How to Choose the Best Bad Credit Loan Lender

According to FICO, 16.3% of Americans have a credit score below 600. This can make it hard to qualify for a loan. But when unexpected expenses arise, such as car repairs or emergency medical bills, waiting to improve your credit score before applying for a loan may not be practical.

Luckily, there are ways to get a loan with bad credit. Options include secured loans, loans with a co-borrower, or loans from lenders specializing in bad credit. Alternative borrowing options, such as cash advance apps or buy-now, pay-later (BNPL) programs, may also be available.

Here's how to choose the best bad credit loan lender for your needs in seven steps.

Compare personal loans for bad credit borrowers

1. Confirm what loan term works best for you

Start by determining how much money you need and how long you'll need to repay it. Short-term borrowing options, such as cash advance apps and payday loans, typically require repayment by your next paycheck. While practical for small amounts, these options may not be ideal if you need a larger loan or more time to repay.

For instance, personal loan term lengths generally range from 1 to 7 years, though this varies by lender. Consider your repayment ability and the time required to pay off the loan to narrow your search.

2. Review loan types and availability

Once you've determined the repayment term you need, review the types of bad credit loans available:

Short-term loans for bad credit

• Cash advance apps: These allow you to access a portion of your paycheck early. Fees may apply, and repeated use can lead to a cycle of borrowing, as repayment comes directly from your next paycheck.
• BNPL programs: Buy now, pay later apps split the cost of a purchase into smaller payments. Each program works differently, but a common structure is to make one payment at purchase and then three more within a given time period. Short-term repayments might be interest- and fee-free, but longer repayment periods may come with interest or fees.
• Payday loans: High-cost loans requiring repayment by your next paycheck. These should be a last resort due to predatory practices and APRs reaching 400%, according to the Consumer Financial Protection Bureau.

That said, such borrowing may be unavoidable. "It's easy to sit back and say never use a cash advance app, but if you're trying to feed your family or keep the furnace on in the winter, that's a lot different," says R.J. Weiss, Certified Financial Planner and founder of The Ways to Wealth. "Yes, you want to avoid these forms of debt whenever possible, but as a last resort, they can help in urgent situations. The key is to borrow only what you absolutely need and have a plan to pay it back quickly."

Long-term loans for bad credit

• Personal loans: These installment loans typically have terms of 1 to 7 years and can be used for various purposes, such as debt consolidation or home renovations. Interest rates often max out at 36%.
• Payday alternative loans (PALs): Offered by credit unions, payday alternative loans loans have consumer-friendly terms and are easier to qualify for compared to payday loans. PALs are a credit union-exclusive loan designed with far more consumer protections than a payday loan. They're governed by the National Credit Union Administration (NCUA).
• Credit card cash advances: These let you withdraw cash from your credit card's available credit. Be cautious of high APRs (usually 30%) and transaction fees.

No-credit-check options

Some lenders and products may not require a credit check, but be prepared for higher fees, interest rates, and limited borrowing amounts.

Learn More: 8 Types of Bad-Credit Loans and Common Uses

3. Review eligibility requirements

You might ask yourself how much of a personal can I get with your credit score — or if you can qualify at all. But credit score only paints part of the picture. In addition to minimum credit score thresholds, lenders may have several other eligibility requirements for personal loans, including:

• Debt-to-income ratio: This is a measure of your monthly debt obligations compared to your monthly income. Lenders generally want to see a debt-to-income (DTI) ratio of 36% or less, but some may accept slightly higher DTIs. If you're getting a personal loan to consolidate debt, lenders may be more lax about this.
• Employment and income: Lenders want to know that you're able to make monthly payments. Proof of employment or a source of monthly income is thus a common requirement for a personal loan.
• Collateral or co-borrower: If you have bad credit, you may also need to get a secured loan by offering collateral; your house or car are common collateral for a personal loan. Alternatively, you may need a co-borrower with better credit to sign the loan with you.

In addition, lenders typically have requirements regarding age and citizenship for personal loans.

Learn More: What Are the Requirements for a Personal Loan?

