"Sorry, but you do not meet the requirements..."
"We regret to inform you..."
"At this time, we cannot..."
If you have bad credit, you may have seen these or similar statements on your loan applications. Reading rejection letters can get discouraging, but don't abandon hope just yet. Applying for a personal loan may seem impractical when you have a less-than-stellar credit score, but many people with bad credit still qualify for personal loans. Let's start with some personal loan basics and then dive into possible solutions for consumers with bad credit.
What is a Personal Loan?
A personal loan refers to borrowed funds that you repay in predetermined installments for a set period of time. This differs from revolving lines of credit where payments are flexible and based on spending or borrowing habits. Regardless of which loan type you choose, lenders typically charge an annual percentage rate, commonly called an APR, for the amount borrowed.
An APR is your yearly interest rate, but you may still accrue interest each month. When you repay your loan, you must give the lender the entire balance you borrowed, plus any interest your loan accumulated. You may also have a one-time origination fee for your loan.
APRs typically range from 5% to 30%, though other amounts are possible. Expect to pay a higher APR if you have bad credit, no credit, or an unstable employment history. Low APR rates are often reserved for applicants with a good financial history. Your annual income and the duration of your loan may also impact your APR rate.
Personal loans are almost always unsecured, which means they aren't back by collateral such as a home or car. That means a lender can't automatically seize your property if you default on the loan, though they can still pursue repayment through civil court.
Some personal loans are short-term loans that you must repay within as little as 60 days. Other loans may take up to 15 years of payments until your balance is clear. The duration of your loan depends on how much you borrow and how much you can comfortably repay each month.
How Do You Get a Personal Loan?
Many people wonder how to get a personal loan since they see loans promoted for automobiles and mortgages, but not personal use. You can get a personal loan by applying at a bank, credit union, or by using an online lender or online lending network.
Funds are generally distributed via cash, check, or direct deposit. Some funds are available in a day or two, while other lenders wait a couple of weeks before disbursing your loan. Your estimated disbursement date should be referenced in your loan documents when you apply. If you don't see it, ask the lender when you can expect your money.
Can You Get a Personal Loan With Bad Credit?
If your financial history makes it difficult to get approved, you may wonder how to get a personal loan with bad credit. Start by visiting your local bank or credit union if you have a good history there. You may want to postpone your loan application if you have an overdrafted checking account or an empty savings account, as these are not signs of a financially responsible applicant. Lenders want to know that you will use their funds wisely and repay them in a timely manner.
Try an online lender if you don't have luck getting a personal loan from your financial institution. Some online lenders, such as OneMain and Avant, accept applicants with less-than-perfect credit. You may also do well with a peer-to-peer lending platform such as Peerform.
Expect to pay a high APR for your personal loan if you have bad credit. Your lender may also request collateral if you want a large loan.
What's the Application Process Like for a Personal Loan?
Applying for a personal loan requires some basic information about your identity, income, and credit history. You may be asked to provide the following documents or items:
- Photo ID
- Social Security card
- Proof of employment
- Bank statements for the last year or two
- Income taxes
Many lenders run a credit check before awarding a personal loan.
You may have the option to check if you are preapproved for a loan before you go through the full application process. Preapproval for a personal loan involves a soft credit check, which means your credit score isn't impacted unless you accept the funds offered. During the preapproval process, a lender reviews some quick data to determine if you're likely to meet the full qualifications for a loan.
How Do You Show You're a Good Candidate for a Personal Loan if You Have Bad Credit?
Your credit score is important to lenders, but sometimes it doesn't reflect your current situation. If the factors that contributed to your poor credit score are no longer in place, talk to the lender about what you did to address these concerns. You can even ask for reconsideration from the underwriting department if your application was already rejected.
Here are some common issues that can contribute to a low credit score:
- Divorce or separation
- Loss of a spouse
- Serious medical conditions
- Job loss or layoff
- Fluctuating income in self-employment
- Identity theft
Many of these situations are outside of what you can control and if you take the time to explain what caused your low credit score, it may help your case when applying.
How Can You Repair Your Credit for a Personal Loan?
Your credit repair approach depends on how much debt you have on your report and how long you've had these accounts. You should also consider your annual income and how much you can afford to contribute toward debt consolidation or elimination.
Start by reviewing your credit report and looking for errors. You may discover your credit report contains debts that were reassigned to your spouse after divorce or find inaccurate information, such as a $1,000 balance for a $100 bill. If you've previously filed for bankruptcy, some companies may have mistakenly failed to discharge your debt. You can reach out to these companies directly, but you should also dispute these issues by filing an online complaint or mailing a letter to the appropriate credit bureau.
After you dispute inaccurate debts, take a look at which accounts are actually yours. Some of them may be easy to repay, such as a $40 copay you forgot at the doctor's office or an old cell phone bill that you didn't pay after you switched companies. Knock these debts out of the way quickly, then move on to bigger debts. This is called the snowball method, and it's popular with financial guru Dave Ramsey's followers.
If all of your debts are for similar amounts or you feel more comfortable making small payments, consider sending a payment to each company on your list. Aim for slightly more than the minimum required payment, as interest rates and other fees may cancel out your payment — at least in a lender's eyes. This is a common issue with student loan recipients.
Contact companies before you make a payment, as some debt collection agencies are willing to accept a lump sum rather than the full payment. You may also be able to set up a payment plan for less than the monthly amount you usually pay. This frees you up to tackle multiple debts at once.
What Are Some Alternative Sources for Personal Loans?
While you're repairing your credit, you may find it difficult to get a personal loan, even if you apply with a bad-credit lender. In this situation, consider alternative sources, such as funds from friends or family members.
Small business owners may be able to qualify for working capital loans. These loans are offered by lenders such as PayPal, Stripe, and Kabbage. There's often no credit check; companies just review your annual earnings to see if you can repay the loan quickly. Repayments are automatically deducted from sales as long as you meet the minimum monthly or quarterly requirements.
You've Got Your Loan Money...Now What?
A personal loan is not an excuse to blow your money on things you wouldn't normally buy. If you get a personal loan with bad credit, use your funds wisely. Put some money toward debt management and repay any maxed-out credit cards. You may also want to knock out loans with higher interest rates so that you stop racking up debt from them.
Think about why you have bad credit and determine what you can do to improve your financial situation. Securing a personal loan isn't easy if you have bad credit, but it's not impossible. Take steps to repair your credit if you have yet to score a loan approval and use your funds appropriately when you receive them.