How to get a loan with bad credit
Credit isn’t an easy subject to understand. Acquiring a good credit score can be even more challenging. It involves a lot of work and consistent effort to maintain it. And without good credit, it can be difficult to get a loan.
If you’re like most Americans, you probably don’t have what is considered “excellent” credit. In fact, VantageScore released a report in 2021 that showed the average American credit score was 695. What does that score mean, and what if your score is lower than that? Can you still get a loan? Let’s talk about different types of loans for bad credit.
What is a credit score?
A credit score is based on a record of your financial history and your current financial standing. It can be affected by things like the length of your credit history, your payment history, credit utilization, outstanding debts, various types of credit and new credit. You can learn more about these factors here.
There are multiple credit agencies that provide credit reports. Because they are each unique entities, your scores may vary from one to the other. To gain a full picture of your score, you should familiarize yourself with the three bureaus — TransUnion, Equifax and Experian.
There are two main credit scoring models. One is called FICO, which is named after the Fair Isaac Corporation. The other model is called VantageScore, which we mentioned above. While the models do vary, they both use the same ranking scale: 300-850. Let’s break down what these numbers mean for you and your potential loan options.
This score is common for individuals who haven’t had time to build up their score or who have significant financial difficulties. If you fall into this range, lenders may consider you high risk. While it may be more difficult for you to get a loan, you do have options. We will discuss how to get a loan with bad credit in a little while.
While not as risky as those with scores below 580, this score is still less than ideal. There are still more loan options readily available to borrowers in this range, although they are not easy to get.
To many lenders, this score means they take on less risk than they would lending to borrowers with a score below 670. This may open up better lending opportunities to you. Based on the 2021 VantageScore report, this is where the average American falls on the credit score scale.
Very Good: 740-799
This score usually comes after years of dedicated work building up your credit and staying on top of any payments or debts. It takes a lot of work to get to this score, but once you have, it demonstrates you are a lower risk to lenders. You will usually be offered loan opportunities with much better terms than high-risk borrowers.
This is the best range you can be in and demonstrates very reputable financial habits. The best lending terms available may be offered to you if you possess a score in this range.
If you have a score that falls in the Poor-Fair range, don’t be discouraged. Building credit can be hard and it can take a long time for many. You don’t have to miss out on opportunities, such as buying a home or paying off existing medical debt. You can still get loans for bad credit. It just may take more work than it would for those with a more ideal score. So, what are your options?
How to get a loan with bad credit
Bad credit home loans can be hard to come by. Luckily, there are government programs that help homeowners who struggle to gain good credit. Programs by government agencies, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA) all offer the opportunity to secure home loans for those with lower credit scores.
But what if you already own a home but want help to complete renovations? What if you want help consolidating or paying off existing debts? Personal loans for bad credit exist too and can be available to you under the right circumstances.
While the majority of personal loans are unsecured, if you have bad credit, you may only be approved for secured loans. Unsecured loans are loans that don’t require collateral for approval. While lenders can’t repossess your assets if you default on payment of an unsecured loan, they do typically charge higher interest rates to mitigate the risk of loss.
Secured loans are loans that do require some form of collateral. These are more common for borrowers who are deemed high risk (such as those with scores below 580). The most common forms of collateral are a borrower’s car or home. This can place some added pressure on you to repay the loan, as defaulting on the payments can result in your assets being repossessed. A plus to applying for a secured loan is that your interest rate may typically be lower than that of an unsecured loan. It should be noted that loans for bad credit, on average, come with higher interest rates overall.
Loans for bad credit can come with additional fees. If you have poor credit, you need to be prepared to cover additional costs such as an LLPA. An LLPA is a loan level price adjustment. LLPAs are added fees required by some investors for borrowers with certain risk factors (for example, bad credit). As an example, Fannie Mae has a chart explaining their LLPA cost based on credit score for mortgages on single family homes. You can view that chart here.
Fannie Mae is not the only investor that requires LLPAs. In fact, most, if not all investors require it under the right circumstances. There may even be additional expenses, besides the LLPAs. It’s best to discuss any fees with your lender.
Co-signers & co-borrowers
For many with low credit, the high interest rates can make borrowing feel impossible. One option to get a better interest rate is to get a co-signer for your loan. This is a person who agrees to pay back your loan if you default on it. It is an added layer of security that a lender may need to approve your loan request with bad credit.
Similarly, a co-borrower can also improve the interest rate offered on your loan. This is a person who shares, equally, the responsibility to repay your loan. This can be great help if you or your partner have bad credit, or if one of you needs additional income to qualify for the loan.
How to improve your credit score
The surest way to improve your credit score is to maintain good credit habits. If you're feeling limited by your credit score, the best course of action may be working to improve your credit.* What are some good credit habits you can practice?
- Pay bills on time (setting up autopayments can help)
- Pay off debt ASAP
- Use less of your credit limit on your credit cards (and pay off the bill on time)
- Check your report for any mistakes and report these to the credit agency (inaccuracies impact up to 25% of accounts)
Developing excellent credit takes time and consistent effort. There are many reasons you may have less than perfect credit. If you have bad credit, you’re still able to get loans. There just may be more stipulations and qualifications you need to meet. As long as you’re prepared to put up collateral, pay additional fees or get a co-signer or co-borrower, you can most likely still get the loan you need. And if all else fails, there are ways to improve your score.
*GUARANTEED RATE IS NOT A CREDIT REPAIR COMPANY, CREDIT REPORTING AGENCY, BROKER OR ADVISOR. You acknowledge that Guaranteed Rate is not a credit repair company or similarly regulated organization under applicable laws, and does not provide credit repair services. Where available, recommendations, tips and education materials are provided to you at no additional charge, and for educational purposes only. The services are intended to provide you with general information and assist you with identifying your options. The information is provided only to enable you to make your own choices about your personal finance, and is not intended to provide, legal, tax or financial advice. We do not provide any services to repair or improve your credit profile or score, nor do we provide any representation that the information we provide will actually repair or improve your profile. Consult the services of a competent professional when you need any type of assistance. You acknowledge that Guaranteed Rate is not a “consumer reporting agency” as that term is defined in the Fair Credit Reporting Act as amended.
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