What to do if you need a personal loan and you have bad credit
If you have credit problems, you may find it challenging to find a lender that will work with you. If you need to pay off high interest debt or cover an unexpected expense, a personal loan may be your best option, regardless of your credit situation.
Check your credit files
If you have time to shop around for a personal loan, take time to check your credit for mistakes. According to the Federal Trade Commission (FTC), 21% of Americans have an error on at least one of their three credit reports. There were eight million reported errors last year.
Mistakes on your credit report could damage your credit score, causing you to pay higher interest rates and fees on a personal loan. For this reason, it’s important to take a close look at each of your three credit reports and contact the credit reporting agency if you find a mistake.
The credit reporting agency must, by law, contact the company reporting the incorrect information to ask for substantiation. If the company can’t or won’t provide proof that the information is correct within 30 days, the credit reporting company must remove the information from your file.
Everyone with a social security number is entitled to see each of their three credit reports once every 12 months. You can access this information at no charge at www.annualcreditreport.com.
Research your options for a personal loan
Most banks, credit unions, and online lenders offer personal loans to consumers with good or fair credit scores. If you have a FICO credit score below 620, you’ll need to work with a lender that specializes in personal loans for people with bad credit.
Here are some things to look for when researching personal loans for bad credit:
Lender reports to all three credit bureaus
This is important because you’ll want your on-time payments to help raise your credit score. New information has a bigger effect on your score than old information, so making on-time payments can help boost your score if the lender reports to Experian, Equifax, and TransUnion every month.
Some sub-prime lenders charge up-front fees to help off-set their risk when lending to people with bad credit. Understand these fees before you proceed with a loan. Also, be aware of any of the following additional fees commonly charged by sub-prime lenders:
- Early payoff penalty
- Penalty interest rate for late payments
- Late payment fee
- Returned payment fee
- High up-front payments
- Processing fees
- Application fee
Lender requirements for qualification
If a bank, credit union, or online lender has a program to help people with poor credit scores get a personal loan, they may have additional qualification requirements.
Some lenders look at the following things when evaluating applicants:
- Job history
- Current salary or hourly wage
- Bank account activity
Who qualifies for a personal loan with bad credit?
No matter your current financial situation, if you have a FICO credit score that dips below the mid-600s, you are considered a subprime borrower. This means that a bank, credit union, or online lender that offers you a personal loan does so with the understanding that you are statistically more likely to default on the loan than someone with a higher credit score.
Lenders can’t deny you a loan based on anything other than your financial picture. Here are a few things that people who are sub-prime borrowers typically have in common:
- Very short credit history
- Too few accounts reported to the credit bureaus
- Low income
- Several late payments
- Wage garnishment for non-payment of debt
- Repossession of automobile or other collateral
Having any of these things in your financial history doesn’t automatically mean you’ll have problems qualifying for a loan. Lenders evaluate potential borrowers on a case-by-case basis.
Even if you have a poor FICO credit score, it’s possible to get a personal loan with decent terms from a reputable company. When searching for a personal loan that meets your immediate financial needs, you must be your own advocate. Don’t accept terms that are unfavorable or deal with a company that receives bad reviews and complaints from other borrowers.
Because qualifying for a personal loan means you’ll receive a hard inquiry on your credit reports from potential lenders, limit your applications to a few of your top choices. In most states, there are rules that limit the maximum amount of interest on a personal loan to 36% or lower. When researching potential lenders, be sure to look at their record with the Better Business Bureau (BBB) and take the time to read reviews from other borrowers.