When you need money, one obvious option is a loan. To get a loan, lenders are going to consider your credit score before deciding how much money to give you. This can feel like a big barrier if you are hoping to find loans for bad credit. A low or “bad” credit score can limit your options in terms of where you can borrow money, how much money you can borrow right now, and how much it will ultimately cost you to pay back the loan later.
A low credit score does not necessarily make you a bad candidate for a loan. You can even find loans for bad credit whose terms will fit your financial goals. Here’s how to find those loans and determine which one is right for you.
The challenges of finding loans for bad credit
A credit score begins with a number calculated by a credit bureau, an agency that exists to examine credit and determine credit scores. Your credit score (or FICO) is based on the credit reports from each credit bureau.
You can request credit reports once every year from each of the major credit bureaus. Asking won’t affect your credit score, so it’s the best jumping-off point for learning what kinds of loans might be available to you today.
To calculate your score, a credit bureau will look at:
- Payment history
- Debt
- Available credit on your cards or accounts
- Age of accounts
- Credit “mix” (how many different types of loans you have)
- Whether you’ve recently opened or applied for new credit accounts
A credit score between 580 and 669 is considered “fair,” and a credit score that’s 579 or lower is considered “poor.”
It can be difficult to find loans for bad credit scores because many banks and other lenders have minimum cutoffs. They see a credit score as an indicator of repayment, and they will often exclude loan candidates with low credit scores.
Other factors that lenders assess
Getting a loan isn’t just about your credit score. On your loan application, lenders will also ask about your current income, employment history, savings and reserves, and loan purpose (to buy property or a new vehicle, for example).
Your current income and the amount of debt that you owe is your “debt-to-income ratio,” or DTI. If you earn a lot of money and don’t have much debt, then your DTI is low. If you have significant debt and don’t earn a lot, then your DTI is high.
With a secured loan, lenders will also assess the value of the asset or collateral that you are using to “secure” the loan.
What’s the difference between secured loans and unsecured loans?
Unsecured loans will generally require the borrowers to have good credit and a steady income. A secured loan is based on collateral, something of value that you own. You are using the value of your property to secure the loan.
Each loan has benefits and drawbacks.
Pros of unsecured loans:
- The borrower doesn’t have to own any collateral.
Cons of unsecured loans:
- Borrowers typically need a high credit score.
- Interest rates are higher.
- The borrowing limits are relatively low.
Pros of secured loans:
- Borrowers don’t need perfect credit.
- Borrowing limits are usually higher.
- Interest rates are lower.
Cons of secured loans:
- Secured property might be at risk if borrower is unable to pay back the loan.
- There might be restrictions around loan purpose.
Getting either a secured or an unsecured loan will usually impact your credit by lowering your score in the short term, but if you make timely payments, both types of loan can help improve your credit over time.
4 types of unsecured loans for bad credit
It’s typically not as easy to get an unsecured loan with poor credit as it is to get a secured loan, but there are still unsecured loans for bad credit that you might want to consider.
- Personal loans: Borrowed from a bank, credit union, or online lender, and usually paid back in monthly installments. Can be secured or unsecured.
- Payday loans: Short-term loans based on current income that are typically due back on your next payday. Many states have set maximum limits for payday loan fees because these are high-interest loans that can put borrowers even deeper into debt.
- Credit card cash advance: Using the available credit on existing credit cards (or new accounts) in lieu of a loan. These carry the same interest rate as the credit card and will be due back in monthly payments.
- Peer-to-peer lending: Borrowing money directly from other people, usually via an online platform. The borrowing limits aren’t always enough to cover expenses, and people with bad credit will have to pay higher interest rates.
4 types of secured loans for bad credit
People with bad credit who own real estate or other valuable property or assets might want to consider exploring the world of secured loans.
Credit builder loans
A credit builder loan can help you build your credit score. The person who wants to build their credit gives money (usually between $300 and $1,000) to a bank or credit union, which holds the money in a savings account. The borrower won’t get the money back until the loan is repaid, which is how they build credit.
Title loans
A title loan is a secured loan that typically uses a car title as collateral. You can get a title loan for smaller amounts of money, and they usually have higher interest rates and a short payback period.
Home equity loans
A home equity loan uses the equity in your home as collateral. How much equity you have will depend on when you bought the house (and how much you paid at the time), its current value today, and how much of the mortgage you’ve paid. Put simply, it’s the market value of your home minus the amount you still owe on your mortgage. These are also known as a second mortgage.
Homeowners can get a home equity loan with bad credit, which can help them access money quickly. The interest rates can be on the higher side, and if borrowers don’t make payments on time, they might risk losing the home.
401(k) loans
If you have a 401(k) retirement savings plan that you’ve been paying into over years, then a 401(k) loan can be an option for getting a loan with bad credit. These loans allow you to borrow against the money you’ve saved for retirement (usually up to half of the total loan amount or $50,000 — whichever is lower).
