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How to get a personal loan with bad credit

young_professional_womanBecause personal loans are usually not secured by any collateral, getting one depends on the lender's faith in your ability to repay. Being able to demonstrate that ability not only determines whether or not you can get approved for a personal loan, but also how much you may pay for it.

That last point is crucial because interest rates on personal loans vary within a very wide range -- from single digits to rates in excess of 30 percent. A low interest personal loan can be a cost-effective alternative to consolidating and paying off credit card debt, but rates at the higher end of the scale can be prohibitively expensive. This difference makes knowing how to shop for personal loans critical to your finances.

How to get a personal loan

Here are some of the steps you should take when considering personal loans, regardless of whether you have good or bad credit:

  1. Know where your credit stands
    Before shopping for a personal loan, check your credit score. If your credit score is lower than expected, check your credit report in detail to see if there are any problems you can clear up before you apply for a loan. Otherwise, getting a loan is likely to be more difficult and more costly.

  2. Consider alternatives
    Before pursuing a personal loan, consider whether you have other options. For example, if you have equity in your home, it may be cheaper to get a home equity loan rather than a personal loan. If you are taking out the loan to finance a major purchase, consider whether you can delay that purchase so you can save up for it rather than borrowing to buy something now.

  3. Stick with your employer
    If you are planning to get a personal loan, hold off on making a job change. Lenders not only care about how much money you make, but also how stable your employment history has been.

  4. Compare rates for your credit status
    When you start shopping for personal loans, look beyond the rates lenders advertise and find out specifically what rate someone with your credit score would be able to get. A personal loan comparison may be very different for bad credit loans than for people with excellent credit.

  5. Watch out for closing costs
    While the interest rate is very important, be aware that closing costs can add a significant expense to a personal loan. Make your personal loan comparison on the basis of Annual Percentage Rate (APR), which includes both the interest rate and any other costs spread out over the life of the loan.

Options for bad credit loans

If you start this process and realize that your credit score is low, your approach to getting a personal loan may have to be a little different. Here are some things that might help if you are searching for personal loans for bad credit:

  1. Look into peer-to-peer lending
    Go beyond traditional lenders like banks and credit unions, and check out peer-to-peer lending web sites. These often allow for lower credit scores, though at a significantly higher price.

  2. Show how repayment fits into your budget
    You may not be able to do anything about your credit history, but you can help a lender have faith in your future if you show a budget that demonstrates how you can repay the loan -- plus, that's something you should work out for your own benefit before you borrow.

  3. Consider a co-signer
    A co-signer is someone who agrees to share responsibility for the loan's repayment. If you know someone who is willing to take that risk, it may be one way you can get a loan with bad credit.

It takes a little extra work to shop for the best terms on a personal loan, but it is well worth it when you consider that it is a decision you may be living with for however long your repayment schedule lasts.

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