Having bad credit can be stressful, especially when unexpected expenses come up and you need to take out a new loan. Many traditional lenders will give preferential interest rates to those with the best credit scores, while those with lower or poor credit scores may not even qualify for loans.
Even consumers who currently have a good credit score can suddenly find themselves taking a big hit thanks to the spread of the COVID-19 virus. Government mandated shutdowns and quarantines have led to the highest unemployment rate in the U.S. since 1934, with over 20% of the workforce unemployed as of the week ending April 18. This percentage represents over 26.5 million workers filing for unemployment claims within the last five weeks alone. Add in the over 7 million people who had already filed for unemployment before March 13, and there is a total of over 33 million unemployed in the country, with no immediate end to the jobs loss in sight as the pandemic continues to cause businesses to limit their activity or close altogether. Those who don’t have a large enough emergency fund can quickly find themselves running out of options.
As people find themselves losing their monthly income, falling behind on bills, and missing payments, credit scores can take a big hit. According to Bruce McClary, Vice President of Communications for the National Foundation for Credit Counseling (NFCC), some credit cards are already lowering customers’ credit limits. “If there’s a balance on the credit card when the credit limit is lowered, it could harm a person’s credit score because of the change in their debt ratio,” he points out.
But there’s still hope, with many lenders willing to take a chance on someone with a less-than-desirable credit score. But they’re not in it just to give you a second chance. Many of them still charge high fees, and in some instances can prey on people in unfavorable financial circumstances at the cost of their credit. We’ve sorted through the myriad of online lenders to find those that offer the most favorable terms to people who have bad credit, as judged by their APR ranges, loan amounts, term lengths, payoff features, and minimum credit score requirements. By making timely payments, you can use a personal loan to improve your credit score.
Important Things To Know About Bad Credit Loans
- You will typically be offered higher interest rates, up to 36% APR, but they should be far lower than those of payday loans (also known as guaranteed loans, with APRs which can go up to 400%)
- Getting approved for a bad credit loan is a good opportunity to improve your credit score through timely payments
- Lenders use soft credit pulls to see if you prequalify for a loan—which won’t impact your score
- If you have bad credit you’ll be targeted by predatory lenders, meaning loans with absurdly high APRs and no credit check. Try to avoid car title and payday loans — also known as cash advances — at all costs. These are the most popular types of predatory loans targeting consumers with subpar credit.
- Consider how taking out a new loan can further impact your credit. Before you go through with your decision to borrow, expend all other options like borrowing from friends and family or, if you’re an entrepreneur, an interest-free loan from a platform like Kiva.org. If you do go through with taking out a loan with compromised credit, your greatest concern should be making payments on time so you don’t aggravate your credit situation.
- Car title loans: small, short term loan with higher than average rates which uses the title of your car as collateral. They range from $100-$5,550, according to the FTC.
- Payday (cash advance, guaranteed) loans: short term, high interest loans with no credit check for immediate cash. Advertised in the radio, television, and even the mall as “GET CASH FAST.”
- Soft credit pull: also called a soft inquiry, looks into your credit history without impacting your credit score. Creditors will initially use this to check if you are eligible for their loans and grant pre-approval.
- Hard credit pull: a credit inquiry that will deduct points from your credit score. This is done when the bank is running an official approval for a loan.
What Is Bad Credit Exactly?
Think of your FICO credit score as a numeric representation— in the range of 300 to 850— of your ability to pay your bills on time. Based on the FICO scale, a very bad credit score is in the 300-579 range and a fair credit score is in the 580-669 range. According to McClary, options for people with low credit scores can be limited, but starter loans can be a feasible option if you’re looking to rebuild your credit.
“Everybody has to start somewhere so there is a time, a place and a set of circumstances where using a lender who offers starter loans can be helpful to start the process of building a credit score,” he says. “This will then make more affordable lines of credit and loans possible for somebody in that situation as their credit score increases.”
And according to Experian, rehabilitating your score is achieved through concerted steps such as paying your bills on time, checking what your actual credit score is, getting a secured credit card, applying for a short term loan or a credit-building loan (where you make payments to yourself while building credit.)