4. Prequalify with several lenders

While the pool of lenders offering bad credit personal loans is small, there are still plenty of lenders to consider.

Use an online loan marketplace to compare multiple lenders in one place. You can usually get prequalified for a loan without an impact on your credit score. While prequalification does not guarantee approval, it'll give you a good idea of whether you're likely to be approved — and at what rate and with what fees. Once you apply for a loan, most lenders will conduct a hard credit pull which could temporarily ding your credit.

Once you're prequalified with a few lenders, compare personal loan rates and fees to find the best offer.

But remember, online lenders aren't your only option. You may have good luck with a local brick-and-mortar bank or credit union. Credit unions can be especially helpful for members, even if you don't ultimately get your loan through yours.

5. Assess lender reputation through customer reviews

There's more to compare than simply rates and fees, however. If you're taking out a personal loan that you'll repay for years, you'll want to find a reputable lender with happy customers.

Use review sites such as Better Business Bureau and Trustpilot to learn more about each lender you're considering. Take note of what other customers are saying about:

• Hidden fees
• App usability
• Customer service

Looking at app reviews in the Apple App Store and Google Play can also provide insight into each lender.

6. Consider other perks

When you're comparing loans, rate, fees, and customer reviews are all important, but there's more to a personal loan to consider:

• Funding speed: Some personal loans offer same- or next-day funding. If you need money ASAP, prioritize loans with lightning-fast funding.
• Direct payment: Using a personal loan to consolidate your debts and make a real effort at becoming debt free? Some lenders will pay your creditors directly. Some, like Universal Credit and Upgrade, may even discount your rate for doing so.
• Automatic payments: Most online lenders offer an autopay feature. If you've had trouble remembering to pay your credit card bills in the past, this will be a useful feature to ensure you don't fall behind on payments.

Other loan products for borrowers with bad credit may have additional perks. Credit-builder loans, for instance, may offer free credit score monitoring.

7. Review fine print

The last thing to review when choosing a bad-credit loan lender is the fine print. Scour the terms and conditions to get a feel for things like:

• Origination fees: These increase the loan's APR and reduce the amount you receive.
• Late fees: Fees can vary widely between lenders.
• Pre-payment penalties: These are uncommon among personal loan lenders. If a loan you're considering charges one, you may want to look elsewhere.
• Rate contingencies: Some lenders may offer a certain APR only if you sign up for autopay. If you're not comfortable using autopay (because of the risk of overdrafting your checking account), adjust your expectations for the rate or find a lender with a better offer.

How to apply for a bad credit personal loan

Applying for a personal loan with bad credit is much like the process of applying for a personal loan with good credit. Your pool of options will just be smaller — and you'll likely face higher rates and fees.

1. Get a handle on your finances: Check your credit score, calculate your debt-to-income ratio, and figure out just how much you need to borrow. Knowing these parameters will help you filter your search to lenders that are likely to approve your application.
2. Compare lenders: Using the steps we outlined above, compare multiple lenders to see which advertise the lowest rates and fees but also have a solid reputation with customers.
3. Prequalify: Once you've narrowed down your list, get prequalified with the remaining lenders. This should be a soft credit check with no impact to your credit score — and will help you determine which lender will give you the lowest rate and fees.
4. Fill out the application: Online lenders make the application process easy, but you'll still need to find paperwork such as recent paystubs or tax returns to get approved. You'll also need to provide bank information so the lender can fund your account. Your credit score may drop a few points if the lender conducts a hard credit check at this stage.

Learn More: How To Apply for a Personal Loan

Read More:

• The Best Ways to Borrow Money
• Should I Get a Personal Loan?
• Does Paying Off a Loan Help Your Credit Score?
• Pros and Cons of Bad Credit Loans
• Where Can I Get a Bad Credit Loan?
• Ways to Get an Emergency Loan with Bad Credit
• Ways to Improve Your Personal Loan Application

Disclosure: Some lending partners that participate in Credible's comparison marketplace offer loans to borrowers with scores as low as 550. Borrowers with low scores will have fewer lending options than borrowers with higher credit scores.