Best Personal Loans for Bad Credit of December 2023

Bad credit loans are a type of personal loan made for borrowers with poor credit, typically with a FICO? Score of 579 or less. Bad credit borrowers can have a higher risk of missing payments or abandoning repayment altogether. Personal loan lenders will likely have these borrowers pay a higher-than-average interest rate and possibly extra fees, compared to those with good or excellent credit.

There are lenders that specialize in loans for borrowers in this situation. It's important to seek out the best personal loans for bad credit so you don't overpay for your loan.

The best loans for poor credit might be a good option if you urgently need money while you are in the process of rebuilding your credit. Weigh whether you really need that money right now or if it can wait until you've improved your credit. Crunch the numbers to see how much you can afford each month and how much it will cost you overall.

Deciding whether a personal loan for bad credit is right for you is a matter of being clear about your financial goals and whether that loan will help you meet them.

What credit score is considered "bad"?

A score between 300 and 579 is considered bad. It indicates to lenders that you've had trouble paying bills in the past and may not be on solid financial footing.

Classifying credit scores as "excellent" or "poor" is not an exact science, but here's a rough breakdown of how creditors view a borrower's credit history using their FICO? Score (the most widely used type of credit score by lenders):

It can be a bit surprising to learn how much more a high APR loan will cost. According to a study by The Ascent of personal loan statistics for 2022, the average personal loan balance in the U.S. is just shy of $10,000. That's the number we'll use to illustrate the difference a credit score can make.

What do the best bad credit loan companies look for in an application?

Once you fill out a loan application, a personal loan lender considers two primary things: Your credit score and your debt-to-income ratio (DTI).

• DTI: Your DTI refers to how much you owe compared to your monthly income. The lower your DTI, the more confident a lender will be that you earn enough money to make all your payments on time.
  • For example, if you earn $5,000 a month and your rent, car payment, and credit card payments amount to $2,000, your DTI would be 40%.
• Credit score: This is a number between 300 and 850 that indicates how well you've dealt with credit in the past.
  • If you've been late on payments, suffered a foreclosure, filed for bankruptcy, or have too much debt in relation to your income, your credit score may be low. Setting a minimum credit score helps a bank, credit union, or online lender establish the maximum level of risk they are willing to take.

What are the credit scores for poor credit loans based on?

It can help to think of your FICO? Score as a pie, cut into five pieces. Not all five pieces are the same size as some weigh more than others. Here's how each piece plays into your credit score.

The good thing about understanding what goes into your FICO? Score is how it allows you to make positive changes. For example, since you know payment history makes up 35% of your total score, you can be doubly careful about getting all payments in on time. And since you're aware that 30% of your score is based on how much you owe, you can concentrate on chipping away at your balances.

What type of credit check do personal loan lenders run for bad credit?

Most personal loan lenders run a "soft" credit check to determine whether or not you're a good candidate for a loan. That's good news because a soft credit check has no impact on your credit score. It's not until you accept a loan offer that a "hard" credit check is run.

A hard credit check will ding your credit score (possibly by a few points), but your score will rebound quickly with regular payments. In fact, if you use the personal loan to pay off another existing debt, it's possible that you'll see a boost in your credit score almost immediately.

What's the difference between secured and unsecured loans for bad credit?

A secured loan requires you to put something of value up as collateral. Typically, if an item can be appraised it can be used as collateral. This includes valuable jewelry, rare coins, collectable cars, and even retirement accounts. The advantage of a secured loan is that the lender offers you a lower interest rate than it would offer if the loan was unsecured. The disadvantage is why it offers you a lower rate. The lender knows that if you fail to make payments it can take possession of the collateral, sell it, and recoup its losses.

Unsecured loans are when a lender checks your credit history, and if your loan application is approved, lends you money on the promise that you'll repay the loan. You put nothing on the line.

It's clearly more expensive to borrow money if you want loans for very poor credit, but there are advantages worth mentioning.

Here are some of the advantages of taking out a bad credit loan.

