Everyone needs extra money from time to time, and there is no exception to this fact when you have bad credit. Unfortunately, your options become limited with a low credit score, making it difficult to get a loan even in the case of a financial emergency.
Whether you’re wondering how to get a car loan with bad credit, how to pay hospital bills, or even how to get a mortgage with bad credit, we’ll take you step-by-step on the best way to get your finances back on track. Not only will you find out how improving your credit can save you money on your next loan, you’ll also learn steps you can start taking today to increase your credit score.
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How does bad credit affect your ability to get a loan?
Before you start looking for a loan, it’s important to get an accurate understanding of your credit score. Most lenders use FICO scores, which range from a low of 300 to a high of 850. A “bad” credit score is typically defined as 300-629.
If you want to know your exact number, you’ll have to purchase the information from FICO. But if you simply want to see what kind of derogatory items are you on your credit report (and potentially fix them), you can get a free copy of each of your three credit reports. Take advantage of this free service every 12 months to check your reports for accuracy even if you’re not actively looking for a loan.
Once you’ve established whether or not your credit is low, find out the exact impact bad credit can have on your life. Bad credit affects you both financially and emotionally, but the most expensive effect is the type of loan you’re able to get.
When applying for a loan, the lender will charge you higher interest rates for a lower credit score. These costs can really add up over the life of the loan. Keep reading to find out exactly how much.
Even worse than getting a high interest loan, you may not qualify for a loan at all if your credit score is too low. This may not seem like a huge deal if you just want a loan to remodel your kitchen, but it can really affect your well-being if you have serious financial needs, like car repairs or medical bills. At this point, some people decide to turn to “no credit check” lenders who offer products like payday loans.
Though short-term, these loans have extraordinarily high APRs and often lead people into a cycle of never-ending fees for what started off as just borrowing a few hundred dollars. Luckily, there are many ways to avoid ending up in this situation.
Where can you get a loan with bad credit?
If you do have bad credit, there are some reputable lenders who might be willing to offer you a loan. Just remember, you’re going to be paying a lot of interest on top of the amount you actually borrow. It’s always good to check with a local bank, although they are likely to have stricter lending standards and a slower origination process.
Many online lenders offer quick approval and funding, even with a low credit score. Just be sure to do your research to make sure the company operates a legitimate business. Check its Better Business Bureau rating in addition to reviews from other customers before giving any of your personal information. Avant is a major online lender that only requires a minimum credit score of 580.
OneMain has physical locations in addition to its online presence and actually has no credit score minimum. The company says its average customer has a credit score between 600 and 650. Don’t get too excited, though – your APR could be as high as 35.99%.
If you do decide on getting a loan with bad credit, keep a few things in mind so you don’t damage your score even further. First, limit your number of loan applications. Every time you apply for a loan, the lender makes an inquiry on your credit report, lowering your credit score anywhere between one and five points depending on your individual scenario.
That might not seem like a lot, but it could affect your interest rate if you’re on the border between “bad” and “fair” credit. Plus, many lenders view a large number of inquiries as a risk factor, especially if they’re all made within a short period of time.
Thoroughly research potential lenders in advance and see if they offer a preliminary application that only does a soft inquiry on your credit report rather than a hard one. That way you can compare interest rates without hurting your credit score even more.
How much extra interest should you expect to pay on a loan with bad credit?
Even after getting approved for a loan with bad credit, there’s no getting around the fact that it’s going to be an expensive decision. Just how expensive depends on the terms and conditions of the loan. On top of your interest rate, your lender may also charge an origination fee. Unfortunately, this is a pretty universal concept, so there’s not much you can do to avoid paying it.
The origination fee is usually charged as a percentage of your loan amount, so – just like interest – the more you borrow, the more you pay. You don’t have to come up with the cash upfront; instead, the fee is deducted from your loan.
Make sure you account for this deduction in your loan request. For example, if you need a $20,000 loan and there is a 3% origination fee, be sure to request $20,600 because 3% of $20,000 is $600.
A helpful tool in determining the best interest rate and applicable fees is the loan’s annual percentage rate, or APR. This number helps you compare offers that have different rates and fees to see which is better on an annual basis.
