How to Get a Bad Credit Loan

When you have bad credit, getting a loan can be a challenge, especially if you don't know where to look. Many lenders require at least good credit for personal loans, and borrowers with bad credit may need collateral or a cosigner to get approved. 

You're also likely to pay a higher interest rate than someone with a higher credit score. But knowing what to expect and how to approach the process can help you make an informed decision and reduce stress.

Learn how to get a bad credit loan, how to improve your chances of approval, and what other options are available.

How to get a loan with bad credit

Bad credit might not prevent you from getting a loan if you find the right lender. Learn how to get a bad credit loan by taking the following steps.

1. Budget for a loan payment

Look over your monthly expenses to determine how much you can comfortably set aside for a loan payment. Look for areas to cut costs, like dining out or unnecessary subscriptions. Remember that personal loans typically have repayment terms between two and five years, so your belt-tightening would need to be a long-term commitment.

Related: Personal Loan Term Length: What You Need To Know

2. Assess your income (from all sources)

Lenders look at your income and your income stability, and many have minimum income requirements, so it could be more difficult to qualify if you've recently switched jobs or your income changes monthly. If you have inconsistent income, you'll likely need to provide one or more tax returns so lenders can see your income over time.

Check lenders' websites or contact them about their income requirements and whether they consider different types of income besides salary and wages. Some lenders may consider household income — for example, if your spouse has a job and you use a joint bank account — or other sources such as self-employment income or Social Security benefits.

3. Evaluate your debt vs. income

Lenders also consider your debt-to-income ratio (DTI), which measures how much of your pre-tax monthly income goes toward debt payments such as credit cards and auto loans. Lenders tend to prefer a DTI of 36% or lower for personal loans. If your DTI is above 36%, you can lower it by paying off revolving debt such as credit card debt.

4. Check your credit score and credit report

Knowing your credit score can help you gauge which lenders you're more likely to qualify with as most have a minimum credit score requirement. Since you have bad credit, you should expect a high APR, but there could still be some variation. 

For instance, if your credit is on the low end of the fair credit range, you might be able to qualify for an APR around 30%. However, if your credit score is less than 580, you could be looking at an APR as high as 36%.

Compare: APR vs. Interest Rate on a Personal Loan: What To Know

Keep in mind that your credit score and credit report are two different things. Your credit score is a number that lenders use to estimate how likely you are to repay a loan or credit card on time, while your credit report is a comprehensive history of your credit activities. You can check both your credit score and credit report without lowering your credit score.

• Credit score: Some banks and credit card companies provide free credit scores for accountholders, but you may have to pay to get your credit score from credit bureaus.
• Credit report: You can get free weekly credit reports from each credit bureau using AnnualCreditReport.com. Check your credit report for inaccuracies and report mistakes to the appropriate creditors and credit bureaus as soon as possible.

If you don't need a loan right away, work to increase your score and strengthen your credit profile before applying. The most impactful thing you can do is make consistent on-time payments to your credit accounts. The second is to pay down debt. Payment history makes up 35% of your FICO score, while the amount of debt you owe makes up 30%.

"This will increase your approval odds and could help reduce your interest rate," says debt relief attorney Leslie H. Tayne, finance and debt expert, and founder of Tayne Law Group. It could also give your score a boost to offset the impact of a hard credit check when you apply.

Check Out: 7 Ways to Improve Your Personal Loan Application

5. Compare types of bad credit loans

There are several types of bad credit loans to consider:

