How to get a loan, even if you have bad credit

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It's not impossible to get a loan with bad credit, but you'll need to consider all of your options.

Your credit score and your debt to income ratio can impact the rates lenders are willing to offer you, so you'll want to know yours before applying for a loan.

Borrowers with bad credit can consider approaching credit unions or online lenders, both of which tend to be able to offer lower interest rates than traditional banks.

They may also want to consider getting a secured loan, or getting a cosigner to guarantee the loan. However, a secured loan puts collateral like a house or car at risk, and a cosigner becomes responsible for loan payments should lenders be unable to pay.

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Getting a loan with bad credit can be challenging, but it's not impossible. There are several ways to boost your chances for being approved for a loan. We've asked experts on how to get the loan you need.

How to get a loan with bad credit

1. Understand how your credit score affects interest rates

Generally, a credit score is the most important factor in deciding what interest rate a lender will offer you. “Although many lenders offer personal loans to borrowers with only fair credit, you can expect to pay higher interest rates,” says Jamie Young, personal financial expert with Credible, an online loan marketplace.

No matter what your credit score, it's important to check rates with multiple lenders to see who will offer you the best rate and terms. “If your credit score is low, don't assume that if you're turned down by one lender that you can't get a loan. You may have to apply to several lenders before you'll get an offer,” Young says.

2. Get your most recent credit score

It's one thing to suspect you have bad credit, and another to know exactly how bad it is. Credit scoring company FICO issues five categories of credit score:

poor: 300-579

fair: 580-669

good: 670-739

very good: 740-799

excellent: 800-850

It's always a good idea to have a sense of your credit status before you apply for any loan. Companies like Credit Karma issue a close approximation of your score for free, and there's no limit on how many times you can check it.

You don't need to have excellent credit to get a loan, but as your score creeps down through “very good” and “good” into “fair” and “poor,” you'll see a change in the rates and offers lenders are willing to give you — if they're willing to give you a loan at all.

Priyanka Prakash, lending and credit expert with Fundera, says online lenders (more on that below) will work with individuals who have as low as a 550 FICO score.

3. Calculate your debt-to-income ratio

Some lenders will also calculate a potential borrower's debt-to-income ratio — how much of that person's monthly income goes toward debt — to help decide whether to issue a loan.

You can find your debt-to-income ratio through a simple calculation: Divide all monthly debt payments by gross monthly income and you have a ratio, or percentage (once you move the decimal point two places to the right).

“Lenders prefer a debt-to-income ratio of 35% or lower, meaning no more than 35% of your income should go towards paying back debt — this includes the loan you're applying for and existing loans,” says Prakash.

4. Consider a credit union

Credit unions are a great option for those looking to get a loan with bad credit. They are more flexible and they cap out their interest rates at 18%, says Nathalie Noisette, founder of CreditConversion.

According to Experian, not-for-profit status means credit unions are exempt from paying taxes and may be willing to accept riskier borrowers than banks would, and they can charge lower interest rates and fees than banks. Experian also says that poor credit may not be a deal breaker at a credit union, as a credit union considers the applicant's entire financial application and history.

5. Consider a secured loan

Since consumers with bad credit are seen as a default risk, secured loans are issued with a caveat — collateral, says Noisette. “If a consumer is willing to put a house, car, watch, or just about anything up against the amount of the loan, they will be able to qualify more easily,” she says.

Mortgages, home equity loans, and auto loans are considered secured loans, since you're putting up collateral. However, a secured credit card may also be considered a secured loan.

Remember that if you take out a secured loan using your home, your car, or something else as collateral, you run the risk of losing that collateral should you become unable to pay your loans — in plain language, if you agree to offer your car as collateral and become unable to pay the money you owe, the lender could seize your car.

Most any lender that offers unsecured loans, including banks and credit unions, will also offer secured loans.

6. Consider a home equity loan

If you have home that has equity, consider using the equity. That money is available can be used, without leaning on a poor credit history.