However, APR does not account for the loan term, which is the amount of time it will take you to pay off your loan. A loan may have an extremely low interest rate, but if it takes 10 years to pay off, you might actually end up paying a lot more in interest.
There are clearly a lot of variables when figuring out how much interest you’ll be paying on a loan with bad credit. Let’s look at an example to help put these facts and numbers into context.
Assume you want to figure out how to get a new car loan with bad credit. By using an online calculator, you can determine if making the purchase now is worth paying the extra interest compared to fixing your credit score first.
According to Experian, the average length of a new car loan is 67 months and the average loan amount is $28,711. For simplicity’s sake, let’s say you get a 60-month (five year) loan for $28,000. Here is how MyFICO estimates different credit scores to stack up in the same scenario.
The differences in the amount of interest paid over the life of the loan is jaw-dropping: a person in the lowest range pays nearly $9,500 more than someone in the highest range. So you wouldn’t be paying $28,000 for that new car, you’d actually end up paying almost $37,500. Bumping your score up just 31 points from a 589 to a 620 could save over $4,600 in this scenario. Think of how many paychecks that adds up to before you decide on getting a loan with a bad credit score.
Should you fix your credit before applying for a loan?
If you want to potentially save thousands of dollars on your next loan, then yes, you should consider fixing your credit score before you apply. While some credit components take time to improve, there are many actionable steps you can take right now to increase your score.
It’s always better to get a head start on the process rather than waiting for a financial emergency. If you don’t absolutely need the money right away, take the time to fix your credit now so you can save big when you are ready to borrow.
The first thing to do is to start making all of your monthly payments on time if you don’t already do so. Payment history is the biggest part of your credit report, accounting for 35% of your score. This includes credit cards, loans, mortgage, utilities, and even your cell phone bill. Once you have that under control, start paying down any existing debt.
Your credit utilization ratio accounts for 30% of your credit score, meaning you’re not just judged on the amount you owe, but also on the amount you have borrowed compared to the amount you are allowed to borrow.
If your credit cards let you borrow up to $10,000 and your balance is $4,000, your credit utilization ratio is 40%. Most lenders want to see this number under 30% so if you’re above that, try to make extra payments to get your ratio in a healthier range.
If you have a lot of negative items on your credit report, consider hiring a credit repair service like Lexington Law. They repair credit by working with creditors and disputing those negative items on your credit report.
By law, an item must be removed from your report if the creditor can’t verify it within 30 days. By having a tireless advocate on your side, you’ll make sure your current and past creditors are following the law and that your credit report has been updated to accurately reflect your financial history.
How can you maintain your credit score once it’s fixed?
After taking the time and effort to raise your credit score, make sure you do everything in your power to keep it up — or get it even higher! You might not be looking for another loan or line of credit at the moment, but you never know what your financial future will look like. Perhaps you rent an apartment now, but want to buy a house further down the road.
It’s hard to figure out how to get a mortgage with bad credit, so do your best to make sure you take care of your credit score now. That means paying all your bills on time, setting aside cash for emergency savings, and not racking up unnecessary debt. Remember, most infractions stay on your credit report for up to seven years, so the financial decisions you make now stick with you for a long time.
Plus, think of all the ways bad credit affects your life outside of getting a loan. Many landlords run credit checks on prospective tenants, so you might not know how to rent an apartment with bad credit.
Potential employers also sometimes run credit checks on job applicants to see how they handle their money. Why? They think that if you’re not responsible in your own personal life, you probably won’t be responsible in your work life.
So bad credit not only affects your spending power, it affects your earning power as well. Keep every door open by making a conscious effort to continually improve your credit score. It would be a huge waste of time and effort to give up on all the progress you just made. Do yourself a favor and consciously manage your money going forward.
It certainly is possible to get a loan with bad credit, but that doesn’t mean it’s the best decision for you. Analyze just how urgent your financial needs are, then decide if you can wait a while to improve your credit score before taking out a high-interest loan.
A reputable credit repair service can help you aggressively put your credit score on the fast track to improvement. Check out our credit repair reviews page for a list of reputable credit repair companies that can get you started today.