You can get a loan with bad credit — but beware of these risks
Written by
Writer, Fox Money
Kathryn Pomroy is a personal finance writer with over seven years of experience. Her work has been featured by GOBankingRates, MSN, Kiplinger, and Fox Business.
Updated October 16, 2024, 2:46 AM EDT
Bad credit can happen to anyone. One day you’re on the top of the FICO Score, and the next day you’ve landed at the bottom with a score below 669. Maybe you lost your job or hit a rough patch. Now, you owe large amounts of money, you’re making late payments or paying nothing at all.
Can you get a loan with bad credit?
While difficult, you can get a loan with bad credit. But it comes with risks. Lenders want to feel confident you’ll repay your loan, so they may be a bit reluctant to approve your application if you have bad credit.
Several online lenders are willing to work with people with fair to bad credit. The application process is relatively straightforward, but you'll likely pay a higher interest rate, your term may not be as favorable, and the loan amount may be for less than you need. But applying through your bank or credit union may make the process much more challenging, and you may not get approved at all.
HOW TO PREQUALIFY FOR A PERSONAL LOAN
What are the risks of taking out a loan with bad credit?
If you have bad credit, know the risks before you apply for a personal loan.
1. Higher interest rates
If you are approved for a loan, you’ll pay higher interest rates and more interest over time. That’s because having a low credit score indicates to lenders that you’re a riskier borrower than if you had a higher credit score. To offset the risk, lenders charge higher rates.
And, if you make late payments or default on your loan, your credit score will sink even further, making it very unlikely you’ll qualify for a loan in the future.
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2. Calls from creditors
If you’re unable to make the payments on your personal, car, or mortgage loan, your lender will reach out first to recover its money. If that doesn't work, a debt collector will likely contact you multiple times.
With that in mind, if your loan is in default, you are protected under the law via the Fair Debt Collection Practices Act (FDCPA). It spells out what credit bureaus and debt collectors can and cannot do, such as making threatening calls, using obscene language, or harassing you.
HOW TO GET APPROVED FOR A PERSONAL LOAN
3. You may need a co-signer
If you need a loan but you have bad credit, you may consider applying with a co-signer. If somebody you know guarantees the loan, basically promising to repay the debt for you if you can’t, it can improve your chances of getting qualified.
A co-signer with good to excellent credit may even get you better rates and terms on your loan. And, as you repay your loan, your credit score will improve. But if you default on your loan, your co-signer is on the hook for your payments.
You can find a list of lenders that offer personal loans with cosigners here.
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How to build your credit?
There are other consequences of having bad credit—you may not be able to rent an apartment, or your security deposit may be double what it would be if you had good credit. Lenders may charge you higher insurance rates, or you may find it difficult to get a job. Fortunately, there are ways to boost your credit score.
1. Going forward, pay all of your bills on time.
2. Get a secured credit card. Backed by an upfront cash deposit, you use a secured credit card much like a standard credit card. You can charge up to the maximum credit limit, which is usually your deposit amount. Secured credit cards can still be a good option if you're looking to boost your credit score and history. Here are Credible's secured credit card suggestions that offer a "worry-free way to build your credit."
3. Apply for a secured loan. A secured loan is backed by collateral or personal assets. Make your loan payments, and your credit will improve over time. Miss payments and your credit score suffers.
4. Apply for a credit-builder loan. When you apply, and you’re approved, you deposit the amount of the loan into a savings account. Make your payments on time every month and once the loan is paid off, you get your deposit back.
5. Become an authorized user. Ask a friend or family member who has good credit if you can become an authorized user on their credit card. But neglect to make your payments, and your friend or relative is responsible for any debt you’ve racked up.