reasons — perhaps to deal with unexpected medical expenses, to consolidate high-interest credit card debt, or even to take that well-deserved vacation. Unfortunately, if you have borderline or bad credit, personal loans may be difficult to get at your local bank or credit union. You can resort to payday lenders that loan money for short periods of time at very high interest rates, or you can investigate the growing number of online lenders that focus on loans for people with bad credit.
Bad credit personal loans represent an underserved market, mainly because most banks and credit unions have plenty of available business without dipping into that particular higher-risk pool. Many personal loans through traditional banks are unsecured, meaning that the bank accepts that you are a low risk to default on the loan and is willing to loan you money without collateral. Unless you are willing to accept a secured loan backed by some form of collateral such as a savings account, CD, or equity in your home, you generally need a credit score of 680 or above to qualify for a personal loan. (The 630 to 640 range is often considered the boundary defining poor credit, where lending criteria becomes increasingly strict.)
Fortunately, innovative lenders are available to offer personal loans for bad credit. They focus on the niche between traditional installment personal loans and short-term payday loans. Consider these three examples that define the ends of that niche.
- Avant: Avant primarily services the average to poor credit range, defined as credit scores from 580 to 700. Installment loans are available from $1,000 up to $35,000 at rates of anywhere from 9.95% to 36% and repayment periods from 24 to 60 months. Avant also charges no up-front origination fees — a great advantage with bad credit loans.
By keeping the process online all the way through signing of the loan contract, Avant streamlines the overall loan process. Approval is fast and funds are provided quickly via direct deposit, potentially as soon as the next business day after approval. Avant offers one of the best loan packages available within the 580 to 700 credit score market with respect to terms and borrowing limits.
- LendUp: LendUp targets the higher-risk end of loans with bad credit — people who find themselves on the borderline of managing daily cash flow and occasionally needing short-term small loans just to pay bills. Such borrowers can be tempted by payday loans that can charge interest rates in the 300% APR range. Borrowers who have trouble repaying run the risk of renewing the loan and falling into a debt spiral of accrued interest and fees.
LendUp's initial loans (up to $250) also start with high APRs commensurate with the risk, but their focus is to keep your debt from growing. Debt-accumulating rollovers are not available; in their place, LendUp offers a free thirty-day extension. By repaying smaller loans on time, you gain "points" that lead to lower interest rates (as low as 29%) and can access higher loan limits on subsequent loans (up to $1,000) with the "LendUp Ladder" program. Points may also be earned through credit education courses. As you climb the ladder, you establish a positive payment history while lowering your risk and rebuilding your credit.
- OppLoans: OppLoans installment loans don't require one large lump-sum payment as payday loans do. OppLoans spreads out the cost of the loan over consistent, scheduled installments. These fixed payment amounts are more manageable and affordable than payday loans are.
Even if you have a poor credit score and earn a low income, you could still qualify for an installment loan. Compared to the average 300-1200% APR interest rates on payday loans, the rates on OppLoans installment loans are much lower at 99-199%. The average 36-month term of their installment loans means that your monthly payments will also be lower.
The three examples illustrate an important principle — the greater the risk that you represent to the bank, the higher the interest rate on the loan. Interest rates on loans with bad credit tend to start in the 20% to 30% range. LendUp's lowest interest rate is toward the upper end of Avant's in keeping with the relative risk that their customers represent. Higher credit risk also leads to a lower cap on the amount of money that a lender will be willing to lend.
It is important to check your credit score before applying for a personal loan to make sure that there are no mistakes in your credit profile and that the offers you receive are in line with your true credit history. It takes time to correct any errors that you find, so make sure that you check your credit report for accuracy well before you apply for a personal loan. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Lenders do take credit scores into account, but they also realize that a credit score is only one part of risk assessment. Careful scrutiny will be given to your income level and the likelihood that your income will remain stable over the life of the loan. Special circumstances may be taken into account, such as a large one-time medical expense that has caused a temporary disruption in your finances. Do not simply assume that a credit score of 640 or below dooms you to a bad credit loan. If you have extraneous circumstances working in your favor, put them to use in your application and see if you can secure a lower interest rate.
If you do not qualify for a traditional loan and cannot stomach paying high interest rates under any circumstances, consider a secured personal loan. Secured loans offer a lower interest rate option for those with poor credit, since there is no credit check necessary — the lender has an asset that can be claimed or repossessed in case of non-payment. However, secured personal loans are limited to the value of the asset (or less, depending on the lender's policies). You also have to weigh the lower interest rate against the risk of having an asset repossessed.
Not all lenders operate in all states, and your state may have specific laws regulating bad credit loans. Verify with the lender that they service your area and that their terms and conditions are compatible with your state's laws.
Nobody wants to pay a higher interest rate than he or she has to, so consider the purpose of your loan before applying. Is it for debts or upcoming expenses that require immediate attention, or can the loan wait until you have an opportunity to build up your credit score and receive a better rate? Only you can answer that question, but at least be sure to ask the question before you rush into any loan agreements.
"Bad credit" does not necessarily mean "no credit." You have alternatives, but be sure to check them out thoroughly. Review the terms to make sure that you understand all the fees and potential charges, and calculate the total amount of money you will pay over the life of the loan. Choose poorly, and you could be caught in a seemingly endless debt cycle. Choose wisely, and you could be on your way to improving your financial position while rebuilding your credit.
If you are interested in a personal loan, visit our curated list of top lenders.