How To Get a Loan With Bad Credit

There are several financing options you can explore, even if you have poor or limited credit. Here are some loans you may be able to get with bad credit.

Credit union loans

Credit unions, which are member-owned financial institutions, can often provide tailored services to meet your funding needs. Even if you have weak or limited credit, a credit union may help you explore options and show you which loans you qualify for.

For example, a credit union might offer a payday alternative loan (PAL), which provides up to $2,000 with a repayment term as long as one year. The rates on PALs max out at 18% annual percentage rate (APR), which is much lower than you’d find with most payday loans.²

Credit unions also often have financial advisors who can show you how to build credit to qualify for larger loans. To join a credit union, you may have to live, work, or go to school in a specific geographic area. Some credit unions, however, are open to anyone who wants to join.

Personal loans with a co-signer

Applying with a creditworthy co-signer can significantly increase your chances of getting a personal loan. Their strong credit history can help you qualify for loans you might not get on your own.

A co-signer shares responsibility for the loan, so make sure you and your co-signer understand the risks involved. If you make late payments or default on the loan, their credit score can be negatively affected.

Making on-time payments, however, could be beneficial for both your credit scores.

Secured personal loans

While most personal loans are unsecured, some lenders offer secured loans, which you back with collateral. Collateral could take various forms, including a vehicle, savings account, or fixtures in your home.

Secured loans tend to have easier credit requirements, since they’re less risky for the lender. That’s why they can be popular funding options for people with bad or no credit but have access to other assets.

The downside, though, is that lenders get to keep your collateral if you can’t make loan payments.

Unsecured personal loan vs. secured personal loan

An unsecured personal loan doesn’t require any collateral; instead, approval is based on your credit and income. A secured personal loan, on the other hand, is backed by something you own, like a car or savings account. Learn more about secured versus unsecured loans.

Credit builder loans

A credit builder loan is a unique tool designed to help you establish a positive payment history. With this type of loan, you don’t get the money upfront.

Instead, the lender places the loan amount into a savings account while you make regular payments. Once you’ve paid the loan in full, the funds are released to you. The lender reports your on-time payments to the credit bureaus, which can help build your credit score.

Credit building loans could be helpful if your goal is to improve your credit score and you don’t need immediate access to the funds.

Secured credit cards

Secured credit cards work somewhat similarly to secured loans, but you can access a revolving line of credit instead of a lump-sum amount. And instead of putting up assets as collateral, a secured credit card requires cash upfront as insurance against you defaulting on your loan payments.

Your upfront payment acts as your maximum credit line. A secured credit card can also help you build credit while accessing an alternate funding source.

Family and friends loans

If you have a trusting relationship with family members and close friends, think about asking them to be your lender.

When asking for money from friends and family, consider drafting a loan proposal that explains how much you’ll borrow, when you’ll pay it back, how much interest you’ll pay, and whether you’ll offer a valuable asset such as a car as collateral.

Although you don’t have to sign a contract, doing so could protect you and your loved one and help prevent any misunderstandings.

Payday loans

Payday loans are short-term, high-interest loans you can often qualify for based on your income instead of your credit score. They’re designed for small, emergency expenses and must be paid back by your next payday.

The biggest drawback is the cost. Interest rates can be as high as 400%, and you may pay $10 to $30 in fees for every $100 you borrow.³ This makes payday loans much more expensive than traditional personal loans.

You can find payday loans online fairly easily, but they should be used as a last resort, if at all. Because of the cost, payday loans could lead to additional debt and financial strain if you can’t afford to pay back your loan. They also aren’t available everywhere, as some states have outlawed payday loans.³

Once you’ve explored your various financing options, here are the steps you can take to get a loan with poor credit or a minimal credit history.

1. Assess your financial situation

Before you apply, take a close look at your finances.

Start by defining why you need the loan, whether it’s for debt consolidation, a car repair, or a medical expense. Then, review your income, existing debts, and monthly budget to determine how much you can realistically afford to pay each month.

If you’re considering a secured loan, think carefully about the collateral you’re offering. You don’t want to risk losing a valuable asset like your car. Remember, getting the money is only half the battle. You also need to feel confident you can repay it.

2. Compare different lenders and get prequalified

Next, shop around for lenders that offer bad credit loans. Compare interest rates, fees, borrowing amounts, and term lengths to find an option that fits your needs. Many lenders offer prequalification, so you can see potential offers with a soft credit check that won’t impact your credit.

Ask these questions while shopping around:

• Does the lender have any prepayment penalties if you decide to repay your loan early?
• What’s the minimum credit score requirement, and are there income requirements?
• Can you use a co-signer, or is there an option for a secured personal loan?
• How much would your monthly payment be, and is it affordable?

3. Select the best loan offer

Once you’ve compared your prequalified offers, select the one with the best terms for your situation. Remember, the formal application will result in a hard inquiry on your credit report. To minimize the impact on your score, it’s best to submit only one application.

If you are partnering with a co-signer or loved one, now is the time to review your agreement’s structure and ensure everyone is on the same page.

4. Collect all necessary loan documents

Specific requirements will vary by lender, but some documents you may need to provide include:

• Proof of residency: You could share a utility bill or recent rent or mortgage payments.
• Proof of income: Provide proof of consistent funds coming into your account, such as pay stubs.
• Driver’s license: Share a copy of your license or passport.
• Bank statement: Provide samples of recent bank statements.

Try to respond promptly to any requests for additional documentation to speed up the loan process.

5. Submit your loan application

You can typically apply for a loan online. If you’re working with a co-signer, you’ll fill out the application together. Depending on the loan option you choose, you might get an approval decision the same day you apply.

When you submit a formal loan application, the lender will likely run a hard credit inquiry, which will appear on your credit report and impact your credit score. You may see your credit score dip by five points or so, but it should bounce back if you make on-time payments on your loan.⁴

6. Carefully review loan terms before you sign

Before you sign anything, read the entire loan agreement carefully. Make sure you have a full grasp of the interest rate, repayment schedule, and any fees. Factor the new loan payments into your monthly budget to ensure you can make on-time payments from the start.

Once you sign your loan agreement, the lender will fund your loan, and you’ll receive the money you borrowed in a lump sum within a few business days. Then, you’ll start paying it back on the agreed-upon repayment schedule.

By understanding your options and following these steps, you can find a loan that works for you, even with bad credit. Making consistent, on-time payments on your new loan is a great way to start building a positive credit history for the future. With stronger credit, you’ll have even more financing options available to you with better rates and terms.

To prepare for a smooth loan application, review the key personal loan requirements lenders use when deciding whether or not to approve you for a loan.