Bad Credit Loan Reviews
When deciding which lender and loan product to go for, make sure you understand the overall cost of the loan you’re being offered to ensure you can comfortably afford it. Pay close attention to rates, terms, and fees, and use a personal loan calculator to estimate your monthly payments before you make a decision.
OneMain Financial Review
Rates: 18.00%-35.99% APR with an origination fee that can either be a flat rate ($30-$150) or a percentage of the loan amount (between 1% to 5%).
- Term lengths: 24, 36, 48, or 60 months
- Loan amounts: $1,500-$20,000
OneMain’s COVID-19 Response: OneMain is waiving the late fees for loan payments due between March 15 and April 30. They are also not reporting any new payment delinquencies to the credit bureaus for payments due between March 1 and April 30. Finally, for customers who can’t make their loan payments, the lender is working on a case by case basis to find a solution. Customers in this latter situation should contact their local branch by phone for assistance.
Offering both secured and unsecured loans, OneMain Financial differentiates itself from other online lenders by taking into account other factors besides your credit score as criteria to approve your loan application. Your financial history, credit history, income, expenses, and assets are equally important for this lender. If you have a poor credit score or low income, you might not be eligible for unsecured loans from most banks, but OneMain financial offers prospective borrowers another option: secured loans.
Secured loans are backed by your own assets, which serve as collateral for the bank. That means you pledge a car, motorcycle, camper, RV, savings account, or a certificate of deposit in order to get a lower rate. In the case that you default on the loan, the lender will repossess the latter to counter for the loss.
You will need to purchase extra insurance to cover the collateral against damage, such as collision and comprehensive insurance on a vehicle (if you don’t already have it), and you’ll have to visit a local bank branch to provide the necessary documentation to corroborate your identity.
Other lenders offering secured loans include Wells Fargo, PNC Bank, TD Bank, Fifth Third Bank, and BMO Harris.
Rates: 9.95%-35.99% APR with an administration fee of up to 4.75%
- Term lengths: 24-60 months
- Loan amounts: $2,000-$35,000
Avant’s COVID-19 Response: Avant is working with its customers on an individual basis. Those who need special assistance with their loans are encouraged to call the lender at 1-800-712-5407.
Avant bills itself as an alternative to payday lenders for average Americans; the average customer has a credit score between 600 and 700, but Avant will accept scores as low as 580.
Although Avant does offer loans for as low as 9.95% APR, with bad credit you’ll probably qualify for a higher APR; up to 35.99% with an added 4.75% administration fee. Their loans are fixed-rate, meaning the amount owed each month won’t change. Avant stands out because of its flexible payment options, which include automatic withdrawals, ACH payments, digital checks, credit or debit cards, personal checks, cashier’s checks or money orders. The lender does charge an additional fee depending on the payment method you choose. Also, they have customer service representatives available seven days a week by phone, email, and chat.
One thing to note, however, is that Avant doesn’t serve people living in Colorado, Iowa, Vermont, or West Virginia.
If you’re approved for a loan, you could receive the money in your bank account as soon as the day after you apply, depending on your bank’s ACH transfer policies.
Rates: 5.32%-36% APR
- Term lengths: 24-60 months
- Loan amounts: $1,000-$50,000
LendingTree’s COVID-19 Response: As a lender marketplace, LendingTree provides educational resources on how to manage your finances during this time. For specific assistance with payments and forbearance, customers should contact their lender directly.
LendingTree is a bit different from the other names on our list. It’s not a lender in itself, but rather an online lending marketplace to be used as a comparison tool. This means it doesn’t actually issue loans but instead connects you with partners that do. By simply providing your personal details, you can see the rates potential lenders would be willing to offer.
Marketplace lending could be a convenient option for people that aren’t sure what they’re looking for and want to shop around for options. You can get quotes from different lenders by completing a single form, and browse relevant articles and useful tools to help you make better-informed decisions.