“Your credit score will not be factored into the decision to use a home equity loan,” says Noisette. “As long as there is equity, you can use it to your advantage.”

Home equity loans have a fixed interest rate and fixed repayment term, Holly Johnson reports for Business Insider. “You can borrow money for up to 30 years,” writes Johnson, “and the interest may be tax deductible if you itemize on your taxes and use the money to make substantial improvements to your home.”

However, she writes, bear in mind that there are some downsides to a home equity loan: primarily, that you're putting your home up as collateral, so you could lose your home if you fail to repay. Plus, some home equity loans do have fees, and you need considerable home equity to qualify. If you do decide to pursue a home equity loan as an option, make sure to do your research and compare multiple offers from lenders.

7. Search online lenders

If you have bad credit, you can still get a loan by searching beyond your bank.

Prakash says online lenders will work with individuals who have as low as a 550 FICO score. Personal loan lenders include SoFi, Payoff, and Lending Club. Sites like Credible, Fundera, and LendingTree allow borrowers to compare offers from multiple lenders side by side.

Banks face more regulations, so “as a result, they have the strictest lending standards, so if you fall below a certain credit bracket, you're out of luck,” says Prakash. “Online lenders are a lot more flexible. They place less importance on credit and more importance on your ability to pay back a loan. That means income is paramount.”

If the borrower can show you have sufficient income from your job or your business or assets to draw on to pay back your loan, then you can get approved even with a bad credit score.

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8. Bring on a cosigner

If you're able to bring in a cosigner who adds enough strength to your application to get approved, it could make the difference between buying a home now and waiting until you can rebuild your credit.

“Cosigners give lenders peace of mind, because they provide lenders with an extra layer of security if the primary borrower becomes unable to make the payments,” says Josh Goodwin, mortgage loan expert with Goodwin Mortgage Group. “In this event, the cosigner must take over payments until the primary borrower gets back on his or her feet. That said, if the primary borrower defaults, the lender can pursue remedies from the cosigner, even if they also end up unable to pay.”

If you're considering bringing on a cosigner, make sure that person understands that they're liable for your loan payments should you be unable to pay.

9. Consider getting your credit report to better understand your score

Going forward, you'll want to try and increase your credit score to make it easier to get a loan next time, or perhaps to refinance the ones you have. The first step in increasing your credit score is to understand it, and the way to do that is by getting your credit report.

Your credit report spells out everything being counted in your credit — every loan, every credit card, every debt. You'll want to take a look to make sure everything is correct — it's not uncommon, nor unfixable, for there to be mistakes — and to see where you might be able to make a big difference fast, like paying off an old utility bill that went into collections without your knowledge. (It happens!)

You're entitled to one free copy of your credit report every 12 months from each of the three nationwide credit reporting companies, Experian, Equifax and TransUnion. Order it online from annualcreditreport.com, or call 1-877-322-8228.

10. Try and boost your credit score

Your credit score is calculated, approximately, with the following five factors:

payment history (35%)

current debt balances (30%)

length of credit history (15%)

new credit (10%)

credit mix (10%)

Some of those factors are difficult to change, like the length of your credit history.

But others can make a big impact in a relatively short time.

“The biggest factor in your credit score is your on-time payment history, so you should start by making sure that is perfect going forward,” writes Eric Rosenberg for Business Insider. “The easiest way to ensure you never miss a payment due date is to turn on automatic billing and payments using your bank's bill pay or your credit card billing website.”

Note that improving your credit is a marathon, not a sprint. If you're taking steps in the right direction, you'll see it pay off — and the next time you want to apply for a loan, you'll be in a better position.

Considering an online lender for a personal loan？ Consider these offers from our partners:

Read more about getting a loan:

How to get a loan

How to use a home equity loan

Should you use a credit card or a loan to borrow money？

Home equity loan vs HELOC: Which should you use？