Everyone tries to keep a healthy credit score, but sometimes monthly bills, past debts, living expenses, and the like can add up to be just a little too much to stay on ahead of. For those who’ve fallen behind on their bills and felt the sting in their credit score, don’t think your number has completely cut off your access to credit. Those with a bad credit score (generally considered anything below 650) can still find lenders willing to hear out their case, but they should be careful. A lender taking on the risk your credit score indicates usually means you’ll be taking on some risks yourself.
How to Get a Loan With Bad Credit
1. Personal Installment Loan
For those with bad credit, a personal installment lender can come in handy for emergency expenses or taking on high-interest debt. Personal installment loans are common, simply referring to those loans that borrowers pay back on a timeline in several installments.
Many online lenders and local banks have these types of personal loans customized for those with bad credit scores. Some of these loans are secured, meaning a borrower will have to put up collateral to get the loan, or unsecured, meaning no collateral is required. Regardless of whether a loan is secured or unsecured, for the lender to feel comfortable loaning to someone with a bad credit score, they’ll usually charge higher interest rates at the very least and possibly higher fees for things like administrative services.
2. Credit Unions
Credit unions can be a great asset to those with a poor credit score because, unlike banks, their initial evaluation of a borrower isn’t based purely on her or his credit score. They also tend to charge lower interest rates on account of their tax-exempt, not-for-profit status. The key, though, is actually getting into one of these credit unions. Some sort of shared trait is typically required for membership in them, but they tend to be broad and easily met, with traits like location, occupation, family, or education all being common sources of eligibility.
3. Secured Loans
By taking on a secured loan, you have a better chance at attracting wary lenders with less severe interest rates. The catch is that you’ll have to be willing to put up collateral like home equity or personal vehicles for the security of the lender. While this can open the door to more loans with better interest rates, just keep in mind the risk it comes with. Failure to meet payments can mean losing your home, car, or whatever you’ve put up as collateral.
4. Friends and Family
A word of caution, taking out a loan from a friend or family member can change the dynamic of your relationship with that person. However, if you feel comfortable enough or are willing to put the nature of that relationship on the line, getting a loan from someone you have a personal relationship with usually will land you with a far better conditions than a bank seeking to offset your risks would.
Keep in mind though, failing to pay back a personal loan can lead to far more damage in your personal life than any bank loan could. If you’re going to enter into this, try doing it with the utmost seriousness. Consider even drafting up formal documentation, like a contract listing out loan terms, interest rates, and the consequences incurred with failure to repay the loan.
Another less direct way of using your personal connections for a loan would be finding a co-signer. By co-signing on a loan with someone, you’re giving the lender the right to collect debt from either you or your co-signer. This means your co-signer would assume 100% responsibility for repaying the loan if you fail to. With this heavy responsibility in mind, the co-signer’s credit score will weigh heavily into the terms and conditions of the loan.
The interest rate and terms of payment can become much more lenient if you can find a co-signer with a credit score and income that guarantees at least one of you will be able to pay back the loan.
6. Follow Up With Your Lender
While the first thing a lender looks at will be your credit score, it doesn’t necessarily have to be the last thing.
If you have some strong reasons for why you’re a safe bet now, you should let your lenders know. These will have to be pretty rock-solid if you want a bad credit-score to be passed over, but factors like a current high-income that can easily take on new debt or a thin credit-history that doesn’t accurately convey your risk as a borrower may get your lender to reconsider.
7. Payday Loans (As a Last, Last Resort)
Payday loans often look like a lifesaver, offering a short-term loan to cover the gap between paychecks by giving out small amounts of $500 or less that have to be paid back in two to four weeks. The Consumer Financial Protection Bureau, however, has labeled these a “debt trap,” citing the many people who take these loans out that can’t afford to pay back the high fees on the loan at their initial due date. This results in taking on more fees to push back the payment date until eventually the total fees due become larger than the amount of the loan.
Additionally, payday lenders typically won’t report these transactions to credit bureaus. So even if you manage to pay it out without getting caught in a debt trap, it won’t do anything to improve your credit health.
8. Peer-to-Peer Lending
Peer-to-Peer lending has grown since the 2008 recession caused banks to cut off lines of credit to everyone but their most-trusted customers. In this form of lending, individuals borrow directly from other people or groups of people rather than institutions. A borrower simply needs to post the loan they need and what it’s for on a peer-to-peer website and wait for a response.
While you still report your credit score for these loans, because individuals rather than financial institutions are evaluating your risk, you have a greater chance of convincing people to weigh factors other than your credit score to determine the loan’s risk.
9. Rebuild Your Credit Score
The most straightforward way to get a loan with bad credit: improve your credit. Paying your bills on time, getting rid of debt, keeping credit balances low–all this will help get your credit score back up with time. Of course, not everyone has the time to wait for taking out a loan, but if you can, the least-risky way to get a secure, reasonably-priced loan is to rehabilitate your credit score.
Pros and Cons of a Bad Credit Loan
It’s Fast: Convenience comes as a prime asset included in loans for those with bad credit. Rather than having to wait the time it could take to regain a credit score attractive to lenders, someone with bad credit can find outside channels to get the money they need in as little time as a single business day.
Improves Your Credit Score: By taking on these bad credit loans, you can even set yourself up for more mainstream lenders down the line. This all depends on whether the lender you choose reports to a credit bureau, but if so, paying back bad-credit loans now can mean access to a greater variety of loans with a greater variety of terms and conditions in the future.
Plenty of Lenders: With the variety of peer-to-peer lenders out there, you should have a good range of options to choose from. With patience and some savvy, finding interest rates and fees that work for you could be within reach.
High Interest Rates and Collateral: The main issue with bad credit loans is that lenders will typically charge high interest rates to insulate themselves from the risk of lending. For even more protection, some will include collateral as part of the deal. In this case, not only has the interest you have to meet been raised but the consequences of missing it could be increased to losing your jewelry, car, or even home.
Bad Lenders: Many predatory lenders lie in wait for someone with a bad credit score willing to take a few risks for quick cash. Be wary of the interest rate and fees attached to bad-credit loans, especially with secured loans, where the collateral involved can very often outweigh the value of your loan many times over.
Fees and Penalties: The devil is in the details. Know what you’re agreeing to. Watch for hidden fees. This is especially the case with payday loans, which essentially bank on a borrower’s inability to pay back all of the fees attached to their short-term loan and then get caught in a cycle of incurring more debt to push back their date of repayment.
It’s never too late – or too early – to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet’s Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com.