• Bad credit personal loans: Some lenders offer personal loans to borrowers with bad credit, but they could come with APRs as high as 36%. However, they usually have lower interest rates and longer repayment terms than short-term loans, like payday loans.
• Payday alternative loans (PALs): If you're already a member or eligible for membership with a federal credit union, you could be eligible for a payday alternative loan even with bad credit. These loans are often available with no credit check in amounts up to $2,000, depending on the type of PAL. APRs are capped at 28%.
• BNPL loans: Buy now, pay later, or BNPL, loans let you split purchases into smaller installments, often interest-free and without a credit check for short-term loans. Most BNPL lenders don't report to credit bureaus, so whether you repay or fail to repay might not directly affect your credit score. However, an unpaid BNPL loan that gets turned over to a debt collector and reported to credit bureaus could lower your credit score.
• Family loans: You could get more favorable terms by borrowing money from a family member than a commercial lender, but there's also the risk of hurting your relationship if you are unable to pay. Also, the family member who loans you the money may have to satisfy IRS requirements, such as charging a minimum interest rate.
• App-based cash advances: Cash advance apps provide short-term loans with no credit check. These apps typically offer between $200 and $500 and require you to pay by your next payday, which could keep you in a constant cycle of debt. Optional fees for fast funding and tipping, however, can drive APRs into triple-digit-territory.
• Payday loans: Payday loan lenders offer short-term loans due your next payday. However, the combination of high fees and a short repayment time equates to very high APRs — more than 500% APR in some states. While some payday loan lenders allow payment extensions, they can come with additional fees that increase the cost even further. "Most payday loan business models are predicated on loans rolling over three or four times before being repaid," says Martin Lynch, president of the Financial Counseling Association of America (FCAA). "That should be a significant red flag for potential borrowers."
• Pawn and title loans: These loans require collateral — a valuable asset for a pawn loan and a car for a title loan — so their approval process is relatively easy. However, they're best to avoid due to high APRs and the possibility of losing your collateral if you can't pay.

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

6. Compare lenders and get prequalified

Look for reputable lenders offering the type of loan you want, like a personal loan or home equity loan. Read online reviews to learn about other borrowers' experiences, and visit lender websites to read through answers to frequently asked questions to help you compare.

If you want to apply for a personal loan, you can prequalify with multiple lenders. Prequalifying requires a soft credit pull, which doesn't affect your credit score. Prequalification provides an estimate of interest rates and terms you might qualify for if you apply, but it's not an offer of credit. Only when you apply do most lenders run a hard credit check, which can lower your credit score by a few points temporarily.

"Alternatively, you could sit down with a local bank or credit union lending officer, show them your current credit report and score, and ask whether they would be able to approve you for an unsecured loan if you were to apply today, and, if so, at what rate and terms," says Lynch. This could help you avoid a hard credit check for a loan you're unlikely to be approved for.

7. Consider adding a cosigner

A cosigner can help you get a loan by agreeing to pay the loan if you can't, but they can't access your loan's funds. A co-applicant is another option. They'll also sign for the loan with you, but unlike a cosigner, the co-applicant has an equal stake in the loan's funds. Cosigners and co-applicants take on a significant risk with this favor. If you miss payments, it could affect their credit score as well as yours.

Because a lender also considers your cosigner's or co-applicant's finances and credit history when evaluating your application, you could get approved for a better rate and terms. So, it's important to make sure another signer can help your situation. Someone with lots of outstanding debt or a high DTI may not be the best option.

Check Out: Best Personal Loans With a Cosigner

8. Compile necessary documents

Gather the documents you'll need ahead of time to help prevent delays in the application process. Usually, you'll need the following for a personal loan, home equity loan, or HELOC, but lenders of other loans, like payday or pawn loans, may not require as much:

• A form of identification, like a driver's license or birth certificate
• Your Social Security number for a credit check
• Income proof, like pay stubs, tax returns, or an employer letter
• Asset information, if pledging collateral
• Proof of address, like a voter registration card or utility bill in your name
• All of the above information for your cosigner or co-applicant, if adding

9. Submit your application

Fill out the lender's application. Applications for some types of bad credit loans are lengthier than others. For example, a personal loan may have more steps than a loan with less stringent requirements, like a payday loan or BNPL loan.

Read all terms of your loan agreement before accepting your final offer.

