Personal Loans for Bad Credit: Options and How to Get Approved

What credit score is considered bad for personal loans?

For personal loans, a credit score below 580 is generally considered bad credit. Lenders use this threshold to categorize applicants, and those with scores below it are often offered subprime loans, which carry higher interest rates and fees than prime loans.

Understanding where you stand is the first step. Your score will influence which lenders consider you and the rates you might receive, but it does not automatically rule you out. Many lenders specialize in bad credit borrowers, and some even consider applicants with no minimum score.

• A score below 580 is typically labeled 'bad credit'.
• Scores from 580 to 669 are often considered 'fair' or 'near-prime'.
• Subprime loans are designed for borrowers with poor credit, but they come with higher costs and should be seen as a short-term solution, refinancing when your credit improves.

Sources: Achieve, County of Los Angeles Department of Consumer and Business Affairs

Types of lenders that offer bad credit personal loans

Several types of lenders serve bad credit borrowers. Traditional banks may be harder to qualify with, but credit unions, online lenders, and specialized finance companies are often more flexible. Credit unions, for example, may offer payday alternative loans (PALs) that are based on income rather than credit score and carry friendlier terms.

• Credit unions: Member-owned, may offer PALs with lower rates and help you build credit.
• Online lenders: Often use alternative data, such as education and employment, to evaluate applicants.
• Finance companies: May have no minimum credit score requirement but often charge higher fees and interest rates.

Sources: Achieve, Bankrate, LendingTree, The Yukon Project

Secured vs. unsecured loans for bad credit

With bad credit, you can choose between secured and unsecured personal loans. Unsecured loans do not require collateral, but they may have stricter credit requirements or higher interest rates. Secured loans require an asset—such as a car—as collateral. Securing a loan can lower the lender's risk, potentially offering lower rates, but you risk losing the asset if you default. OneMain Financial, for instance, offers secured loan options and has no minimum credit score requirement, but it may charge origination fees and other costs.

• Secured loans often have lower interest rates because the collateral reduces risk.
• Unsecured loans are based on your creditworthiness alone and may have higher rates for bad credit borrowers.
• If your credit improves, you might refinance a subprime loan into a prime loan with better terms.

Sources: County of Los Angeles Department of Consumer and Business Affairs, LendingTree, The Yukon Project

How to avoid predatory lenders

Bad credit borrowers are prime targets for predatory lending. Predatory lenders use high-pressure sales tactics and steer borrowers into high-interest loans with junk fees, even if they qualify for better loans. Recognizing warning signs can protect you from costly traps.

A common red flag is a 'guaranteed approval' offer. Legitimate lenders always review your financial information. Other signs include interest rates that seem too good to be true, missing disclosures, and pressuring you to act immediately. Payday loans are particularly dangerous; they often have APRs exceeding 300% and can trap borrowers in a cycle of debt.

• Avoid lenders that guarantee approval without checking your financial information.
• Be wary of high-pressure sales tactics or lenders that don't explain fees clearly.
• Payday and auto title loans are high-cost, short-term products that can lead to a debt cycle.
• Check the lender's reputation and read all terms before signing.

Sources: County of Los Angeles Department of Consumer and Business Affairs, Bankrate, NerdWallet, Credit.org

Steps to improve your chances of approval

While having bad credit reduces your options, you can take steps to improve your approval odds. Start by checking your credit reports for errors—disputing mistakes could raise your score. Also, paying bills on time, reducing existing debt, and considering a co-signer are strategies that can strengthen your application.

Another important tactic is to limit credit inquiries. When you apply for multiple loans in a short period, the hard pulls can ding your credit. However, if you rate shop within a 14-day window, credit scoring models typically treat it as one inquiry, minimizing the impact.

• Check and dispute errors on your credit reports.
• Pay down existing debt to lower your debt-to-income ratio.
• Consider adding a co-signer with better credit.
• Limit applications and rate shop within a 14-day period to minimize credit score impact.

Sources: Experian, NerdWallet

Alternatives to personal loans if you have bad credit

If you need funds but avoid high-cost loans, consider alternatives. Credit union payday alternative loans (PALs) are designed for consumers with limited credit and offer friendlier terms than payday loans. Some lenders also offer secured loans using collateral, which can be cheaper. You might also explore borrowing from family or friends, or negotiating payment plans with creditors—though these options aren't always available or suitable.

• Credit union PALs: Based on income, not credit, with lower rates.
• Secured loans from some lenders: Use collateral to get better terms.
• Peer-to-peer loans or informal family loans: Flexible, but be careful about personal relationships.
• Credit counseling agencies: Can help you manage debt and budget without new loans.

Sources: Achieve, Bankrate, First Alliance Credit Union, Credit.org

Side-by-side category and decision-criteria matrix

When comparing bad credit loan offers, focus on key criteria: APR (which includes fees), loan amount, term, origination fee, and credit requirements. Use a table like the one below to evaluate lenders side by side. Here's an example of how two lenders might compare based on public information.

• For each potential loan, calculate the total cost, including origination fees, not just the APR.
• Check if the loan has prepayment penalties; some subprime loans may charge them.
• Consider the loan term: longer terms mean lower monthly payments but more interest over time.
• Before applying, verify the lender's current terms and rates.

Sources: LendingTree, The Yukon Project