How to Get a Loan With Bad Credit

Bad Credit Loans

Bad credit – not the type of situation anyone would want to find themselves in, but it happens more often than you think. According to a 2020 Consumer Credit Review by Experian, it turns out that while only 1.2% of Americans have a perfect credit score of 850, 16% have “very poor” credit, and 18% are placed in the “fair” credit score range. 

And what do you get when you combine that with the current high appetite for debt in America? 

An increasingly high number of loan application rejections. So much so that – going by a survey conducted by YouGov on behalf of ScoreSense – 53% of Americans have, at one point or another, been rejected for a car, loan, or credit card due to bad credit. That’s literally more than half of the country’s population. 

On the flip side, though, it just so happens that the rejections don’t always mean the end of the road for the applicants. Quite a number of them go on to successfully apply for what is known as a “bad credit loan”. 

Yes, that’s right – it’s possible to get a loan with bad credit. This article explains how the entire process works, all the bad credit loan options you might have, the differences between secured and unsecured bad credit loans, plus the pros and cons of bad credit loans. Then to top it all off, it provides insights into how you can progressively improve your creditworthiness over time. 

What is Considered Bad Credit?

Bad credit, for starters, is just a general term used to describe a poor credit history. Lenders use this to identify risky borrowers. 

Some of the missteps that could negatively affect someone’s credit in such a way include:  

  • Filing for bankruptcy to escape debt. 
  • Repossession of your financed properties.
  • Going through mortgage foreclosure. 
  • Letting unpaid debts proceed to collections. 
  • Late credit payments. 
  • Defaulting on debt repayments for more than 90 days. 

All these are usually tracked by credit reporting agencies, which then proceed to award credit scores that summarize your entire credit history. And while they use different credit scoring models, the FICO system happens to be the one that most lenders refer to when making loan decisions. 

Now, to be specific, FICO scores range from 300 to 850, which are further grouped into five credit rating categories. Borrowers with a FICO score of 800 and above are considered “Exceptional”, while 740 to 799 is in the “Very Good” category, and 670 to 739 is rated “Good”. 

On the other end of the spectrum, anything less than 580 is considered “Poor”, while “Fair” lies between 580 and 669. 

That said, the current average FICO credit score in the U.S. is 711, which represents a significant improvement since bottoming out at 686 in October 2009. 

Make no mistake about it, though. A lower-than-average score doesn’t necessarily place you in the “bad credit” bracket. And neither do the “Fair” or “Poor” ratings of the FICO scoring system.

As it turns out, “bad credit” is relative to a certain extent. As long as they follow the laws prohibiting discrimination, lenders get the privilege of dictating what they consider to be “bad credit”. 

While some might only be open to borrowers with an “Exceptional” rating, others are willing to accept borrowers with “subprime” or less-than-ideal credit. It all depends on the levels of risk that the lenders are comfortable taking. 

All in all, however, it’s generally accepted that a credit score of less than 550 will attract rejections from the bulk of the lenders. This is where you find borrowers with a history of bankruptcy filings, and a debt default rate of around 75%. 

Individuals with credit scores of 550 to 619, on the other hand, are widely considered to be subprime borrowers – since they come with a history of slip-ups like account rejections and credit delinquencies. Although they might qualify for loans, they tend to attract high interest rates because of their high-risk status. 

What are Bad Credit Loans?

Just like the name suggests, bad credit loans are special loans reserved for borrowers who happen to have a poor credit rating, or in other cases, no credit history at all. 

And instead of basing lending decisions on credit checks, lenders typically determine eligibility according to a borrower’s ability to repay the loan. In other words, they review your financial circumstances at the time of application to establish if you can indeed afford the loan. 

As such, it’s possible to qualify for bad credit loans even when you have a history of missing debt repayments. 

It’s worth noting, though, that to cover the high risk that comes with such borrowers, the lenders charge considerably higher than normal interest rates. What’s more, the principal amounts are usually much lower than in other types of loans. 

Bad Credit Loan Types 

Because of the huge profit margins that bad credit loans generate, this space continues to attract a wide range of players – who, in turn, offer interested borrowers a host of loan products to choose from. 

These bad credit loan offerings can be categorized into the following types: 

  • Personal loans. 
  • Peer-to-Peer loans. 
  • Credit union loans
  • Payday loans. 
  • Subprime loans. 

Personal Loans

Among the more than 23 million personal loans issued to U.S. borrowers are bad credit loans that operate differently from regular personal loans. 

For instance, while regular personal loans are handled by registered banks, bad credit personal loans are offered by non-mainstream lenders with an appetite for higher risks accompanied by higher returns. 

