How to Get Loans for Bad Credit

When applying for online loans for bad credit, it often starts by looking at the reasons why you might not be approved, and understanding how lenders decide on who they would allow to borrow.

The typical lender often determines a loan application based on risk, and whether they think someone has the ability or will payback what they borrow.

The most common way of doing so is usually based on a credit score if applying for a personal loan or installment loan. Payday lenders usually don’t rely on this and use alternative data.

For those trying to get a bad credit loan, having a bad credit score is not always a factor for a loan request not being approved. 

Most lenders will also look at more than just your credit score. They’ll consider your payment history and whether your bills are paid on time. They might look at whether your past includes collections, bankruptcy, Orderly Payment of Debts (OPD), Debt Management Program (DMP), repossession, consumer proposal or remarks. They could look at what you owe, your income versus expenses, and your debt to income ratio.

Whether you’re looking for an unsecured loan for a car, pay off credit cards, debt consolidation or another reason, if you have bad credit and your score is under 600 it can be very difficult to get approved. 

What is a Bad Credit Score?

The answer can vary with who you ask, but for many a bad credit score will be close to or below 600. The average credit score in Canada is about 650, which is still only a rating of fair. To have a good credit score requires a rating in the low 700’s. For some a fair credit score can be as low as 580 or even 550, but anything below that will usually be considered a bad credit score. If your credit score is below 550-580 you will have a difficult time finding borrowing options other than payday loans, which are high interest short term loans that are best to avoid if you have alternatives.

Having bad credit is more than just a score, it can also include your history. If there is a pattern where you have many non-sufficient funds (NSF) and bills aren’t being paid because the account balance is low, this can be cause for concern with some lenders about repayment. Or they might see your history includes many recent loan applications which could suggest there are current financial issues and the increase in seeking for funds could be considered a red flag.

Where to Start for Loans with Bad Credit

You should know what your credit score is before thinking of applying. There are a number of options to find out for free, and checking your credit score won’t affect your credit as doing so is considered a soft pull and doesn’t go against it. 

While it can take time to improve your credit score if you have a bad credit rating, being aware of your your debt-to-income (DTI) ratio, also known as your utilization rate, is another way of improving how a loan application might be reviewed or assessed. Your debt-to-income ratio can be a big part of your credit score, and while your history of repayment is a big factor, managing your debt-to-income ratio can be another way of improving your overall score so that you might be able to apply for a personal loan even with bad credit.

In most situations a lender is looking at a debt-to-income ratio of less than 30%, since this is related to your ability to repay the loan and puts the lender at less risk of you defaulting on it.

Paying down debt to improve your debt-to-income ratio is the simplest option, and sometimes even debt consolidation can help. 

Options for Loans with Bad Credit

If you’re looking for a larger sum in the way of a personal loan, a bad credit score can make it challenging to get approved. But if you’re looking for a smaller amount there might be some options available.

Some of the options for those seeking a loan with bad credit might include speaking with friends or family, which probably won’t run a credit check and might offer better interest rates, or even none at all. If your credit isn’t too bad, a credit union can be a good option since the allowable interest rate is usually 18% or less. Getting a co-signer can help to get a lower interest rate. Or consider trying online lenders, which can be very flexible with terms. 

In addition to lenders for online personal loans, there are also installment loans and payday loans that can be another option for those with really bad credit that have trouble finding approval anywhere else. These types of lenders don’t always look at your credit score and might consider an application based on the amount of salary, pay frequency, length of employment with a company and other criteria. These types of lenders offer fast cash that can be deposited in your account, often as soon as the next day, but their interest rates are often much higher than most other options.

Ways to Improve your Credit Score

There are 2 main credit bureaus in Canada (Equifax and TransUnion) that can provide a credit score. Each don’t always provide the same score because one might have other details not captured by the others concerning your credit. If you’re ever applied for a credit card, auto loan, mortgage, installment loan or other forms of credit, many creditors refer to a credit score from Equifax or TransUnion to assess the risk of allowing you to borrow and how likely you might be to make your payments on a loan. 

