What To Know When Applying For A Personal Loan With Poor Credit

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When it comes to paying for some of life’s biggest expenses — a home renovation, a large medical bill, an emergency, a wedding, or even a funeral — sometimes it can be easy not to have enough money to cover those expenses. And if your savings don’t reach the amount of money you need to cover those expenses, you may need to find a way to make up the difference.

This is where a personal loan can help. Personal loans are actually one of the fastest-growing debt categories in the U.S., in part because they offer flexibility some credit cards don’t: lower interest rates and the ability to have a sum of money deposited directly into your bank account and use it as needed.

In general, when taking on debt, it is ideal to apply with good or excellent credit to get the best credit terms. But if you’re applying for a bad credit personal loan, there are still options for you – there are just a few things you need to consider before you begin the application process.

Can you apply for a bad credit personal loan?

Your credit history and credit score are important as they provide lenders with an indication of whether they believe you are a responsible borrower who will repay the loan on time and in full. A healthy credit score can really be beneficial when applying for credit for big milestone purchases like buying a home or car.

While it is possible to approve a personal loan with bad credit, the final decision rests largely with the lender you are applying to. Some lenders will tell you upfront what their minimum requirements are. For example, Payoff Personal Loan requires a FICO score of 640 (which is within the “fair” range) or higher for approval.

Some lenders actually cater to those with bad (or no) credit. Upstart Personal Loans, for example, only accepts a FICO or Vantage score of 600, but they also accept applicants who have not yet built up a sufficient credit history. OneMain Financial also approves applicants who have bad or fair credit for their personal loan products. (See our round-up of the best personal lenders for bad credit for more options.)

Outstanding Personal Loans

  • Annual Percentage Rate (APR)

  • loan purpose

    Debt consolidation, credit card refinance, wedding, relocation, or medical care

  • loan amounts

  • conditions

  • credit needed

    FICO or Vantage score of 600 (but will accept applicants with insufficient credit history to have a credit score)

  • incorporation fee

    0% to 8% of the target amount

  • Penalty for Early Payout

  • late fee

    The greater of 5% of the monthly amount past due or $15

OneMain Financial personal loans

  • Annual Percentage Rate (APR)

  • loan purpose

    Debt consolidation, big spend, emergency expenses

  • loan amounts

  • conditions

  • credit needed

  • incorporation fee

    Flat fee from $25 to $1,000 or percentage between 1% and 10% (depending on your state)

  • Penalty for Early Payout

  • late fee

    Up to $30 per late payment or up to 15% (depending on your state)

Which interest rates are suitable for you?

The better your credit rating, the more likely you are to get favorable terms – like lower interest rates – when you apply for a loan. This also applies to personal loans. If you have bad credit, you are likely to get a higher interest rate on your loan. That means you spend more money to pay off the loan.

Of course, the exact interest rate you end up getting will depend on the lender’s offer, but you can compare personal loans before you apply. So you can be sure that you will get the loan on the most favorable terms for you.

Compare offers to find the best loan

When looking for a personal loan, it can be helpful to compare several different offers to find the best interest rate and payment terms for your needs. With this comparison tool, you only need to answer a handful of questions for Even Financial to find the best deals for you. The service is free, secure and will not affect your credit score.

Editorial note: The tool is provided and operated by Even Financial, a search and comparison engine that matches you with third-party lenders. Any information you provide will be shared directly with Even Financial. Select does not have access to the data you provide. Select may receive an affiliate commission from affiliate offers in the Even Financial Tool. The commission does not affect the selection in the order of offers.

It’s also worth noting that in some cases it may make more sense to use a credit card with a 0% APR introductory period, as you can fund your purchase and make payments on the balance without being charged interest for a period of time. For example, the Citi Simplicity® Card gives you a 0% period of 12 months (14.74% to 24.74% variable APR thereafter). This option is only optimal if the credit limit is enough to cover your expenses and you are confident that you can repay the entire balance before the 0% APR period is over.

How long do you have to pay back the loan?

The time you have to pay off a personal loan is often referred to as the “maturity” of the loan. Similar to interest rates and creditworthiness requirements, loan terms can vary from lender to lender. The good news is that this information is generally offered upfront, so you can immediately check if the repayment schedule is working for you.

Loan terms can be as little as six months and as long as seven years. If you take out a loan that gives you more time to pay off the balance, you’ll likely have smaller monthly payments – just be aware that a longer term means you’ll have to pay more interest over time. Shorter terms, on the other hand, could result in a higher monthly rate but less interest over the life of the loan.

How Does a Personal Loan Affect Your Credit Score?

There are a few ways that applying for and taking out a personal loan can affect your credit score.

Similar to any other loan, mortgage, or credit card application, applying for a personal loan may result in a slight drop in your credit score. This is because lenders have to do a tough check on your credit, and every time a tough check is done it shows up on your credit report and your score goes down a bit. However, remember that this drop is temporary and continuing good credit habits can increase your score again over time.

However, it pays to be as strategic as possible when applying for a personal loan. Applying for a personal loan shortly after applying for a new credit card could result in an even greater drop in your credit score, since a rigorous check would be performed on both applications.

On the plus side, taking out a personal loan can actually help your credit score as you build a track record of making payments on time. This is especially true if you have been approved by a lender that accepts applicants with an insufficient credit file. Payment history is the most important factor in calculating your credit score, accounting for 35% of it. Making your monthly payments on time and in full can provide a lender with clues that you are very likely to repay any money you borrowed in the future. As a result of consistent on-time payments, your credit score is likely to improve.

A personal loan can also help improve your credit mix. Your credit mix refers to the different types of credit accounts you have, including credit cards, student loans, mortgages, etc., and makes up 10% of your credit score.

That’s not to say you should bother taking on different types of debt, but having a variety of accounts can show lenders that you’re capable of managing multiple types of loans. This can make you appear more like a creditworthy borrower (just make sure you don’t get into too much debt).

bottom line

Personal loans — and the idea of ​​taking on more debt — can seem daunting, especially if you already have a low credit score or no credit history at all. But when used responsibly, they can help you cover large, necessary expenses and improve your credit score as you make on-time payments. If you are applying for a bad credit personal loan, all you have to do is keep the above things in mind so you don’t feel caught off guard during the process.

Editorial note: Any opinion, analysis, review, or recommendation expressed in this article is solely that of Select’s editorial team and has not been reviewed, approved, or otherwise endorsed by any third party.

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