Bad credit? It’s more common than you think.
Experian reports that almost a third of Americans have credit scores below 601. Whether your score is in the 300s, 500s, or sometimes even the 600s, a below-average credit score can seriously hurt your financial opportunities.
Tired of struggling to get the funds you need to move forward? You can learn how to get a loan with bad credit. Yes, it is possible — and it’s not as hard as you might have thought.
In this guide, we’ll go over your options for getting a loan with bad credit, so you can choose the path that’s best for you. Keep reading to learn how to borrow money with bad credit!
What’s a Bad Credit Score?
Not sure what “bad credit” really means? Let’s define the terms.
Your credit score is a number used to show your ability to pay back a loan. Of course, they aren’t a perfectly accurate measurement, since many things can hurt your credit. But if a lender sees a low credit score, they’ll assume you aren’t prepared to pay a loan back — that’s why it’s so hard to get a loan with bad credit.
Credit scores range from 300 to 850. Some lenders define bad credit differently than others. But most of the time, anything below the 600-650 range is defined as bad credit.
The 650-699 range is typically called “fair credit,” while 700 and above is “good” or “excellent.”
Unfortunately, when your credit score falls, it can take a long time to build it up again. While you’re in that process, you might need a loan. That loan could function as a way to repair your credit score, or it might be for something unrelated. Either way, you’ll need to know how to get a loan with bad credit.
Types of Loans for Bad Credit
When you have bad credit, you actually have a few different loan options. Let’s take a look at what those are.
- Secured Loan
With a secured loan, you’ll put up property that you own as collateral for the loan. This loan uses your assets as a promise that you’ll pay the loan back. If you can’t make payments, the lender will collect the collateral and use it to pay back the loan.
This helps lenders feel confident in loaning you money, since they know there’s a way to get back what they invested in you. However, these loans also come at a greater risk to you, since you stand to lose something valuable if you can’t pay.
Assets used to back a secured loan might include your house, your car, or something else. For example, one common secured loan is a Home Equity Line of Credit (HELOC).
HELOCs let you borrow against the money that you’ve already paid into your home. This is a great loan option for homeowners with bad credit, even though it does mean using your home as collateral.
- Credit Union Loan
If you look to credit unions instead of banks for your bad credit loan, you’ll probably have better luck.
Credit unions don’t operate for profit, so they have more flexibility when it comes to giving out loans. Many people also find banking with a credit union better than a traditional bank in many other ways. They’re known for having lower fees, better customer service, and other perks. If you’re looking for a loan with bad credit, this might be a good time to make the switch.
- Co-signed Loan
If you have a co-signer with good credit for a loan, you’ll have a better chance of getting that loan. However, keep in mind that the co-signer will take on responsibility for the loan if you can’t pay. This can make some people reluctant to sign on.
- Bad Credit Loans
Finally, bad credit loans are another common type of loan that you can get with a low credit score.
Bad credit loans are easy to qualify for, but they do usually come with high interest rates.
How to Get a Loan with Bad Credit: Your Step-by-Step Guide
Now that you’ve decided which kind of loan to target, let’s take a look at the steps you’ll need to follow.
- Find Your Lender
Now, you’ll need to find the best lender to give you the loan you need.
You can look for institutions like Bonsai Finance that work specifically with bad credit loans, as well as other lenders like local credit unions in your area. Make sure the lender you choose offers the right kind of loans for your needs.
Next, check out what their requirements are for getting that loan. For example, some credit unions require you to live in a certain area, so make sure you qualify.
You’ll also need to meet the requirements for the loan itself. This might involve collateral, a certain credit score, and more. See which requirements you meet already, and what you’ll need to do to meet the rest.
- Apply for the Loan
Once you’ve done the prep work, applying for the loan should be fairly easy. You won’t waste time with rejections, because you’ve already checked to make sure you qualify for that loan.
- Pay off the Loan and Build up Your Credit
Once you have the loan, make sure to start paying it off with timely payments. At the same time, you can start working to build your credit score back up.
Timely payments will help build your credit up. You can also consider moving your debts from your high-interest credit cards to a lower-interest loan, with some types of loans. This will lower your interest rates so you can pay your loan off faster.
Ready to Get Your Finances on Track?
Now that you know how to get a loan with bad credit, you’re that much closer to getting your finances healthy again. Your loan can help you navigate difficult financial times in the smartest way possible.
If you’re looking for more financial advice, don’t miss our guide to living well on a budget!