Some of the other ways (besides debt-to-income ratio) for improving your credit score include;

  • Limiting the number of hard inquiries into your actual credit worthiness or score
  • Disputing any errors on your credit report that can affect your score
  • Always paying your bills on time to build a strong credit history

The length of your credit history is also a factor when evaluating your ‘creditworthiness’ when a lender looks at your profile.

Even with bad credit a loan can be an option, but the terms might involve higher interest rates and annual percentage rates (APR) than those with a fair to good credit rating.

The interest rates of an unsecured loan are closely tied to your credit profile for personal loans and installment loans.

When looking for errors that can affect your credit score or profile, some of the things to watch are often data management errors and can include;

  • Incorrect personal information (i.e. address, misspellings)
  • Incorrect public records (i.e. foreclosures, bankruptcy)
  • Incorrect inquiries (i.e. hard checks that should not have happened)
  • Missing account details (especially cases that could help your score)
  • Accounts that are not accurate (i.e. listed as open when actually closed)
  • Accounts that are listed as ‘closed by grantor (i.e. they say open but actually closed)
  • Accounts that do not belong to you or duplicate accounts, 
  • Delinquencies, derogatory remarks or fraudulent activity

One of the easiest ways to improving or fixing your credit score often starts with identifying any incorrect information or inquiries that should not be associated with your account and going about having them removed to correct the details about your credit rating and history.

How Much Can a Loan Cost with Bad Credit?

Let’s say that your car breaks down and is in need of repairs. 

A personal loan of $2,500 for someone with a good credit rating (e.g. FICO score of 740) could qualify for a loan with terms like a three-year personal loan at a 9.33% interest rate. This means that the monthly payments would be about $79.88 and they would have to pay a total of $375.82 over the life of the loan in interest.

But let’s say this person had a poor credit rating  (e.g. FICO score of 580) and as a result the interest rate for the loan they are approved for was 35.89%. In that case, their your monthly payment would be $114.35 and they would have to pay a total of $1,616.70 over the life of the loan in interest charges.

In the above example, the loan for the person with poor or bad credit would cost an extra $1,240.88 for the $2,500 borrowed over the three-year term.

While trying to improve your credit rating can be slow and frustrating, it is possible, and their are lenders out there that will take on some risk for those with a poor or bad credit rating that can use a loan for unexpected expenses, emergencies, debt consolidation, big purchases and other reasons. When you have bad credit a high interest loan is sometimes the only option available.

RELATED: How to Avoid High Interest Loans

Other Factors to Improving a Bad Credit Score

While your debt-to-income ratio is an important factor, another is your payment history. Having a long history that shows you are capable of making payments on time is a big one. But if you have missed some, it can hurt your score. It should also be known that the effects of missing payments can also increase in how it hurts your credit score the longer a bill goes unpaid. 

As mentioned, your debt-to-income ratio or credit utilization rate is also fairly important. Having unpaid balances from maxing out credit cards can hurt your scores by increasing your utilization rate.

The length of your credit history is another factor often considered, from the age of your oldest or newest account, to the average age of your accounts or whether you have used an account recently.

While the credit bureaus usually have slightly different scoring models, it can often look like this:

760-850 – Excellent

700-759 – Very good

660-699 – Good

600-659 – Fair

600 or less – Poor or Bad credit score

RELATED: How to Get Approved for a Personal Loan with Really Bad Credit

The Downside of Bad Credit Loans

When looking at getting loans with bad credit, be sure to read the fine print. While it should go without saying with any loan terms to know what you’re signing, with bad credit loans a lender wants some reward with the risk, and knowing the terms is important. Understanding the APR, interest rates and other particulars like orgination fees, late fees, or other fees is a must.

Not everyone has an emergency fund, and unexpected expenses can happen. Managing your credit profile so you don’t have a bad credit rating puts you in a better position in the future. Having bad credit impacts your options and makes it less affordable to borrow, but can also affect if you want to rent, get a mobile phone and more.

While improving your credit score isn’t going to happen overnight, it’s something that you should regularly monitor and manage. This way, somewhere down the road if you decide you wanted to get a mortgage, car, do some home renovations or something else and required a large loan, your odds of approval would likely be that much better, along with getting better rates and terms.

Making sense of finance one day at a time.