How to get a personal loan with bad credit in the USA

Obtaining a personal loan with a low credit score can be intimidating. Many Americans have to face this same challenge each year due to late payments, unexpected medical bills, job loss, or surprising financial emergencies. The good news is that while lenders will be extra cautious, there are still options that can get you approved and access the cash you need.

This article will give you all the information to help you understand how credit scores influence your borrowing options, which lenders are more lenient, and what steps you can take to improve your chances of getting approved. When you finish reading this article, you will have the basic steps you can take to obtain a loan and get started raising your financial wellness.

What does “bad credit” mean?

In the United States, lenders mainly utilize the FICO® score, graded between 300 and 850. This is how it is typically classified:

• 300–579: Poor credit – Hard to get approved; limited options; and usually involves high interest.
• 580–669: Fair credit – Better than poor, but still below the national average.
• 670–739: Good credit – Most lenders consider this acceptable.
• 740–799: Very good credit – Respected by the lender; competitive loan offers.
• 800–850: Excellent credit – Access to all industry’s lowest rates and terms.

If your score is below 670, most lenders will view you as a higher risk. This does not mean you can’t get a loan; it may just mean you will get a higher rate, stricter repayment terms, or require collateral.

Why does your credit score matter to lenders?

A credit score demonstrates to lenders how you have handled debt in the past. They utilize it to anticipate how well you may repay debt in the future. A lower score usually indicates you have missed payments, high credit card balances, or defaults emotionally and financially, which makes lenders extra cautious. 

With borrowers in mind, however, many lenders in the U.S. are also now looking at alternative data by way of your possible repayment ability. Lenders may be looking at: 

• The history of the previous jobs, 
• The stability of monthly income, 
• Debt-to-Income ratio, 
• Utility or rent payments, 
• Banking activity: the responsibilities you maintain with your credit union or bank.

Even if your score is low, you can balance your low score with proof of stable income and responsible management of your financial habits and duties. 

Steps to increase your chances of approval

Presenting the following strategies can be a useful approach to improving your chances of approval to borrow money, even with bad credit today: 

1. Review your report 

Start with AnnualCreditReport.com, since every American is entitled to 1 free copy of their report from each of the 3 bureaus (Experian, Equifax, and TransUnion). Look for discrepancies or errors in your report, such as reporting of late payments or balance discrepancies. You can dispute incorrect information, and we have seen changes with the reporting from those actions, causing an instant increase of one score or more, as the score changes to reflect the updated information.

2. Think about a secured personal loan

With a secured personal loan, you could provide an asset—like your car, a savings account, or a certificate of deposit—as collateral. This can help to reduce the risk for the lender and likely allows you to have a lower interest rate. The disadvantage is that if you default on the loan, you could lose the asset you used as collateral.

3. Recruit someone to co-sign

If a family member or friend is willing to co-sign on the loan, and they have good credit, then it may be easier for you to get approved for the loan and to find a lower interest rate. One thing to keep in mind is that the co-signer will be legally responsible if you do not pay the loan, which could make things uncomfortable for you and them.

4. Build a relationship with a credit union

Some credit unions prioritize their members, which could lead to a willingness to consider factors like your overall profile rather than just your credit score. Oftentimes, credit unions are more flexible than large banks, especially if you have been a long-time member. Many Americans with bad credit have had better success with small, local credit unions.

5. Look into online lenders

Sites like Upstart, Avant, or LendingClub are examples of online lending options that often provide loans to borrowers with imperfect credit. Oftentimes, they use some non-traditional underwriting, and factors like job history, educational history, and banking history are reviewed when they lend.

6. Provide proof of consistent income

While applying, be ready to show pay stubs or tax returns, or bank statements. If you have a record of consistent income that supports repayment, then lenders may overlook a low score. 

7. Apply for smaller amounts

The smaller the loan amount, the smaller the risk for the lender. If you only borrow what you need, you will have a better chance of being approved. 

