When you have bad credit, getting approved for a personal loan can be a challenge. But when you have really bad credit then getting approved for a personal loan can sometimes seem almost impossible.
Depending on your credit score and who you ask, a bad credit score is often defined differently. Many lenders and banks prefer to see a credit score of about 700 or higher, but if your credit rating falls below this there are options. The question is, just how bad is really bad credit?
What is Bad Credit?
Before answering that, let’s discuss just what a credit score actually is. This is a rating by one of the main credit bureaus (Experian, Transunion, Equifax) between 300 and 850, with the higher your number suggesting a stronger creditworthiness. This number gives lenders and financial institutions an idea of how likely you are to repay a loan, and helps them to determine whether you might be too much of a risk and whether to allow you to borrow from them.
According to many lenders the common rating for a credit score look like this:
- 760-850 – Excellent Credit
- 700-759 – Very Good Credit
- 660-699 – Fair Credit
- 620-659 – Bad (poor) Credit
- Scores under 620 – Very Bad Credit
Even with poor or very bad credit it is still possible to find a personal loans lender, although you will have higher interest rates and possibly additional fees involved.
How A Bad Credit Scores Affects Your Borrowing
The simplest way to explain this would be that if you have bad credit, it’s going to cost you to borrow. This means that you will not get the preferred terms, interest rates and APR that is usually reserved for those with good credit, and you’ll have to pay more to borrow.
If you have fair to good credit, the difference in the interest rates will be fairly small, such as possibly 3 to 5%. But if you have a bad credit rating of 620-659 then the interest rate is likely to be close to 10%, which is twice that of what is charge for a fair credit rating (660-699) and as much as 3 times the interest rate for those with very good (700-759) to excellent (760-850) for a credit score. But if you have really bad credit (619 or less) you might expect to pay up to 5 times what someone with a very good or excellent credit might pay for interest.
Is it fair? This too might also depend on who you ask. You should also know that those with bad credit scores might be more likely to find additional expenses attached to a personal loan request such as origination fees and similar.
It’s for this reason that when shopping and comparing personal loans you don’t want to only look at interest rates. It’s important to keep an eye on annualized percentage rates (APR) as this reflects the true cost of borrowing more accurately since they factor in additional fees that might be involved with a loan.
Unless your loan request is more of an emergency, sometimes your best move with really bad credit would be to try to improve your credit score before applying. This is especially true if your credit score should be on the threshold of what is considered the next level of where you currently are. For example, if your credit score was 615, by raising it just a few points to go from Very Bad to Bad in terms of a credit score could save you a lot of money. At the same time, if your credit score was around 630 or 640 and you managed to raise it to 660 the amount you could save in potential interest costs is significant enough that it should be seriously considered.
What to Know Before You Borrow
The place to start is to check your credit score, so that you have an idea of what kind of interest rate you might be eligible for. There are a number of lenders that have a minimum credit score requirement.
As you are looking for lenders that could be a good match, you can apply for pre-qualification, which doesn’t affect your credit score. This is also known as a soft credit check, and applying will tell you what rate, loan amount and repayment terms to expect.
Most lenders view an applicant in different ways. It isn’t always just about a credit score. Many will look at other factors, such as your employment history, whether you rent or own, along with your debt-to-income ratio. All these are to determine a borrowers potential creditworthiness in an attempt to reduce any potential risk for the lender.
Where to Get Loans with Bad Credit
It mostly comes down to what your credit score is when trying to determine your loan options and what you might be approved for. While some might think a bank is your only real options, there is actually a few. Credit unions can be one direction to go for personal loans with bad credit. There are also many online lenders that can be an option as well. If you have property or a vehicle to put up as collateral, some lenders can have interest in this.
More people turn to online lenders these days, as they often provide competitive rates or even better at times. Part of their popularity is that some are more of a marketplace that makes things more convenient for comparing loans. You don’t want to assume your bank is the best option.
Even people on benefits can be approved for loans on social assistance if their application meets the criteria.
Tell Me More About These Fees for Personal Loans with Bad Credit
There are a number of fees that a lender might charge to borrowers with bad credit for personal loans, ranging from origination fees and late fees to having to pay a fee for making your payments by check.
Origination Fee – This is a fee charged by the lender that is often 0.5 to 1% of the loan amount for processing a loan application. While these can sometimes be negotiable, it usually means the borrower must pay a higher interest rate over the life of the loan.
There are a number of other potential fees (depending on the lender) from prepayment fees and brokerage fees to processing fees and more, all which should be in the terms and conditions when finalizing a loan.
Of course there is also your interest rate and APR, but these are standard and not additional fees.
With a lower credit score, it is more probable that you might have to pay origination fees since the lenders know you often have fewer options.
The following are examples of fees if you have been approved for personal loans;
Check Handling Fee – also referred to as a check processing fee, is a fee that some lenders charge for having to deal with physical checks. Typically around five dollars, but this is not a one time fee, but rather one that you would have to pay use time you make a payment with a check.
Nonsufficient funds (NSF) fee – this is when a loan payment does not go through due to insufficient funds in your account. This can also go by several other names, including returned cheque fees, failed payment fees or returned payment fees.
When comparing personal loans and fees, even with bad credit you can still find options that are acceptable. While it can be challenging to prequalify, especially if you carry debt, there are options still to be found.