Such lenders don’t spend a lot of time on credit checks. Instead, they tend to focus more on the borrowers’ income sources, along with factors like your employment history, schooling history, college degree status, etc. 

Normally, it takes only a couple of hours to review and process the applications, after which the funds are disbursed directly to your bank account. You can borrow as little as $500 to as much as $50,000, which is usually payable in 24 to 60 months – at an Annual Percentage Rate (APR) of up to 36%. 

So, although lenders process them quite fast, bad credit personal loans can be costly. 

Peer-to-Peer Loans

Peer-to-Peer loans – or P2P lending – is another popular option for people who intend to get a loan with bad credit. 

In this system, both good and bad credit individuals get to borrow loans directly from other individuals – instead of relying on banks to act as the middlemen. The whole process is actually facilitated by P2P lending websites, which freely link up borrowers with various individual lenders. 

Investors are first required to register personal accounts on the P2P lending websites, and then load them with the amounts they wish to disburse in loans. The loan borrowers, on the other hand, just need to set up a financial profile, and the system will subsequently place them in an appropriate interest rate category based on their overall risk rating. 

At that point, it’s up to the borrower to assess offers from different investors before choosing one. The system will then automatically handle the transfer of funds, as well as the corresponding repayment process. In the meantime, you won’t be required to provide collateral or any form of security. 

So, all things considered, peer-to-peer lending is quite convenient to both investors and borrowers. The only problem is, the accompanying annual interest rates can stretch up to 36% for bad credit loans. 

Otherwise, you should be able to use the funds for pretty much anything – including asset purchase, business, debt consolidation, etc. 

Credit Union Loans

The U.S. currently hosts more than 5,400 credit unions, which serve all sorts of groups – from local communities to professional societies and welfare organizations. They are growing increasingly popular among borrowers because, unlike banks, credit unions offer very flexible loan terms. 

Some, for instance, allow their members to conveniently get a loan with bad credit. They just review your application based on your character, membership level, and maybe the projected repayment schedule. 

The benefits don’t stop there, though. If you go for a federal credit union loan, you’ll notice that the Annual Percentage Rate (APR) maxes out at 18%. That’s according to the National Credit Union Administration (NCUA), whose data additionally places the average APR for a three-year federal credit union loan at 8.86%. Banks, on the other hand, charge an average rate of 9.98% over the same period. 

That explains why credit union loans in the US have almost doubled in value within just six years – from $660 billion in 2013 to $1.19 trillion in 2020. 

Payday Loans

Payday loans are built specifically for individuals who desperately need to get a loan with bad credit. You can think of them as some form of emergency loan that acts as an advance against your next paycheck. That essentially means you’ll be required to repay the loan on your payday. 

The payday loan application process itself is pretty straightforward. You just need to provide proof of income and the funds will be processed in hours based on affordability. 

But then get this – although payday loans are designed to offer short-term credit, the subsequent repayment process can be extremely draining. The average APR here, according to research by the Consumer Finance Protection Bureau (CFPB), is almost 400%. 

As such, it’s no surprise that 80% of payday loans are rolled over or renewed within 14 days. Just typical of predatory loans. 

Subprime Loans

Subprime is a blanket term used by financial institutions and commercial banks to describe bad credit scores. And while the precise score threshold isn’t universal across all institutions, the generally accepted subprime range stretches from the “Fair” to the “Poor” FICO rating category.  

These are the types of individuals who are given subprime loans that come with higher than average interest rates – while the opposite, prime loans, are exclusively reserved for low-risk borrowers with satisfactory credit scores. They are the ones who get to enjoy fair interest rates. 

The good thing about subprime loans is, they qualify you for asset financing with bad credit. For example – you can go ahead and borrow a mortgage or an auto loan in the form of a subprime loan. Lenders will take into account your income, asset down payment amount, past credit delinquencies, plus loan size. 

On the flip side, however, the interest rates here are not very friendly. In 2018, for instance, CFPB tracked interest rates across various subprime credit card accounts and revealed that borrowers were being charged as much as 21.50%. 

So, in a way, you could say that subprime loans are a form of predatory lending. Industry regulators and experts even claim that their high interest rates had a lot to do with the 2008 housing crisis. 

Secured vs Unsecured Bad Credit Loans

There are two different approaches one could take when getting a loan with bad credit. You could either go for a secured loan or settle for an unsecured one. 

Wondering which is a better option for bad credit borrowers? 

Well, that depends on your specific circumstances. 