Types of personal loans available with bad credit

Not all personal loans are the same. Here are the most common types of loans for borrowers with a low score in the U.S.: 

• Secured Personal Loans – You put up collateral to borrow. However, the interest rate is lower than that of unsecured loans.
• Unsecured Personal Loans – An unsecured personal loan does not require any collateral. However, if you have a poor credit score, you will pay more in interest.
• Debt Consolidation Loans – Also known as a debt relief loan, it allows you to combine many payments into one payment and possibly lower the interest rate.
• Payday Alternative Loans (PALs) – Are short-term loans with a more reasonable alternative to payday loans that are regulated and offered by credit unions. The costs are capped by the government.
• Peer-to-Peer Loans – Loans through platforms like Prosper or Lending Club allow everyday people to be lenders, rather than a financial institution. The reasons for a loan may tend to be more flexible. 
• Credit Builder Loans – Small loans that are often offered by a community bank or credit union that require a monthly payment, but you can’t access the funds until you have paid in full. The goal for these loans is to help improve one’s credit.

Example: How a loan might look with bad credit

Consider two different borrowers applying for a loan of $5,000.

• Borrower A (Good credit: 730): Approved at 9% APR, for a term of 36 months. Monthly payment: approximately $159.
• Borrower B (Bad credit: 580): Approved at 27% APR, for a term of 36 months. Monthly payment: approximately $240.

Borrower B will end up continuing to pay $3,000 more in interest than borrower A does, simply because of a lower score. This example illustrates why shopping around and working on improving credit over time is so important.

Pros and cons of getting a loan with bad credit

Pros

• You can get money when you need it in emergencies.
• You can consolidate your debt into one payment.
• If you make timely payments, you may be able to improve your credit score over time.

Cons

• Higher interest rates will increase the overall cost of the loan.
• You may have to provide a co-signer or some form of collateral.
• If you end up missing a payment, you may find yourself in a deeper hole of debt on the original loan.

Alternatives to personal loans

In some cases, a typical personal loan may not be worth it. Here are some other options to cover costs: 

• Borrow from friends or family. This does not incur interest; however, this requires one to trust you to honor your terms, and you will need to discuss the terms so that each party understands the expectations. 
• Get a side hustle or a part-time job. Increasing your income may reduce the need to borrow.
• Balance transfer credit cards. Some balance transfer credit cards have introductory periods where you can pay off debt at 0% APR.
• Home equity loan or home equity line of credit. If you have owned your home for a period of time, you may have the option to borrow against the equity in your home.
• Cash advance apps. Several apps, like Earnin or Dave, give you access to a portion of your paychecks a few days early. This may come with fees.

How to avoid loan scams?

Despite this, predatory lenders target Americans with bad credit. Protect yourself by being aware of some warning indicators:

The lender requests an upfront fee before the loan is approved.

• The lender, from which you are seeking funds, assures you of loan approval because of your credit score.
• The lender does not provide you with a physical address or their state license after you have requested it.
• The lender uses high-pressure tactics to convince you to sign or borrow the funds quickly.  
• To stay safe, always check that the lender is registered in your state, read reviews, and shop offers from lenders to compare. 

How to rebuild your credit after getting a loan?

Once you have been approved for a loan, you are merely at the beginning stage. To build strong foundations for your financial stability in the long run, there are a few steps to take:

• Make sure you pay on time – Payment history makes up the largest portion of your FICO® score.
• Keep a low credit card balance – You should keep less than 30% of your available credit.
• Don’t apply for too much credit – Having a number of hard inquiries will temporarily harm your score.
• Set up a payment in autopay – You will never be late on a payment again and risk lowering your score.
• Check credit regularly – You can use your bank’s tools for free, and then sign up for free apps like Credit Karma to know how you are doing.

Conclusion

In the U.S., getting personal loans with bad credit will be challenging, but it’s not impossible! If you make your application stronger, look at credit unions or online lenders, and/or pursue a secured loan, you might be able to get a loan after all.

Remember: if you are borrowing with bad credit, it will cost you money. Ensure that the interest rate plus repayment period is favorable enough for your individual financial goals. A personal loan should be a vehicle for you to gain financial stability and should not be a financial burden that adds to your current debt.

If you use a loan appropriately and repay it in time, then even a loan with a higher interest cost may help you consolidate larger debt, meet an emergency, or improve your overall credit score over the course of time. Just be mindful of the loan, take your time in researching options, and only borrow what you can afford to repay. And please note that the repayment period and total cost are important.