Getting a Loan With Bad Credit

How to Borrow While Building (or Rebuilding) Credit

Couple talking to bank manager
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It’s hard (but not impossible) to get a loan with bad credit. You've got fewer options, and loans are usually more expensive. But there's good news: if your credit is "less than perfect" you're not completely out of luck.

With a low credit score, it's easy to fall into expensive traps, so a little bit of preparation can help you avoid major problems. But borrowing wisely helps you save money and build up your credit so that it's easier to borrow next time.

What is Bad Credit?

Your credit may not be as bad as you think. If you’ve been told that your credit ruined your chances of getting a loan, make sure it’s true. There might just be a few errors on your credit report. Once those errors are fixed, things may look very different to lenders.

The term "bad credit" means different things to different lenders. One lender might turn you away while others are willing to lend. Don't be afraid to shop around (it's always a good idea) before deciding that your credit is a dealbreaker. But shop around the right way:

  • Submit all of your applications within a short period of time - two weeks or so - so that you don't ding up your credit with too many inquiries (this shows that you're a wise consumer shopping rates, not looking for a new loan every other month)
  • Apply only to reputable lenders such as banks, credit unions, and online lenders described on this site; predatory lenders will almost always give you a loan (with "no credit check" necessary), but you'll regret it later

If your credit is truly bad, here are a few ways to try getting a loan with bad credit.

Visit Credit Unions

Credit unions may be more willing to work with you, even if you've got bad credit. Because they tend to be smaller than large banks, there's a better chance that they'll look at you personally - as opposed to just looking at a credit score and other numbers on the loan application. If you sit across the desk from a human being, you can better understand what they need, and they can understand where you've been and what you need.

Small, local banks are also a good option.

Try P2P Lenders

Peer to peer lending services are another good option for getting a loan with bad credit. Instead of borrowing from banks (with rigid rules and higher overhead costs), you can borrow from individuals. They may be more sympathetic, but they’re not looking to lose their money.

Other Online Lenders

P2P lenders like Prosper and Lending Club started a trend, and online loans have continued to evolve. That means there are more opportunities to borrow from non-bank lenders, and those lenders might be willing to approve you with lower credit scores. Just be sure to avoid payday loans, which are extremely expensive short-term loans (and they're heavily promoted online).

Tap Friends & Family

Most peer to peer lending sites allow you to borrow from strangers. However, if your credit is really bad, your friends and family may be your only option. They know you, and they may be willing to take a chance. If you borrow from friends and family, do it properly so everybody’s protected: document the loan terms on paper, and consider using a third party to process payments.

If friends and family won’t hand over their own money, they might still be able to help. If they have good credit, they can help you qualify for a loan as co-signers.

Use Collateral

If you’re having trouble getting approved, you may need to put up collateral. By pledging something of value, your lender knows you’re serious and has a better chance of collecting some money (because they can take your collateral and sell it).

Be careful pledging collateral. If you have equity in your home, you can probably borrow against it - but there are significant risks. If you can't make all of your payments, you might be forced out of your home - and that'll make a bad situation even worse.

Borrower Beware

Some lenders (and con artists) take advantage of you when you're down. They specifically target people who are desperate to borrow, knowing that alternative options are few and far between. These lenders charge astronomical fees and make it nearly impossible to dig yourself out of debt. If you borrow at high rates using payday loans, car title loans, or any lender who will "approve everybody," you risk making things worse (not to mention repossession, if you use your car as collateral).

Sometimes, you won't even deal with a real lender: scam artists offer loans, but you need to pay steep application fees up front. Ultimately, you won't get approved, and you won't get your money back (this is known as an advance fee scam). Avoid paying upfront fees to get a personal loan - any processing fees should come out of your loan proceeds