LendingTree partners with companies like OnDeck, Prosper, Marcus by Goldman Sachs, and all of the lenders on this list, so it can be a good option if you’re not sure which company is offering the best rates and terms for your situation. Additionally, LendingTree offers debt relief programs and online resources to help you rebuild your credit history and score.
Rates: 9.99%-35.99% APR with a 0% to 6% origination fee, which you can choose to deduct from the loan amount.
- Term lengths: 2-5 years
- Loan amounts: $2,000-$25,000
LendingPoint’s COVID-19 response: LendingPoint is working individually with its customers, offering a number of mitigation options including multiple payment deferment. LendingPoint customers should contact the lender directly if they need assistance.
LendingPoint is an alternative online lender offering personal loans for up to $25,000 with lower interest payments that can be conveniently used to consolidate existing high-interest debt. Debt consolidation happens when you roll all your high-interest debt into one lower interest payment.
These loans can be used to pay off existing debt due to its refinancing option. Afterwards, you pay off the fixed-rate installment loan in a period of 24 to 48 months.
With the refinancing option—borrowers that have made six or more timely payments— qualify for personal loan refinancing. This means lower rates, more capital, and a lower monthly payment.
To qualify for a personal installment loan you must have a minimum credit score of 585 and a minimum $25,000 yearly salary. What sets LendingPoint apart from other fintech lenders is they consider alternative applicant data to review your loan request. They take into account your debt to income ratio, credit history and credit card debt, verifiable income, current delinquencies and bankruptcies, open tax liens, employment status and length of time worked at your current employment. And if you’re approved you could qualify for same-day funding. They also offer prepayment flexibility by allowing you to pay off your monthly balance up to 5 days in advance.
LendingPoint is not available for West Virginia residents.
Rates: 7.99%-35.97% APR with a 2.9% to 8% origination fee, which is deducted from the loan proceeds
- Term lengths: 3-5 years
- Loan amounts: $1,000-$35,000
Upgrades’ COVID 19-Response: The online lender has launched a program for customers who have been furloughed or lost their jobs entirely, granting forbearance of payments for the next three months.
Upgrade offers unsecured loans, meaning they’re not backed by any collateral. Instead they’re based on your creditworthiness.
If you’re looking for tools to rebuild your credit, you might want to consider this lender. They take into consideration applicants with bad credit, evaluating their free cash flow and current debt to income ratio. While you may not have a perfect credit score, having a strong cash flow is a significant plus when applying.
Upgrade features an initial soft credit pull which won’t impact your credit score. If you decide to apply, Upgrade uses the FICO 9 credit score to evaluate potential borrowers.
Although they don’t have a minimum annual income requirement, most applicants have annual salaries of $30,000 or more. As for free cash flow at the end of the month, their minimum requirement is $800 after all outstanding bills are paid. If your credit score is under their 600 minimum requirement, Upgrade accepts cosigners.
Upgrade is not available for service in Iowa, Maryland, Vermont, and West Virginia.
How We Chose The Best Bad Credit Lenders
The truth is bad credit is not a final destination. Consumers can strive to move out of a difficult financial situation through countless online resources available to help rebuild credit. These five companies were chosen out of 18 online lenders that specialize in lending to consumers with bad credit. Here’s what we looked for when putting this list together:
Loan Details and Odds of Approval
The first thing we looked at was whether you’re likely to qualify at all with bad credit. Not all lenders will be willing to work with you if you have a credit score under 580. Of course, every lender is different and each one takes into account other considerations, such as your income, employment status and debt to income ratio. Many lenders have set risk thresholds for these other criteria, so it’s possible you could still be denied based on other factors, such as not having enough free cash flow at the end of the month.
We considered the loan amounts, the time to pay it off, and their APR ranges. This is an easy way to compare the total cost of loans because the APR incorporates both the interest rate and any fees that come with the loan. These are, most notably, origination fees. You likely won’t qualify for the best rates that lenders offer if you have bad credit, although they’re still much better than those a typical payday lender can offer.
