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How can I borrow money with bad credit?

| MoneyRates.com Senior Financial Analyst, CFA
min read

borrow_money_with_bad_creditQ: I have poor credit. Can I still get a personal loan?

A: There are some relevant tips for how to get a personal loan with bad credit below; but before you ask how to get a loan, perhaps the first question is whether this is the right time for you to get a loan. Answering that starts with assessing your credit situation.

Minimum credit score for personal loans

It's tough to build and maintain a perfect credit score. Only one in five people has a credit score between 800 and 850, which is considered exceptionally good. However, 60 percent of Americans have credit scores of 670 or better, which is considered good enough for most purposes.

If your score is between 580 and 669, you would be considered a sub-prime borrower. That means you might still get a personal loan, but you will pay dearly for it because lenders view you as a high risk. If your credit score is below 580, you have little chance of getting a personal loan from a legitimate lender.

Improve credit for better personal loan terms

If you check your credit score and don't like what you see, you don't necessarily have to play with the hand you've been dealt. There are some options for improving your credit:

  1. Rectify mistakes
    Look at your credit report in detail and see if you can clear up any of the problems with it. This might entail correcting mistaken information on the report or catching up with delinquent payments.

  2. Let time pass on old problems
    If you've made some mistakes in the past but have improved your financial habits more recently, it may benefit you to wait before applying for a personal loan. Over time, the problems will drop off your credit report and be replaced by your more positive history.

  3. Establish a stable work history
    Work history and salary do not factor into your credit score, but they can be an important influence on lenders. Try to avoid changing jobs just before applying for a loan. On top of a weak credit score, a new job could be a real red flag to a lender.

  4. Pay down debt
    Reducing the debt you have outstanding is likely to benefit your credit score, as is the case with making regular payments on your debt. You may well find that your next loan is cheaper if you pay down some existing debt before taking on new debt.

  5. Avoid opening new accounts
    Tricks like shuffling credit card balances among different accounts may tide you over for a short while, but frequently opening new credit accounts can hurt your credit score.

Does borrowing make sense at this point?

Only when you've taken what steps you can to improve your credit will you be able to assess whether or not a new personal loan really makes sense at this point.

Here's a rule of thumb with personal finances: delayed gratification generally means a greater reward. If your credit is really bad, it may be a sign that you would have a tough time handling a personal loan right now. If you hold off on borrowing and instead devote some time to paying down debt, it can really help things go better the next time you borrow. Your payments will be easier to make if you have less existing debt to keep up with, and the interest expense might be less of a burden if your improved credit allows you to qualify for better loan terms.

How to get a personal loan with bad credit

At this point, suppose you've decided you really want a personal loan but, despite your best efforts, your credit score still fits into the sub-prime range. In that case, your best bet may be to do some shopping online for lenders that specialize in making sub-prime personal loans.

  • Peer-to-peer lending
    A promising area to look for a sub-prime personal loan might be peer-to-peer lenders. These offer loans funded by individual investors rather than by large financial institutions. As a result, they are structured to allow for some high-risk/high-reward loans. The drawback is that you are the one funding the high reward by paying interest rates that can top 30 percent.

  • Compare multiple offers
    Because rates for sub-prime loans are so high, it is especially important for you to compare multiple offers to find the best rate for your circumstances. Also, at such high interest rates, you should opt for as short a loan as possible to minimize the length of time you'll be paying interest. Shorter loans will mean higher monthly payments, but this should allow you to pay substantially less in total over the life of the loan.

  • Consider your budget
    Finally, once you zero in on the best loan terms you can find, take a close look at the repayment schedule and make sure it will fit into your budget. If you handle this loan successfully, it could well be a step toward improving your credit; but if you take out a loan you can't handle, it might sink your credit score to the point where your financial options are even more limited.

More Resources:

Use our credit card payoff calculator

Read our Guide to personal loans

Learn more -- Peer-to-peer lending: best platforms, risks and benefits

Applying for a personal loan -- here's what you need to know

More tips on qualifying for a personal loan with bad credit

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Richard Barrington is the primary spokesperson and personal finance expert for MoneyRates.com… (more)
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