Banking

Applying for a personal loan with poor credit? Here’s what you should know

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When it comes to paying for some of life’s biggest expenses — a home renovation, a big medical bill, an emergency, a wedding or even a funeral — it can sometimes be easy to find yourself short on the cash needed to cover these costs. And if your savings don’t stack up to the amount of money you’ll need to cover such expenses, you may need to find a way to cover the difference.

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

When taking on any form of debt, it’s generally ideal to apply with good or excellent credit in order to score the best loan terms and conditions. But if you find yourself applying for a personal loan with poor credit, there are still options for you — you’ll just need to keep a few things in mind before you begin the application process.

Can you get approved for a personal loan with poor credit?

Your credit history and credit scores are important because they provide lenders with clues to determine whether they think you’ll be a responsible borrower who will pay back the loan on time and in full. Keeping your credit score healthy can really be an asset when you apply for loans for big milestone purchases like buying a home or getting a car.

While it is possible to get approved for a personal loan if you have poor credit, the final decision, for the most part, rests with the lender you apply to. Some lenders will tell you upfront what their minimum requirements are. Payoff Personal Loan, for example, requires a FICO score of 640 (which is within the “fair” range) or higher for approval.

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

Upstart Personal Loans

  • Annual Percentage Rate (APR)

  • Loan purpose

    Debt consolidation, credit card refinancing, wedding, moving or medical

  • Loan amounts

  • Terms

  • Credit needed

    FICO or Vantage score of 600 (but will accept applicants whose credit history is so insufficient they don’t have a credit score)

  • Origination fee

    0% to 8% of the target amount

  • Early payoff penalty

  • Late fee

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

OneMain Financial Personal Loans

  • Annual Percentage Rate (APR)

  • Loan purpose

    Debt consolidation, major expenses, emergency costs

  • Loan amounts

  • Terms

  • Credit needed

  • Origination fee

    Flat fee starting at $25 to $onem00 or percentage ranging from 1% to 10% (depends on your state)

  • Early payoff penalty

  • Late fee

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

What interest rates do you qualify for?

When applying for any form of credit, the better your credit, the more likely you are to get favorable terms — like lower interest rates. This is also true of personal loans. If you have poor credit, you are likely to receive a higher interest rate on your loan. This means you’ll spend more money paying back the loan.

Of course, the exact interest rate you ultimately receive will depend on the lender’s range, but you can compare personal loans before you submit your application. This way, you can be sure you’re getting the loan with the best terms for you.

Compare offers to find the best loan

When searching 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’ll just need to answer a handful of questions in order for Even Financial to determine the top offers for you. The service is free, secure and does not affect your credit score.

Editorial note: The tool is provided and powered by Even Financial, a search and comparison engine that matches you with third-party lenders. Any information you provide is given directly to Even Financial. Select does not have access to any data you provide. Select may receive an affiliate commission from partner offers in the Even Financial tool. The commission does not influence the selection in 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 intro period since you can fund your purchase and make payments toward the balance without being charged any interest for a specified amount of time. The Citi Simplicity® Card, for example, gives you a 0% period of 12 months (after, 14.74% to 24.74% variable APR). This option is only optimal if the credit limit is sufficient for covering your expense, and you’re certain that you can repay the entire balance before the 0% APR period is over.

How long will you have to repay the loan?

The amount of time you have to repay a personal loan is often referred to as the loan’s “term.” Much like interest rates and credit score requirements, loan terms can vary from lender to lender. The good news is that this information is generally offered upfront so you can immediately consider if the repayment timeline works for you.

Loan terms can be as short as six months and as long as seven years. When you take on a loan that gives you a longer amount of time to repay the balance, you’ll likely have smaller monthly payments — just be aware, though, that a longer term means you’ll end up paying more in interest over time. Shorter terms, on the other hand, could result in a higher monthly payment but less interest accrued over the duration of the loan.

How will a personal loan impact your credit score?

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

Much like with any other loan, mortgage or credit card application, applying for a personal loan can cause a slight dip in your credit score. This is because lenders will have to run a hard inquiry on your credit, and every time a hard inquiry is pulled, it shows up on your credit report and your score drops a bit. Keep in mind, though, that this dip is only temporary and continuing with good credit habits can increase your score again over time.

This being said, though, it’s worth it to be as strategic as possible about when you decide to apply for a personal loan. Applying for a personal loan soon after applying for a new credit card could cause an even bigger drop in your credit score since a hard inquiry would be run for both applications.

On the plus side, taking out a personal loan can in fact help your credit score as you establish a track record for making on-time payments. This is especially true if you’ve 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, making up 35% of it. Completing your monthly payments on time and in full can provide clues to a lender that you are very likely to pay back any money you borrow in the future. As a result of making consistent on-time payments, your credit score is likely to increase.

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 it makes up 10% of your credit score.

That’s not to say that you should go out of your way to take on different kinds of debt, but having a variety of accounts can show lenders that you have the ability to manage multiple types of credit. This can make you seem more like a creditworthy borrower (just make sure you’re not taking on 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 a large, necessary expense and better your credit score as you make on-time payments. If you’re applying for a personal loan with poor credit, you’ll just need to keep the above things in mind so you don’t feel blindsided during the process.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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