The interest rates are usually lower than for personal loans, and the money is paid back to the 401(k) account (including the interest).
Alternative options to loans for bad credit
Getting a loan for bad credit isn’t always the route to take. There are a handful of other options available for people with bad credit.
Grants for business owners
Grants for business owners with bad credit could be one way to get funds — however, you do have to own a business. There are federal, state, local, and private small-business grants that might cover the expenses you’re seeking to pay.
These grants can be difficult to find and even more difficult to get. There is often a lot involved in grant writing that falls outside the scope of running a business, and there is quite a bit of competition for grants, so they’re far from a sure bet.
401(k) hardship withdrawal
Another option for people who have a 401(k) retirement plan is a 401(k) hardship withdrawal. Withdrawals do not necessarily have to be paid back, but they are taxed by the IRS, and you will be limited to the amount in your account. If you’re close to retirement or simply not quite where you want to be savings-wise, then it’s wise to be careful around this type of withdrawal.
Home equity investment
A home equity investment is a way for homeowners to access some of the equity in their home before they sell it. These loans are good for people who:
- Own a house
- Need a large loan
- Have bad credit
- Don’t want to start repaying the loan immediately
When a homeowner secures a home equity investment, they get a lump sum of cash in exchange for a portion of their home’s future equity. Every program is different. With Point’s home equity investment, borrowers can choose to pay back the money anytime before the end of the term (usually 30 years) ends, or they can repay it when they sell the house. There are no monthly payments, no taxes to pay on the upfront cash, and homeowners retain full control of the property.
How to determine the best option for your needs
So what kind of loan should you be trying to get if your credit has suffered? The best option will depend on a lot of different factors, including:
- How much money you need
- How the loan will be used
- Your current income.
- Whether you own a home or have other valuable assets you can use as collateral.
- How much debt you have.
- Whether you can find a co-signer.
- How slowly or quickly you are able to repay the loan.
Homeowners in particular might find that a home equity investment could be the best route for you. It allows you to pull money directly from your home today that you won’t have to repay until you sell the house or the loan term ends (whichever comes first).
Some final advice for getting a loan with bad credit
Whichever option you choose, there are some general tips and steps that apply to every borrower (and every lender).
1. Check your credit report
It’s important to know your credit score, which will be included with your credit report. Your credit report will also include your credit history, a log of all the activity on your accounts that can influence your overall score.
This is especially important when you’re trying to get a loan with bad credit because you might be able to improve your credit by examining your credit history and disputing any inaccuracies that you find.
2. Explore your loan options and shop around
If you think you have more than one way to get a loan with bad credit, investigate all the possibilities.
Ask multiple lenders how much you’d be able to borrow, the loan interest amount, when you’d need to repay the loan, and what specific terms and conditions are involved in the deal. Then sit down and compare each to one another.
3. Consider whether you can find a co-signer
A co-signer is an individual who will (literally) co-sign the loan with you. Typically, a co-signer might be a parent, a spouse, or another close relative or friend. Co-signers with higher credit scores and lower DTIs can be a good option when you’re considering any type of loan because having a quality co-signer can help you get a lower interest rate.
4. Pre-qualify, if possible
Getting pre-qualified for a loan won’t affect your credit, and it can be a good jumping-off point for seeing exactly what kind of loans you can get and what terms and conditions you’ll be working with. This can make it much easier to compare, contrast, and make the best loan decision for you.
5. Weigh all your options
There might be alternatives to getting a loan, like borrowing money from close family members or friends if that’s possible. If you have anyone in your life who can give you money as a gift, the gift tax limit for 2024 is $18,000. Something to think about!
6. Read the fine print
To accurately compare each loan, you’ll need to understand exactly what terms and conditions apply, including fees or penalties (such as prepayment penalties, which you might have to pay if you repay your loan in full before its due date).
Carefully review the terms and conditions of any loan offer to understand the repayment terms, fees, and penalties.
7. Improve your DTI
You can improve your DTI by either increasing your income or decreasing your debt.
Increasing your income might involve finding a side gig, asking for a raise or promotion, or finding a new (higher-paying) job. To decrease your debt, you can pay off credit card debt or other debt. Because credit cards tend to come with high interest rates, paying these off first can be a good idea.
8. Ask yourself: Should you wait?
After evaluating your position and your choices, maybe the best choice is to wait for interest rates to go down, to repay a credit builder loan, to improve your credit score, to pay down debt, or to find more opportunities to earn income. Don’t forget to add this to your list of possibilities if it makes sense for you to delay getting a loan.
Final thoughts
Trying to get a loan with bad credit can feel like an uphill battle, but you probably have more options than you originally thought. Consider them all, including how much financial breathing room you need, and then decide which one is going to be the best choice for you and your unique situation.
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