Secured loans, to begin with, require an asset as collateral. Lenders typically ask borrowers to submit assets such as deeds, personal property, bonds, or stocks. Then in the case of an asset financing loan, the item being purchased ultimately becomes the security for the loan. 

The point here is to have the asset acting as some sort of guarantee until the borrower repays the loan in full. Otherwise, the lender will proceed to auction it off if the borrower defaults on payments.

Unsecured loans, on the other hand, are not accompanied by any form of collateral. Lenders simply assess your financial situation, and then take your word that you’ll faithfully honor the payments. 

As such, unsecured loans pose a greater risk to lenders. That’s why only a few of them are willing to extend the offers to people with bad credit. 

If you’re lucky enough to find such a lender, you’ll notice that qualifying for unsecured loans is no walk in the park. They require higher credit scores and better income prospects than secured loans. What’s more, you might even be forced to add a co-signer to your loan application. 

It doesn’t end there, though. Unsecured loans offer much lower principal amounts and then end up charging higher interest rates. 

As for secured loans, at least the lenders are more willing to work with bad credit applicants – since collateral reduces the level of risk on their part. Consequently, they tend to provide more flexible terms, and much higher loan amounts at lower interest rates. 

How to Get a Bad Credit Loan

Here is a step by step breakdown of how to get a loan with bad credit: 

#1. Review Your Credit Report

Before you even begin the actual loan application process, you should review your credit report in detail. You can get it for free every 12 months from the three popular credit bureaus – Equifax, TransUnion, and Experian. Alternatively, you could still request it at no charge from the federal site,

Whichever you choose, take the time to keenly assess your credit history, scores, and ratings. You never know – you might flag up errors that could be holding back your score and overall creditworthiness. 

#2. Come Up With A Budget

To determine the loan amount you can afford, you need to evaluate your finances and then come up with a budget that stretches through the entire loan repayment period. 

You might, in particular, want to break it down into its constituent months – taking note of all your projected living expenses, savings, extras, and loan repayment amounts. The goal here is to find a balance that allows you to live comfortably as you settle the debts. 

#3. Pre-qualify With Different Lenders

This is the part where you shop around to identify the best bad credit loan providers. You can start on the web by comparing various lenders based on their loan products, interest rates, loan terms and conditions, approval criteria, as well as reviews from previous borrowers. 

While you’re at it, consider running scans on their online eligibility checker to evaluate your qualification status without denting your credit score. Or rather, you could proceed with online pre-qualification checks to get a better idea of the loan amounts, rates, and repayment terms offered by various lenders. That might trigger soft credit checks, which won’t hurt your score. 

#4. Minimize Your Borrowing Risks

The riskier you seem as a borrower, the harder it is to qualify for a loan. And even if you manage to successfully get a loan with bad credit, the risks only increase the interest rates, and possibly reduce the loan amount.

To improve your prospects, therefore, you might want to minimize your borrowing risks. You can do so by introducing collateral to secure the loan, or maybe adding down payment if you’re dealing with asset financing. Some lenders even allow you to bring in additional parties as co-signers. 

#5. Compile Your Loan Application Documents

Once you identify the best bad credit loan provider and then settle on an appropriate loan type, you can go ahead and gather all the documents that you’ll need in your loan application. 

Most lenders will require you to submit copies of your identification documents, along with the social security number, and proof of income. You might also want to have the corresponding pay stubs in hand, as well as your bank statements, tax documents, and W-2s. 

#6. Fill In And Submit The Application

Finally, you can proceed to fill in the loan application forms as required. You should then counter-check all the details, and submit the application along with its document attachments. 

Once the lender receives the application, you can expect them to get back to you within one day to a week. They’ll review all your particulars, and maybe even perform a hard credit check, which could slightly dent your credit score. 

That’s nothing to worry about, though. You’ll get the chance to repair the damage when the loan application sails through. Making timely payments on the loan will ultimately go a long way towards improving your credit status. 

Pros and Cons of Bad Credit Loans

Getting a loan with bad credit is like working with a double-edged sword. It has its benefits as well as drawbacks. 

So, to help you make an informed decision, here’s a breakdown of both sides of the coin…


  • Quick Cash: Bad credit loan lenders don’t spend a lot of time on credit checks and background reviews. They are known to process their loan applications pretty quickly – you could have the funds approved and deposited to your bank account in less than one business day. So, you could count on bad credit loans during emergency situations. 
  • Helps Rebuild Credit: For people who have poor credit ratings, bad credit loans offer one of the quickest ways to boost creditworthiness. You just need to maintain timely repayments, and the positive history will reflect accordingly on your credit score. 
  • Overlooks Credit History: Bad credit lenders are not the type to rely entirely on your credit history. They are always willing to overlook past blunders if you prove that you can afford to repay the loan on time. 