Reporting to Credit Bureaus
The lenders on our list will report your payments to credit bureaus, as opposed to payday lenders. Of course, this can be a double-edged sword. If you make late payments you could harm your credit score. But as long as you make your payments on time (and even pay off your loan early), it’s likely you’ll see an increase in your credit score, making it easier to qualify for better loans at more favorable interest rates the next time you need cash.
Learn to Prioritize Your Bills
Once you’ve received your loan funds, you can start paying off bills. If you took the loan out to pay a specific bill, like a medical bill, credit card debt consolidation, or emergency home repair, you know exactly where the money is going.
But what if you had to take out a loan because you’re unemployed and need to cover all your living expenses for a period of time? Some choices will be obvious, while others may not be so clear cut. Or you may feel so worried and overwhelmed about your finances that making a choice about what bills to pay first can become difficult. Before you make any decisions, your first step should be to contact your creditors. “Be ready to quickly communicate with everyone you owe to make payment deferment arrangements or activate other hardship relief programs,” says McClary. “That will help keep accounts from falling behind while allowing you to use your money for other immediate priorities like health and safety.”
If creditors are calling and pressuring you to pay some bills over others, it can be easy to make the wrong choice. Learning to prioritize your financial obligations can help take some of the stress out of deciding what to pay on time and what to pay late or not pay at all. It’ll help if you write down a list of all your bills, then make a note of the consequences of paying each bill late along with the consequences of not paying the bill at all. Then decide what order you need to pay these bills and follow your plan.
The Consumer Financial Protection Bureau offers a number of different resources to help you manage your debt, including a tool to help you prioritize bills. Using this tool can be an excellent start to organizing your finances and setting a plan to get back on track.
How the CARES Act Can Help Protect Your Credit Score
Your first step in protecting your credit score is to get a copy of your credit report. Under normal circumstances you are entitled to one free credit report per year from each one of the three reporting bureaus – Experian, Equifax and Transunion. However, Experian recently announced that from now until April 20, 2021, you will be able to request a weekly free credit report from any one of the three credit bureaus through AnnualCreditReport.com, without negatively affecting your credit score.
Once you have your report, check it for accuracy. If you do find mistakes, you can contact the credit bureaus to dispute the incorrect information. Getting wrong information off your report will increase your score and help you qualify for a better interest rate if you need to take out a loan.
The Coronavirus Aid, Relief, and Economic Security Act places specific requirements on companies providing information about your accounts to credit reporting agencies in an effort to reduce the damage done to your score.
If you are no longer able to pay all of your monthly obligations, your first step is to contact your lender and reach an agreement, called an accommodation, in which you arrange to defer a payment, make a partial payment, forbear a delinquency, modify a loan or any other type of relief you agreed upon. Once you have this accommodation and, as long as you meet the terms of the agreement you entered into, lenders need to follow these rules:
- If your account is current and you’ve made an agreement to skip or modify a payment, or any other type of accommodation, then the lender must report your loan or account as being current to the credit bureaus;
- If your account is already delinquent and you make an accommodation, then your account will maintain that status until you bring the account current;
- If your account is already delinquent, you make an accommodation, and you bring the account current, then the lender must report that your are current.
These provisions only apply to accommodations reached between January 31, 2020 and the later of these two dates: 120 days after March 27 or 120 days after the national emergency related to COVID-19 ends.
For homeowners with federally backed mortgages, you can request a 180 day forbearance from your mortgage lender, which means you can defer or reduce your payments for a period of time (it doesn’t change what you owe, it just defers it). If you still can’t make you mortgage payments after the first 180 days, you can request a second 180 day forbearance.
You can also take advantage of the moratorium the CARES Act provides, which specifically prohibits any lender or mortgage servicer from beginning or finalizing any foreclosure proceedings against you for 60 days after March 18, 2020.
For student loans owned by the Federal government, the CARES Act automatically suspended loan principal and interest payments until September 30, 2020, with the suspended payments counting towards any loan forgiveness program the borrower may be otherwise qualified for. If you can still make the loan payments, however, your payments will go directly towards the principal of the loan, allowing you to pay the debt off faster and save on interest.
