If you need to borrow money but your credit score isn’t high you may be wondering, ‘can you get a loan with bad credit’? The short answer is yes, you can. It may be difficult but it’s not impossible. Before talking about how to get a loan with bad credit, there are a few things you should know.

What does it mean to have bad credit?

Credit score is a 3-digit number that ranges anywhere from 300 to 850. Here’s how the scores are grouped and what each group says about your credit standing:

• 760-850 – Excellent
• 700-759 – Very good
• 660-699 – Fair
• 620-659 – Poor
• Scores under 620 – Extremely poor

Any score below 620 is considered bad. However, there is no official determination. Every lender has their own definition of what they consider bad credit. Generally, if your score is below 650, you will find it more difficult to get approved for a loan. This is because your credit score is an indication of your history as a borrower. A low score indicates that you are an irresponsible borrower and more likely to default on the repayment. Lenders prefer not to deal with the hassle and most will reject your application outright.

The few lenders who do approve your application will charge you a higher interest rate. Their other fees may also be higher for borrowers with bad credit. The higher interest and fees is meant to offset the higher risk of lending.

How is credit score calculated?

Credit score takes into consideration your borrowing behavior. All your credit transactions such as student loan, personal loan, mortgage, and credit card repayments are reported to the three major credit bureaus. Every time you apply for a new line of credit, that too gets reported to the credit bureaus. This information gets recorded in your credit report and is then used to calculate your credit score. There are a few factors that also go into calculating your credit score.

Here’s how your credit score is calculated:

• Payment history – Payment history has the single biggest impact on your credit score. It accounts for 35% of your total score. On-time payments will boost your credit score by a few points every month. On the other hand, even one delayed payment will damage your score.
• Credit utilization ratio – This takes into account how much of your available credit you use every month. It accounts for 30% of your total score. A higher ratio indicates that you may be struggling financially and are more likely to have trouble making timely payments. You must keep your credit utilization ratio under 30% to protect your score. Use more than that and it will hurt your score.
• Length of credit history – This accounts for 15% of your total score. The longer your credit history, the better especially if you’ve been making payments on time. Your long history of timely payments gives lenders confidence that you will repay the money on time.
• Mix of credit – Lenders like to see that you have different types of credit and that you make all payments on time. Types of credit may include credit cards, student loans, mortgage, and vehicle loans. Having different types of credit will add 10% to your score.
• New credit – New credit accounts for 10% of your score. It considers any new lines of credit on your account and how many credit inquiries you’ve initiated over the previous twelve months. Too many inquiries and applications will damage your score.

Knowing how credit scores are calculated and what is considered a bad score will help you get a better understanding of how to get a loan with bad credit.

5 Things to you can do to get a personal loan with bad credit

1. Start by checking your credit report and credit score

How bad is your credit score? Is it really as bad as you think? The only way to know for sure is by checking your credit score. You are legally entitled to get one free copy of your credit score every year. You can apply for your free credit report at AnnualCreditReport.com

Now that you’ve confirmed your credit score, you can plan your next steps.

2. Research direct lenders for bad credit personal loans

Your next step is to look for lenders who offer loans to borrowers with bad credit. When researching lenders you will find that different lenders have different cut-off scores below which they won’t approve your application. Shortlist lenders that offer loans to borrowers with your credit score. Take a look at the other requirements to further narrow down your list.

When making your shortlist of lenders, it’s important to also consider the cost of borrowing. You’ll find that interest rates vary considerably from one lender to another. But don’t just look at interest rates only. Some borrowers quote rock bottom rates and then charge hidden fees in the form of origination fees and others. They do this to offset the higher risk of lending to borrowers with bad credit. These hidden fees could add a few hundreds or even thousands of dollars to the total cost of the loan. When comparing bad credit loans, it’s important to calculate the total cost of borrowing, not just the interest rate.

3. Work on improving your score

Improving your score by even a few points may make it easier for you to get approved for a loan. It may also help you to get a lower interest rate on the loan. While researching bad-credit lenders and loans, keep working towards boosting your credit score. You can do this by continuing to make all loan and credit card payments on time. Meanwhile, use your credit card sparingly to lower your credit utilization ratio and keep old credit lines open. All of these things will help to improve your credit score by a few points at least.

4. Get a creditworthy co-signer if necessary

A creditworthy cosigner is someone who has a good credit score and meets all the eligibility criteria that the lender has set. When you apply with a cosigner, the lender will evaluate your application based on the cosigner’s credentials. This could help you get approved more easily and you’ll pay a lower interest rate too.

So who can you ask to cosign your loan? This could be any family member or friend who is willing to share responsibility of the loan with you. Not many people are willing to cosign a loan with another person as it puts their own credit at risk. If you default on the loan, it damages both credit scores – yours as well as your cosigner’s. Even worse, the lender will hold the cosigner responsible for paying back the money that you owe.

If you do ask someone to cosign your loan, make sure to discuss what would happen under various circumstances. And be prepared to answer questions about how you intend to make the payments and reassure the cosigner that you are committed to paying the money back on time.

5. Look into secured loans

A secured loan is a loan that’s backed by some asset. Borrowers often use their home or vehicle as collateral. Secured loans have lower interest rates than unsecured loans. If you have collateral that you can use to back your loan, this may be the best way to get a loan when you have bad credit. As with any type of loan, it pays to shop around and compare lenders, rates and other terms and conditions.

Before you take a secured loan, you must be 100% sure that you will be able to pay back the loan on time. If you don’t, you may lose whatever asset you’ve put up as collateral and that could be a huge loss.

Important things to know about getting a loan with bad credit

Borrowing money will cost you more when you have bad credit.  But it’s good to know that you can get a loan if you have an emergency and need that money. The one thing you should continue doing is working towards improving your credit score. This will make it easier and cheaper for you to borrow money when you need it.