How to get a personal loan with bad credit: Can you get one, and should you?

Even if you have a low credit score, you may still qualify for a personal loan — but “if you’re in this situation, you should be prepared to pay a higher interest rate and potentially other fees such as an origination fee, late fees or early payoff penalties,” says Kaitlin Walsh-Epstein, senior vice president of growth and marketing at Laurel Road. Here’s what you need to know if your credit score isn’t stellar and you’re considering a personal loan.

What is a personal loan, and what should those with credit issues use one for?

A personal loan is a loan issued by an online lender, bank, or credit union, usually in a lump sum amount ranging from about $1,000 to $100,000 that you often repay at regular intervals, such as each month, over anywhere from one to seven years. For those with credit issues, a personal loan might make sense to consolidate high-interest debt, for example, but only if the rate you get on that loan is lower than the rates you’re paying.  (See the lowest personal loan rates you might qualify for here.)

“The best personal loans help you achieve a financial goal, like getting rid of credit card debt, but be sure to compare them with other financing options to find the right fit,” says Annie Millerbernd, personal loan expert at NerdWallet. Experts say it may also make sense to use personal loans to pay off medical debt or an emergency that arises. But don’t use a personal loan to fund discretionary expenses like weddings and vacations, experts say.

What interest rate might I get on a personal loan if I have fair or bad credit?

In general, the higher your credit score, the lower the interest rate you might pay on a personal loan.

Source: Bankrate

That said, those rates are averages, and lenders will also judge those with less-than-ideal credit on factors like their income, employment history and assets. If you are offered a high rate like the above, you might be better off with another type of loan product. (See the lowest personal loan rates you might qualify for here.)

How can you get a lower interest rate on a personal loan?

If you’re plagued by a low credit score, getting a co-signer or co-borrower can help. “Some lenders will allow that as an option when you’re applying for a personal loan, explains Walsh-Epstein.

Another thing to do is work on raising your credit score: “First, look at your spending habits and rethink your approach to how you’re paying for things, mainly to make sure you’re keeping lower balances on credit cards. Second, establish a solid payment history by settling automated payments on your regular expenses such as bills, credit cards and student loans,” says Walsh-Epstein. Auto payments can help keep monthly expense planning in check and help avoid late payment fees. “Third, when you can afford it, make more frequent payments to reduce your overall debt and improve your credit score.”

Streamlining your lines of credit and exercising caution when opening new credit cards can also be helpful. And keep in mind that the length of your credit history can account for more than 10% of the weight in determining your credit score — so if you plan to close any unused credit cards, close newer ones first. Finally, Walsh-Epstein says, “Consider refinancing your debt to maximize total debt savings, pay off debts faster and restructure debt to fit your income, all of which helps support the goal of boosting your credit score.” (See the lowest personal loan rates you might qualify for here.)

What fees do you need to watch out for with a personal loan?

Borrowers with fair or bad credit should look out for origination fees with the online lenders they’d like to work with, says Millerbernd. “The fee can range from 1% to 10% and usually the lender deducts the fee from the loan proceeds,” Millerbernd says. If you’re getting a loan with an origination fee, run the numbers to be sure you’ll have enough money left once the lender takes their cut. 

Can applying for a personal loan hurt your credit score?

Be sure to look out for hard credit inquiries to avoid hurting your score further. “Should you find an option suited to you, you’ll then need to apply for the loan, which can involve a credit check. Make sure this is a “soft check” from a trusted lender so it doesn’t impact your credit score further,” says Walsh-Epstein. 

How to apply for a personal loan

Personal loans can be pretty easy and quick to obtain — and it’s possible to apply, get approved and receive funds within 24 hours. Still, experts say it’s wise to do a side by side comparison of  interest rates and fees from 3-5 lenders to make sure you’re getting the best possible deal on your loan.

This story was originally published in July 2022.