If your credit cards and mortgage or student loans are with private lenders, you should contact them directly and explain your financial situation and how you’ve been impacted by COVID-19. Many private lenders, credit cards, even insurance companies are offering mitigation options that can help you weather this storm with minimal impact on your credit score.
If you’re having a hard time negotiating on your own, the NFCC has credit counselors who, free of charge, can help you come to an agreement with your creditors, including negotiating a postponement of credit card payments for between 30-90 days and forbearance on mortgage payments. If possible, use loans as a last resort. “Don’t borrow money until you are sure you have exhausted all other options, which can be discussed during a credit counseling session,” McClary advises.
Keep an Eye Out For Scams
While the spread of the Coronavirus has engendered a number of legitimate charitable efforts and services to help those in need, it has unfortunately also given rise to a number of scams that try to separate you from your hard-earned money. Beware of these scams, as pouring money into a false solution will only make your situation worse.
Some of the more common scams related to COVID-19 include communications, via phone, text or email, that in order to receive the $1,200 stimulus check you need to provide your personal information or pay a fee. If you paid taxes last year and meet the requirements established by the CARES Act, you will receive this payment automatically. Government agencies do not call or email, much less text, to ask for your personal information. They also don’t charge a fee to process legally mandated payments.
You should also beware of unsolicited employment offers. These can be scams designed to get access to personal information like your social security number or bank account numbers, which can lead to identity theft. McClary advises you should only trust information that comes from a verifiable source and avoid clicking on links in unsolicited emails or providing personal information to anyone by phone.
Things to Consider About Loans
If you do need to take out a loan to cover expenses know what options you have and how applying for a loan can affect your credit. Compare lenders and what they offer, in terms of interest rates and payment options, to find the loan that you feel you can comfortably pay back.
Secured or Unsecured Loan?
With some lenders, such as OneMain Financial, you may get the option to choose either a secured or an unsecured loan. The difference between them is that with a secured loan, you pledge some sort of collateral in order to get lower interest rates. With personal loan lenders, collateral is usually a vehicle, although you may be able to use the balance of a savings account or CD as collateral if you get a loan from a bank or credit union.
The upshot to this is that you’ll qualify for lower rates, because the lender is taking on less risk. If you’re very confident that you’ll be able to pay back the loan, and if the loss of the collateral won’t be financially devastating, it can make a lot of sense to choose a secured loan.
The downside is that if you default on the loan, the lender can take back your collateral and sell it to pay off part of your outstanding balance. This can be disastrous for most people, especially if you used your car as collateral and rely on it to get to work. In that case, getting an unsecured loan may be the best option because, while it can still cause a lot of problems, at least you can still get to work if you default.
Soft Credit Check vs. Hard Credit Check
When you’re shopping around for a loan and checking your rates with lenders, it’s a good idea to double-check if they’re doing a soft credit pull. This means that it won’t be recorded on your credit report, which can cause your score to drop even more.
Your lender will do a hard credit check once you complete and submit your loan application. This credit pull will be reported on your credit report, causing your score to drop. Avoid actively applying for multiple loans at once. When comparing rates from different lenders, and before actually requesting a quote, make sure the lender is doing a soft credit pull.
Use a Bad Credit Loan to Your Advantage
Although taking out a loan when you have bad credit isn’t ideal, it’s also true that it can be a good way to build your credit back up. That’s because a full 30% of your credit score is determined by your payment history.
Each month that you make a payment towards your loan — or, conversely, miss a payment — that information will be sent to the credit bureaus. The more on-time payments you have on your credit report, the better. By the time you pay off your loan, you may even see a significant boost in your credit score as long as you don’t miss any payments.
Build Up Your Savings
Always remember: the best loan is actually no loan at all. Loans are great for helping you afford things you need today when your income isn’t coming until later. Just about everyone will go through something like this at some time in their life.
But whatever it is you need — a car, home repairs, medical treatment, or getting through a period of unemployment — there’s a good chance you can save up for it in advance by making some tweaks to your budget. Yes, this means you will need to learn how to manage, put away, and even look for alternate sources of income — but the results are worth it.
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