• Clear loan payment plan: From the day you take out a personal loan, you know precisely how much your monthly payments will be and when the loan will be paid off (also known as the repayment term). This information can help you plan for your financial future.
• Debt consolidation: You may be able to consolidate higher-interest debt into one loan, simplifying your life. In some cases, this can also lower your interest rate or even lower your monthly payment. This may mean stretching your payments over a longer period of time. But if, for example, you are facing bankruptcy, longer repayment terms on a personal loan might give you some breathing room.
• Give you the money you need, quickly: Fast loans for bad credit means you have access to money when your water heater goes belly-up or some other financial emergency creeps into your life. The process is quick and funds are typically dispersed within one or two days.
• Avoid unscrupulous lenders: You can borrow from a reputable lender rather than deal with a payday lender or title loan company. These loans are designed in a way that makes them difficult to pay off by the due date. The bonus for the predatory lender is that you must then take out another loan to pay off the original loan. That means paying another set of expensive fees and a ridiculously high annual percentage rate.
• Build your credit: If you make your loan payments on time, a personal loan can help to build your credit. That may mean you can qualify for a lower interest rate the next time you need a loan.

Even if your credit score isn't perfect, you still have loan options. No matter what a report from a credit bureau says about your payment history, you likely have access to a bad credit personal loan.

Before making a financial decision, it's essential to be aware of the disadvantages. Here are a few potential downfalls that can impact even the best personal loans for bad credit and low income.

• You might not stop spending: Say you use a personal loan to pay off higher-interest credit card debt. Once those cards have been paid off, nothing is keeping you from charging them back up. One disadvantage of a personal loan for bad credit is that you could end up with new credit card debt in addition to the consolidation loan.
• The interest rate may be high: It can be discouraging to compare the interest rate you will be charged for your loan to the interest charged for the same loan to someone with good credit. Don't dwell on this. Make sure you have a solid plan for your loan, like getting rid of really high interest debt and building your credit score. Then, as long as you shop around for the best deal for your circumstances, you can stay focused on your own goals.
• You don't make your monthly loan payment: If you commit to a loan you can't afford, or your financial circumstances change, you may find yourself in a position where you can't meet your obligations. This would hit your credit score even harder and leave you in a worse position.
• You might have to put up collateral: Depending on your lender, you might need to put up collateral to get loan approval. This is known as a "secured loan," and if you can't make your monthly payment, the lender can seize your collateral to help cover their costs. If you want to avoid this, look for an unsecured loan.
• You may have to pay extra fees: Many personal loans charge an origination fee between 1% and 8% of the loan. You may also find loans that charge prepayment penalties if you want to pay back your loan ahead of the loan term. Make sure you factor in all costs when comparing loans. The best bad credit loans have minimal fees.

READ MORE: What Is a Personal Loan Origination Fee?

What are extremely bad credit loans?

Payday loans are a type of personal loan with short-terms and high-interest. It's typically meant for borrowers with bad credit or no credit history. Pay day lenders can charge APRs of 400% or more and trap borrowers into a vicious cycle of borrowing.

Even if you only plan to take out a small loan, working with a predatory lender is a dangerous financial proposition. These lenders are so dangerous that many states prohibit or heavily regulate them. Keep this in mind as you compare lenders.

Also keep an eye out for bad credit scams, like companies telling you they can wipe your bad credit away -- for a fee. No company can do anything to change your score that you can't do yourself. It may take time, but it will be worth it in the end to work toward boosting your own score.

If used responsibly, a personal loan from a reputable lender might help you to improve your financial situation in the long run.

One of the most interesting things about personal finance products is that there is no one-size-fits-all solution. We need to scan the landscape to figure out what works best for us, and personal loans are no exception. Here are some alternatives:

Family: If you're in a pinch, there's no shame asking a family member to lend you money. Before you accept the cash though, make sure you write up a simple IOU. It should include how much you must repay each month, how long you have to repay the loan, the interest rate being charged (if they are charging interest), and what happens if you fail to repay the loan as promised. While it may sound silly to write an IOU to someone you're close to, it conveys respect and reminds you of your promise.

Cosigner: If you have someone in your life with strong credit, ask them to cosign your loan. A loan cosigned by someone with good or excellent credit will qualify for a better interest rate than one designed for a borrower with bad credit. Before asking someone to cosign, though, think long and hard. Remember that if you don't pay, the cosigner will be responsible for your debt. If there is any chance that you will not be able to keep up with your payments, you could be putting an important relationship in jeopardy.

Peer-to-peer lender: Another option for borrowers with a low credit score is to apply for a loan through a peer-to-peer lender. These loans are made by everyday people, based on the level of risk they're willing to take.

Here's how it works: You apply for a loan and the marketplace (the place you applied) matches your application with investors willing to make the loan. The lower your credit score, the higher the risk for the lender. Due to the increased risk, your interest rate will be higher than it would be if your credit score was stronger.

When your credit improves, you may also be able to qualify for a balance transfer card. This would let you consolidate high-interest credit card debt onto a card with a 0% intro APR.