Personal Loan for Bad Credit: What You Need to Know

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with affordable rates are usually offered to borrowers with good credit scores. Banks tend to trust them easily since they’ve shown that they can make repayments in full and on time.


Conversely, borrowers with poor credit scores opt for unsecured personal loans. Due to the risk that they pose, they’re  usually charged higher interest rates. Chances are, they end up in a loop of financing thLoans eir loans. 


This is the last thing you want to happen. If you also have bad credit and need immediate financing, here are some things you need to know. 

Understand How Interest Rates Work

Your credit score isn’t only a deciding factor in your loan approval. It also affects the interest rate that a lender will offer you. While most personal loan lenders offer fair credit to borrowers with poor credit ratings, some may offer higher interest rates. Hence, it’s best to compare lenders and opt for the loan with the best offer. 

Have a Sense of Your Credit (For Free)

Suspecting you have a bad rating is one thing, but knowing how bad it is another. Get your most recent credit rating before applying for any loan. You can make use of the free close approximations offered by some lending companies. They usually don’t have limits, so you can inquire as much as you can. 

Aim for a DTI ratio of 35%

Your debt-to-income (DTI) ratio is another factor that lenders assess before they issue a loan. It refers to the total percentage of your salary that goes toward paying back debt. Most lenders plump for borrowers with a DTI ratio of 35% or lower. There should be no more than 35% of your salary that will be used in repaying your debt, including your current loan application and existing loans. 

Know Your Options 

All borrowers with bad credit are seen as “default risk” by most lenders. It’s one of the reasons why it’s hard for these consumers to take out a loan right away. The good thing is, there are other creditors that pay more attention to other factors than your poor credit score. Here are some of them: 


Credit Unions

Credit unions are best for their flexible interest rates, which are usually capped at 18%. They tend to accept riskier borrowers and charge lower fees, as opposed to banks. A low credit score isn’t even a deal-breaker at this financial cooperative since they consider an applicant’s entire financial history, rather than just their credit. It’s just that borrowers have to join the union to apply for a credit union loan. 


Home Equity Loans

With a home equity loan, your interest rate and repayment term are fixed. You can also borrow money for up to 30 years. What’s more, its interest can be tax-deductible, so long as you’ll itemize on your taxes and spend the loan for your home’s improvement. However, some lenders ask for fees for this loan, and you may lose your property if you fail to repay. 


Online Loans

If you’re more confident about your repayment ability than your credit, online loans can be your go-to financing. Whereas banks have to follow regulations, online lenders are more flexible. They focus more on your income, businesses, or assets, rather than your credit. They’re even willing to work with borrowers who have as low as a 550 FICO rating. The only downside of online loans is higher interest rates.


Looking for a cosigner is the best option for borrowers who don’t have a stable income and good credit rating. Cosigners add strength to the loan application of a primary borrower and an extra layer of security on the lender’s side. While cosigners benefit both a primary borrower and a lender, it may put their credit on risk. In general, cosigners are held liable if primary borrowers are unable to pay back their loans. 

Boost Your Credit Score

After finally taking out a bad credit loan, you’ll realize how hard it can be if you don’t have good credit. Hence, you’ll want to improve your credit score and hopefully look for financing way more easily next time. 


First off, understand how your score is generated, and the way to do that is by checking your credit report. Next, improve your payment history, current debt balances, length of credit history, new credit, and credit mix. Your credit score is calculated with these factors. Since other factors are hard to change, like the length of your credit history, try to focus on others that can make a big impact within a short time, like making on-time payment history. 



Regardless of your credit score, you can always find a lender that can provide you with the best offer. Just because your loan application was rejected due to your poor credit doesn’t mean all lenders will automatically turn you down. Don’t lose hope and apply for several lenders until you get the best offer.