Consumer Comeback Blog

How to Get a Loan with Bad Credit

Written by Jeffrey Trull

bad-credit-loans-signTrying to get a loan with bad credit can be tough or even impossible. Lenders view these types of borrowers as riskier and extend less than ideal terms, if they’re even willing to offer a loan a all.

Because of this, borrowers with bad credit may be better off working on improving their score first.

But if you can’t wait to borrow money, you still have a few options. Here are tips for how to get a loan with bad credit.

Look to loans where credit isn’t important

Not all loans require an excellent credit score. Some don’t rely on your credit at all, and you may be eligible without a credit check.

Some options include:

  • Student loans. Federal Stafford and Perkins loans don’t require a credit check. Just remember: these loans typically can’t be discharged in bankruptcy, either.
  • Reverse mortgage. Again, credit has little impact. What really matters is the equity available from your home.
  • Auto loans. Credit scores do matter, and you may be able to get one even with a low credit score. But as the myFICO loan savings tool illustrates, the costs can be astronomical compared to rates for those with excellent credit scores.
  • Home equity line of credit. Like reverse mortgages, getting approved relies primarily on how much equity you have in your home, not your credit score. The major downside is that if you can’t pay, you put your home at risk by losing it to foreclosure.

With any loan, make sure you’re not getting a bad deal just because you have bad credit (more on that below).

Try peer-to-peer lending

If your credit or borrowing purpose won’t get you a loan at a traditional bank, peer to peer lending might.

The good news is you can often use money you borrow to refinance other more expensive loans, like high interest credit card debt.

Your credit score is typically available for potential peer lenders to see, and you’ll likely be assigned a riskier rating with a higher interest rate if you have a lower credit score.

While you might have a better shot with P2P lending than with traditional banks, it’s far from automatic and you’ll still need to convince others to lend to you.

Unfortunately, you’ll still need a decent credit score, too. Two of largest peer-to-peer sites, Lending Club and Prosper, won’t allow borrowers with scores below 600 and 640, respectively.

Find a co-signer

If your credit score isn’t great, search for a co-signer with better credit.

Lenders may be more willing to give you a loan since co-signing reduces their risk of lending to someone with bad credit.

Of course, this can be risky for your co-signer, as there’s little upside for him or her but a big downside if you stop paying. Lenders will look to collect from him or her if you don’t pay, and the co-signer’s credit will be damaged, too. Both of these reasons are why it’s advised to co-sign with caution.

Borrow from friends or family

Asking a friend or family member for a loan has many pros and cons. Not having to worry about your credit score and potentially paying less interest are both a plus. But maintaining your relationship can be a challenge if something goes wrong with your agreement.

To make the process more likely to go smoothly, make the loan formal. That way the terms and expectations are clear.

Use a service like LendFriend where you can easily create legally-binding loan documents and send and collect payments.

What to watch out for

Finding a loan with bad credit can be challenging and expensive. You’ll need to be extra careful with anything marketed to those who have a bad credit since there might be high costs to go with it.

Usually, the main issue with these loans is higher interest rates. Certain riskier loans out there that charge sky-high interest (sometimes over 100% APR) and are almost never recommended because of this. These can include payday loans, cash advances, and car title loans.

If you’re looking at secured loans where you put a car title or your house up as collateral, you’ll risk losing ownership if you stop making payments. Make sure that exorbitant terms of loans don’t make it more likely that you’ll default.

(Photo credit: BookMama)