Can I Get a Personal Loan with Bad Credit?

Upset woman sitting at laptop with head in hands after seeing credit score

Personal loans can be a saving grace when you have debts coming due or vital, time-sensitive purchases to make. However, many people worry that bad credit can stand in the way of getting a personal loan application approved. Is there any way around poor credit when you need money for something important?

We’re here to help you understand the factors that can affect your eligibility for a personal loan and find reasonable alternatives if you can’t get one. Read on, and learn why bad credit doesn’t have to prevent you from accessing the financial resources you need.

What is a Personal Loan?

Personal loans are also known as consumer loans in some areas. When you take out one of these loans, you agree to borrow a predetermined amount of money and repay it with interest over a set period. Personal loans are one type of installment loan (since you gradually pay them back in installments).

Mortgage loans, auto loans, and student loans are also installment loans in most cases. The difference is that these types of loans must be used for specific purposes, whereas personal loans can be used for nearly anything the borrower needs to purchase.

However, that flexibility comes with certain conditions. In many cases, the interest rate for a personal loan will be higher than for other types of installment loans since other installment loans often rely on collateral of some kind. For example, if you get an auto loan to buy a car, that car functions as collateral until you pay it off.

Since personal loans are usually unsecured (i.e., they have no collateral), lenders often charge higher interest rates to compensate. However, none of this matters if you can’t get approved for a personal loan in the first place — and your credit can have a lot to do with that.

Why Credit Matters for Personal Loans

Before a lender approves your loan application, they need to be reasonably confident that they can get their money back. As such, they need to look at specific information in your financial profile so that they can understand the risk level they face by lending to you.

Credit checks are one of the simplest, most straightforward ways to assess an individual’s financial stability. Your credit score (on a scale from 300 to 900) is based on your credit report, which contains details such as:

  • How much credit you owe
  • What your credit limit is
  • Whether you have been keeping up to date with your payments

Low credit scores suggest that a person may have more debt than they can handle, sending a red flag to lenders and making them less likely to approve loan applications. This is especially true for unsecured loans (including most personal loans) because the lack of collateral makes them relatively high-risk for lenders.

Other Factors Affecting Personal Loan Eligibility

Credit checks are not always the sole determiner of an individual’s eligibility for a personal loan. Lenders may also look at other factors, including:

  • Your employment history: a person who frequently jumps from one job to the next may be less financially stable than someone who has had a steady job for years.
  • Your annual income: the more money you make, the more lenders may assume you will be able to cover your regular payments.
  • Your liquid assets: stocks, bonds, and valuable property can be sold to cover debts in emergencies. Having assets you can liquify if necessary can make you less of a credit risk.
  • Your education level: most lenders understand that having a university or college degree can increase your income potential. The same goes for a trade school certificate or diploma. However, having too much student debt may prevent some lenders from approving you, so be careful.
  • Your address history: staying in the same home for long periods shows that you can meet your rent or mortgage payments on time, giving some other lenders more confidence in your application.
  • How long you have had your current cell phone number: some lenders believe that keeping the same phone number for extended periods shows an ability to keep making payments on your cell phone plan, representing financial stability.
  • Any professional licenses that you may hold: doctors, lawyers, and skilled tradespeople must have licenses to practice their professions. Holding such a license can show lenders that your chances of earning a robust and dependable income are higher than someone who doesn’t have one.

Note that almost every lender has a different process for determining risk. The only surefire way to know what your financial institution will look at when reviewing your loan application is to ask them directly.

Alternatives to Personal Loans

Personal loans are not the only way for individuals to borrow money — which is fortunate since some credit card companies are slashing their customers’ limits during the COVID-19 pandemic and increasing their risk to lenders. Over 50 million people saw their credit limit reduced last April and May, making it harder for many of them to secure personal loans.

You may be able to access the following alternatives to personal loans, depending on your circumstances:

Lines of Credit

A line of credit differs from a personal loan in several ways. For one thing, lines of credit have no fixed period — which means that you can use the credit they provide, repay what you owe, and then use the credit again.

Lines of credit also offer greater flexibility than personal loans since you are under no obligation to use them immediately. With a personal loan, you take out the principal amount at the beginning of the loan period, and your payment schedule begins. A line of credit is more like a credit card — the ability to use credit is there if and when you need it, but until you use it, there’s no debt to pay back.

Lines of credit are ideal for borrowers who know they will need money but don’t know precisely when. However, the interest you’ll pay on a line of credit could be higher if you have bad credit, so it’s also worth considering other options.

Keep in mind, you’re only paying interest on the amount you borrow, so lines of credit can be very affordable if you use them properly.

Payday Loans

These short-term loans allow borrowers with bad or no credit to access relatively small amounts of money, often within 24 hours. Payday loans usually come with higher interest rates and shorter repayment periods than the other loan types we’ve mentioned here. Still, if you know you can pay them off in time, they can be useful for putting money in your bank account on short notice. They often work well for borrowers with reliable incomes who need to access funds during unforeseen emergencies.

Avoiding Higher Interest Rates

No matter what kind of loan you want to take out, you’ll want to make sure you get the best interest rate possible. Review the criteria that lenders are likely to consider (listed above) so that you can give yourself the best chance of getting approved at a reasonable rate.

Joining specific clubs and associations can also reduce the interest rates you’ll face on many different loan types, as well as giving you access to better terms. Several organizations offer membership benefits, so it’s a good idea to look around and find one that meets your needs.

Don’t Let Bad Credit Stop You From Accessing the Money You Need

Bad credit doesn’t have to stand in the way of your ability to borrow money. If you communicate clearly with your financial institution, you might be able to lower your credit risk in other ways. Use what you’ve learned above to find a borrowing option that works for you and get the money you need.

calendar1 phone location2 clock2 chevron-right youtube twitter instagram instagram facebook facebook2 pinterest twitter google-plus google linkedin2 yelp youtube phone location calendar share2 link star-full star-half chevron-right chevron-left chevron-down chevron-up envelope fax star star-half