How to Get a Loan When You Have Bad Credit

A poor credit score can make it difficult to qualify for a loan. You can improve your chances of being approved by doing the following:

• Paying down debt and reducing your debt-to-income ratio
• Adding a co-signer
• Reducing the loan amount
• Offering collateral
• Showing proof of a stable income

No one wants to take out an personal loan, especially in an emergency situation, but sometimes life can hand us financial predicaments.

Common debt triggers include medical emergencies, divorce or separation, job loss or reduction, major home repairs after a natural disaster, or stepping in to help another family member.

Many families don’t have wiggle room in their budget to handle sudden, unexpected costs, and inflation has made paying bills that much harder. Approximately 60% of American families live paycheck-to-paycheck, according to a LendingClub report. 

If you have bad credit, it’s even tougher to find a lower-interest personal loan (also called an installment loan). Poor credit compounds the situation because it reduces your options. Here’s what to know about emergency personal loan products if you have bad credit.

How does your credit score affect emergency loan terms?

The lower your credit score, the more limited your options are for a favorable loan. A poor credit score may lead to a higher interest rate, higher fees, or a low loan amount—or you might not qualify for a loan at all. Traditional banks and credit unions use your credit score as one component to calculate your loan terms.

However, these institutions typically don’t provide small personal loans ($3,000 and under). You’re probably going to be limited to payday loans or an online lender.

Because some online lenders specialize in serving borrowers with poor credit, a low credit score may not be a barrier. These alternative lenders may weigh evidence of satisfactory income more heavily than credit score. However, you won’t have access to low interest rates with a low credit score – those are reserved for consumers with stellar scores.

How can I improve my chances of getting a loan with bad credit?

Your credit score is a major factor in whether or not you'll be approved for a loan, but it's not the only factor. Before applying for a loan, try addressing some of the following errors:

Make sure your credit report is accurate

Errors on your credit report can lead to a lower credit score. Before attempting to open any form of credit, make sure that the information on your credit report is accurate and dispute anything that's inaccurate.

Reduce your debt to income ratio (DTI)

Lenders are primarily concerned with whether or not a potential customer will repay their loan or line of credit. So the amount of debt you're already carrying is often a significant factor. Too much preexisting debt and lenders may be worried that you won't be able to afford your new debt payments.

That's why limiting the amount of debt you're currently carrying will make it easier for you to secure more credit in the future. Using an affordable repayment plan from MMI is a great way to eliminate debt quickly and improve your credit score in the process. 

Ask someone to co-sign on the loan

A co-signer assumes an equal share of the risk for the new loan. Adding a co-signer with good to excellent credit is a great way to overcome your own credit issues.

It is risky to co-sign on a loan, though. If the primary loan holder can't make the necessary payments than the co-signer will need to step in or risk damaging their own credit.

Apply for a smaller loan

The larger the loan, the bigger the risk. If your credit score is damaged, then the risk is already fairly high for lenders. Reducing the amount of the loan is one to reduce the risk and get your loan approved.

Add collateral

Unsecured loans are the riskiest for lenders because there's no asset attached to the loan and nothing for them to collect should you fail to make the required payments.

Securing the loan with collateral, like a car title, can help you get the loan, but then you run the risk of losing the asset. It may be worthwhile in an emergency, but it's generally an option you should avoid if possible.

Show that your income is stable

Again, lending is all about risk assessment. One way to prove that you're a relatively safe investment, even if your credit is poor, is to show that you have a steady source of income. A long history of employment and consistent paychecks can help mitigate some of the risk that comes with a poor credit score.

What risks should I be aware of with emergency personal loans?

Try to avoid payday loans (or fast cash loans) whenever possible. These lenders charge high interest rates and may require you to pay back the loan in full within 14 days or by the end of the month, which can be difficult for someone facing a financial emergency.

Beware of companies offering guaranteed loans for an upfront fee. These loans may be scams because no one can guarantee you’ll receive a loan. Legitimate lenders won’t ask for an upfront fee to guarantee a loan.

Research lenders and look for online reviews. Make sure you understand the terms being offered. Interest rates and fees on small, personal loans tend to be high, even from legitimate online lenders, especially on loans for people with poor credit. Rates will usually be higher than the lender’s advertised rate, which is almost always reserved for those with pristine credit.

Less risky alternatives to an emergency loan

Savings. If you have savings to dip into, that’s the best way to avoid the high-interest trap of an emergency loan. Of course, many people with a financial emergency don’t have adequate savings to cover it. If you don’t, consider whether you could borrow from family or friends or ask for an advance on your paycheck.

Credit card. Believe it or not, putting an unexpected expense on a credit card, even one with a high APR, is usually a better bet than taking an emergency loan from a payday or online lender. If your card doesn’t have a sufficient credit limit or you don’t have a credit card, work on building credit and opening a card so you have a working alternative before an emergency pops up.

Retirement savings. If you have a 401(k) or IRA, you may be able to borrow against the balance in the account. The particulars of the loan or withdrawal will depend on the rules of the retirement savings account you’re trying to borrow against. If you’re making an early withdrawal from an IRA, you should expect to pay a fee (typically 10%). If you’re taking out a loan against your 401(k) you may be barred from making further contributions until the loan is repaid. Borrowing against your retirement comes with risks, so make sure you understand what’s at stake before borrowing.

Payday alternative loan. If you belong to a credit union that offers payday alternative loans (PALs), you might be able to qualify. They’re a much more affordable option to payday loans or online lenders. If you aren’t a member of a credit union that offers these types of loans, ask about eligibility requirements for membership. PALs come in small amounts ($1,000 and below), interest rates are capped at 28%, and they allow repayment in one to six monthly installments.

Where can I get an emergency personal loan?

If you have no alternative but to turn to a payday or online lender, MMI recommends exploring online options first. It’s better than risking a debt-trap cycle with a payday lender. Three online platforms that offer loans and are well-reviewed are Upstart, Best Egg, and Avant.

If cash is so tight that an unexpected emergency can throw your finances into total disarray, it’s time to talk to an expert. The experts at MMI can help you evaluate your budget and create a plan to shed debt, trim your spending, and start saving for rainy days. We’re here to help with free confidential counseling, available fully online 24/7..