Learn More: How To Apply for a Personal Loan

Current rates on loans for bad credit

According to Credible data, the average interest rate on three-year personal loans for people with credit scores below 580 is 31.70% APR:

APRs for bad credit loans vary by lender and type of loan. Here are some APRs you can expect:

• Personal loans: 30% to 36%
• Payday alternative loans: capped at 28%
• Home equity loans or HELOCs: Up to 14%
• BNPL loans: Usually no interest for short-term loans, but monthly installment loans can have APRs of up to 36%
• Payday loans: Typically around 400%, but allowable APRs in some states are over 600%
• Pawn loans: States set their own monthly APRs, which are sometimes more than 200%
• Car title loans: Finance fees can be as high as 25%, resulting in an APR of around 300%

Learn More: Current Personal Loan Interest Rates

How to improve the likelihood of getting a loan with bad credit

The best thing you can do to increase your chances of approval for a loan is to improve your credit by paying down your debts with on-time payments and being careful about adding new debt to your credit profile. However, improving your credit often takes time.

If you need a loan now, think about applying for a secured loan with collateral using something of value, like a savings account or an investment account. "Report all sources of income, such as a side job, to the lender during the approval process," says Tayne. "The higher your income, the higher your chances of approval are."

Finally, consider applying for the smallest amount necessary. Lenders may be more likely to give you a loan if they feel like it's a reasonable amount for your situation with lower chances of defaulting.

Related: How To Get Approved for a Personal Loan

Factors to consider before getting a bad credit loan

Bad credit loans have some disadvantages to consider before applying.

Higher interest rates

Despite your commitment to paying off a loan, having a bad credit score can make you a risky borrower to a lender. Lenders offset some of that risk by charging higher rates, which allows them to recoup some of their money faster.

Higher interest means a costlier loan for you. For example, a borrower with good credit might have an APR of 16% on a three-year $10,000 loan, resulting in total interest costs of $2,657 over the life of the loan. The same loan with a 36% interest rate for a borrower with bad credit would cost $6,489 in interest.

Expensive fees

Fees are almost inevitable with riskier bad credit loans, like payday, title, and pawn loans. Finance charges and late fees can significantly increase the amount you're required to pay your lender. As an example, a pawnshop loan might charge a finance fee of $20 on a one-month, $100 loan. This equates to a 240% APR.

But more reputable types of loans, like personal loans and home equity loans, can also have fees. Lenders commonly charge late fees for missed or late payments. Some lenders also charge an origination fee, which is a fee to process your loan. It can be as much as 12% of your loan amount and is typically deducted upfront. And a prepayment penalty, while rare for personal loans, is a fee for paying off your loan early.

Lower loan amount

Another way lenders work around the risk of lending to borrowers with bad credit is by offering lower loan amounts than they might be eligible for with better credit. This is especially true with loans that don't require a credit check, like app-based cash advances and BNPL loans, which are designed for smaller, short-term loans.

Shorter terms

Several types of bad credit loans aren't meant for long-term financing. Payday loans and app-based cash advances, for example, usually need to be repaid by your next payday.

But personal loans for bad credit may also have shorter repayment periods than those for borrowers with good credit. From a lender's perspective, the shorter you have to pay, the less likely you are to default.

Alternatives to bad credit loans

You may have other options besides a bad credit loan. Here are a few possibilities:

• Peer-to-peer loan: Peer-to-peer (P2P) lending in the truest sense lets you borrow money from a loan investor rather than a financial institution. P2P loans may come with high interest rates and fees but can be easier to qualify for than traditional loans.
• 401(k) loan: Some 401(k) plan sponsors let you take a loan against your saved money with no credit check. Usually, you can borrow the lesser of up to $50,000 or half your vested balance. But the amount you borrow will not be invested until it's repaid, which means you could lose out on years of market gains.
• Salary advance: Check with your employer about a salary advance, which can pay you some or all of your paycheck early. It can be a good way to cover an emergency expense without pulling out a loan.
• Share secured loan: Borrow up to 100% of the money in your savings account with a share secured loan, which often requires no credit check.
• Supplemental income: Sell items you don't need, pick up a side hustle, or pause or cancel subscriptions to get extra cash to pay down debt or use toward expenses.

For a more long-term solution, learn to improve your credit and financial future through credit counseling. "A nonprofit FCAA counselor can show you how to build credit, and they'll probably advise you to save more and borrow less until your credit score improves, allowing you to get the financing you need at interest rates you can actually afford," says Lynch.

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 generally have fewer lending options than borrowers with higher credit scores.