  • Exorbitant Interest Rates: The bad credit status makes you a high-risk borrower. So, of course, it’s only natural that lenders will apply equally high interest rates on the loans to cover the risks on their end. 
  • Multiple Extra Fees: Bad credit loans are often accompanied by a series of additional fees, some of which might be hidden during the application process. You could, for instance, be required to pay origination fees, personal check use fees, and maybe returned payment fees for payments that fail to clear. Then if you happen to miss a payment, you’ll be charged exorbitant late payment fees. 
  • Fixed Repayment Terms: In addition to high interest rates and multiple additional fees, bad credit loans come with fixed repayment terms that are very strict. Borrowers, in most cases, don’t get the privilege to renegotiate anything. 
  • Limited Lenders and Loan Options: Most mainstream financial institutions, including banks, only give loans to people with good credit. That leaves bad credit borrowers with quasi-regulated lenders, who in most cases, turn out to be exploitative. 

How To Improve Creditworthiness

The good thing about bad credit is, it can be improved over time to give you greater qualification possibilities, and better loan terms. That translates to more loan options, higher loan amounts, and lower interest rates. 

Here are six steps you could take to achieve that: 

  • Review Your Credit Reports: Pull copies of your credit report from all the three leading credit bureaus (TransUnion, Experian, Equifax), and then study everything in detail to gain insights into what’s working in your favor, and what’s hurting your credit. 
  • Open New Accounts: Lenders and card issuers usually report their clients’ accounts to credit bureaus. So, you should consider setting up new credit card accounts, and then maintaining timely repayments that’ll progressively rebuild your profile. 
  • Limit Your Loan/Account Applications: While it’s a good idea to open new accounts, you might want to limit the number of applications submitted to lenders, card issuers, and banks. That’s because each application leads to a hard inquiry, which will always show up on your credit report, as well as hurt your overall credit score. 
  • Repay Your Loans/Credit Card Debt On Time: Don’t focus only on settling your debt. You should ensure everything is paid on time, as payment history happens to be the leading influencing factor on your credit score. It has a 35% impact, while credit utilization accounts for 30%, age of credit accounts 15%, credit mix 15%, and new credit inquiries 10%. 
  • Maintain 30% Or Less Credit Utilization: Credit utilization refers to the used-up fraction of your credit limit. After payment history, this is the second most critical determining factor for FICO credit scores. As such, you might want to play it safe by ensuring that the outstanding balance never stretches beyond 30% of your credit card limit. 
  • Consolidate Your Debts: If you’re facing multiple outstanding debts, you should consider getting a debt consolidation loan to pay all of them off. And in case of several card balances, you could easily consolidate them with a balance transfer credit card. Whichever method you choose, at least you’ll finally be left with one debt to worry about – which you should then be able to repay at a much lower interest rate than the previous debts. 

Frequently Asked Questions On Bad Credit Loans

Is there a difference between bad credit loans and payday loans?

Yes and no. Payday loans are a form of bad credit loans that grant people with poor credit funds, which are meant to be repaid when they receive their next paycheck. Bad credit loans, on the other hand, refers to all the loan products that are specifically developed for borrowers with poor credit – that includes payday loans, subprime loans, peer-2-peer loans, personal loans, and credit union loans. 

So, while all payday loans are bad credit loans, not all bad credit loans are payday loans. 

Can I get a personal loan with a credit score under 500?

It’s possible – but your options will be very limited. According to Rod Griffin, senior director of public education and advocacy for the credit bureau Experian, 680 is the minimum credit score that most lenders have set for competitively-priced personal loans. 

If you have less than that, you’ll have a much harder time qualifying for a personal loan. 

Are bad credit loans safe?

It depends on your financial situation, credit score, the lender you’re dealing with, the loan repayment terms, and your goals. 

Credit union loans, for instance, can be a moderately safe bad credit loan option for people who can afford them. Payday loans, on the other hand, are exceedingly exploitative – as they charge an average APR of 400%. 

What should I watch out for with bad credit loans?  

If you intend to get a loan with bad credit, you should principally watch out for payday loan scams, as well as predatory lending – in which quasi-regulated lenders try to exploit desperate borrowers by offering quick loans at exorbitant interest rates. 

You should also pay very keen attention to any extra charges and hidden fees attached to the bad credit loans. They could easily pile up over time and substantially increase the cost of the loan. 

In particular, try your best to completely avoid payday loans. They might seem attractive and tempting at first, but they’re a nightmare when it comes to repayment.