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Bad Credit Loans: What You Need to Know
Updated: Sep 28, 2021
What is a bad-credit personal loan?
A bad-credit loan is a personal loan for borrowers with low credit scores. These loans have fixed rates and are repaid in fixed monthly installments. They are typically not backed by collateral — they're unsecured. Instead, lenders consider your credit score, credit report and debt-to-income ratio when deciding whether to lend you the money.
How a bad credit score affects your ability to get a loan
Having a bad credit score (300-629 on the FICO scale) doesn’t automatically disqualify you from getting a personal loan, but it lowers your chances of approval. If you do qualify, you may get an interest rate at the high end of a lender’s range.
Bad-credit loans are often repaid in monthly installments, usually over one to five years. You can use the funds to pay for almost anything, including a home improvement project, medical bills or credit card consolidation.
Best bad-credit loan companies
Bad-credit lenders each have something different to offer borrowers. These lenders report loan payments to the credit bureaus, so your on-time loan payments can help you build credit.
Upgrade: Best for bad-credit debt consolidation loans.
Upstart: Best for borrowers with limited credit history.
LendingClub: Best for credit card consolidation loans for bad credit.
OneMain: Best for bad-credit secured and co-signed loans.
Universal Credit: Best for bad-credit loans with credit-building tools.
Oportun: Best for small bad-credit loans.
Bad-credit loan rates
Personal loans can have high rates for borrowers with low credit scores. Bad-credit borrowers can expect an annual percentage rate in the high 20s or 30s. Some lenders may consider what you’re using the funds for and the amount you request when calculating your rate.
Personal loan interest rates by credit score
How's your credit?
25.3% (Lowest scores unlikely to qualify).
Source: Average rates are based on aggregate, anonymized offer data from users who pre-qualified in NerdWallet’s lender marketplace from July 1, 2020, to July 31, 2021. Rates are estimates only and not specific to any lender.
How to compare bad-credit loans
Many bad-credit lenders consider your credit score on a personal loan application, but they weigh it alongside other factors like your monthly cash flow, how steady your income is, your employment history and your other debts.
If a lender has a minimum credit score requirement, you’ll need at least that score — ideally a higher one — to borrow from them.
Bad-credit loans typically have high interest rates compared to good-credit loans, but you should still compare offers to find the most affordable loan. There are two important ways to measure the cost of a loan:
Annual percentage rate: A loan’s annual percentage rate is similar to its interest rate, but it also includes any fees a lender may charge, like an origination or prepayment fee. You can use this number to compare the cost of one personal loan to another or to compare it to other options, like credit cards. Most financial experts agree that affordable loans should have an APR below 36%.
Monthly payments: Measure a loan’s monthly payment against your budget to see if you can afford it. You can use a personal loan calculator to see your monthly payments on a personal loan with any rate and term. Many lenders also show you this information when you pre-qualify. If a loan’s monthly payments will overextend your budget, consider cheaper alternatives first.
Bad-credit loan repayment terms tend to fall between one and five years. A longer repayment term will get you a lower monthly payments, but be careful not to let it get too long. The longer your repayment term, the more you'll pay in total interest. Aim for a repayment term that keeps your monthly payments affordable, but helps you pay off the loan quickly.
A bad-credit loan can be funded the same day you apply or it could take up to a week. During the approval process, a lender may ask you for more documentation, like W-2s and pay stubs. In that case, your loan’s funding time is also on you.
When you’re comparing offers, funding time shouldn’t outweigh affordability, but this information can help you choose between similar offers.
Credit building tools
If you have bad credit, consider choosing a lender that will help you understand and build your credit. Some lenders will share your FICO score with you for free and offer financial education to help you learn about ways to build credit.
How to get a personal loan with bad credit
Here are the steps to applying for a bad-credit loan:
Check your credit report: Before you apply for a personal loan, check your credit report and address any errors that could be impacting your score. Bumping your credit several points can not only improve your chances of qualifying, but also get you a lower interest rate. NerdWallet offers free access to your TransUnion credit report. You can also get a free report from each of the three big credit bureaus (the other two are Experian and Equifax) from AnnualCreditReport.com.
Review your budget: It helps to know your monthly budget when you’re about to apply for a personal loan — that way you’ll know how much you can afford to pay toward it each month.
Pre-qualify online: Pre-qualifying lets you see potential loan rate, amount and repayment term offers from multiple online lenders. The process involves a soft credit check, which does not impact your score.
Consider a co-signed or secured loan: Adding a co-signer or collateral, like a vehicle, to the loan application can improve your chances of qualifying or get you a lower rate. If you can’t pay a co-signed loan, your co-signer will be on the hook for the funds. With a secured loan, the lender can take your collateral.
Gather your documents: Most lenders will ask for your Social Security number, but some may ask for proof of employment or income. Gather things like tax documents, pay stubs and W-2s before you apply to speed up the process.
Submit an application: It can take anywhere from one business day to a week for a lender to review an application and fund a loan. The process triggers a hard credit inquiry, which can cause your score to dip, but it should rebound over time as you make on-time payments on the personal loan.
Secured vs. unsecured bad-credit loans
Credit standards are typically higher for unsecured loans than they are for secured loans, so it may be easier to qualify for a secured loan if you have bad credit.
With an unsecured loan, the lender only uses information about you, like your credit profile and income, to decide whether to lend to you. But when you add collateral to an application, the risk to the lender tends to be lower — it has something of value to take if you don't make the loan payments.
Bank and credit unions that offer secured loans may let you use an account, like a CD or investment account, to secure the loan. Online lenders more often let you secure the loan with a vehicle.
Though adding collateral to the loan can help you qualify or get you a better rate, weigh the importance of getting the loan against the risk of losing your collateral.
How to manage your personal loan
As with any debt you take on, have a plan to pay off your personal loan.
Update your budget: Follow a budget that divides your income into needs, wants, savings and debt to ensure timely monthly payments toward your personal loan.
Set up autopay: Setting up automatic payments ensures you’ll make them on time. Over time, this will help improve your credit score. Some lenders offer rate discounts to customers who use autopay.
Keep in touch with the lender: If you lose your job or encounter a surprise expense and think you may fall behind on payments, contact the lender right away to work toward a solution. Some lenders offer hardship programs or will temporarily defer your payments and waive late fees until you get back on your feet.
More bad credit loans
Annual Percentage Rates (APR), loan term and monthly payments are estimated based on analysis of information provided by you, data provided by lenders, and publicly available information. All loan information is presented without warranty, and the estimated APR and other terms are not binding in any way. Lenders provide loans with a range of APRs depending on borrowers' credit and other factors. Keep in mind that only borrowers with excellent credit will qualify for the lowest rate available. Your actual APR will depend on factors like credit score, requested loan amount, loan term, and credit history. All loans are subject to credit review and approval.