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How to get a loan with bad credit

If you've had trouble paying your bills or have defaulted on a loan in the past, you may have a bad credit score. This means if you want to borrow money, banks or lenders might consider you a high-risk candidate and deny your loan application.

If you're wondering how to get a loan with bad credit, read on. These tips could help you get the money you need, even if your credit score isn't ideal.

What is bad credit?

Your credit score is a number that lenders rely on to try to determine whether you're likely to pay your bills on time. There are a few agencies that offer credit scores. The main ones are:

These agencies use slightly different ways of working out credit scores, but the idea is the same. In general, credit scores range between 300 and 850. If you have a score of below 600, this is considered "poor".

Your credit score could drop if you're late paying bills or miss payments on your loans. It could also drop if you take out a lot of loans in a short amount of time. Lenders can become concerned that you're overstretching yourself.

While this makes sense from the point of view of the lender, it's not ideal for people who've fallen on hard times and need a little cash to get back on their feet. In essence, the people who need loans the most can end up paying the most for them.

Fortunately, there are some companies that specialize in working with those higher-risk borrowers. These lenders offer bad credit loans.

What are “high risk” loans?

A high risk loan is a loan that's aimed at someone with a poor credit score. These loans are usually a little more limited than the loans you'd get if you had a good or very good credit score. They might:

  • Be for a smaller amount

  • Be offered over a shorter time period

  • Require you to secure the loan with an asset

  • Require a guarantor

  • Charge a higher rate of interest than a more standard personal loan

  • Carry hefty fees for late payments

Not all high risk loans have the same restrictions on them. Banks and other lenders can choose their target markets and perform their own risk assessments.

Will applying for a bad credit loan hurt your credit score?

One of the criteria that credit reference agencies use when they're calculating credit scores is how often you've applied for credit in recent history. If a bunch of potential lenders have done a credit search on you, this is a sign that you're desperate for credit, and it might cause your credit score to drop significantly.

Fortunately, searches only have an impact on your score for a short time. Your score will recover if you stop applying for credit for a few months.

Not all bad credit lenders do hard credit searches. If you're really worried about your credit score, or it's already very poor, you could look for one of those lenders for the money that you need.

The different types of bad credit loans

There are several types of bad credit loans to choose from, including:

  • Short-term loans: These are high-interest loans for a small amount of money, offered over a period of no more than a couple of months. This type of loan is designed for emergencies, like a car breaking down just before payday. These loans are sometimes referred to as payday loans.

  • Guarantor loans: A guarantor loan is given to one applicant who is the main borrower. However, a second person with a good credit rating acts as a guarantor and promises to make the payments if the primary borrower defaults on the loan.

  • Secured loans: When you take out a secured loan, you put up a valuable asset such as a car or your home as collateral. Secured loans are usually for larger amounts of money and shouldn't be entered into lightly, as the asset could be repossessed if you fail to make the loan repayments.

  • Peer-to-peer loans: Sites such as LendingClub and Prosper allow borrowers to request loans from other individuals. These people may be willing to be more flexible than the average bank when it comes to giving out loans.

  • Cash advances: A cash advance is a way of withdrawing cash on a credit card. If you already have a credit card, this could be a way to pay a bill in a genuine emergency. However, cash advances often carry a fee and are also subject to higher interest rates than standard purchases on a credit card. Get a cash advance with Varo Advance to cover bills or any unexpected expenses.¹

  • Installment loans:

    A loan paid back over a longer period of time is known as an installment loan. These loans are available to people with a variety of credit ratings, but the better your score, the lower the interest you'll be charged. If you can find a mainstream lender willing to work with you and offer an installment loan, this is probably going to be the most affordable form of borrowing.

How to get a personal loan with bad credit

1. Start by checking your credit score

Before you do anything else, head to one of the three main credit agencies and check your credit score. You can request a free copy of your credit score once a year, so there's no need to get a subscription service unless you really want to monitor your score regularly.

If your score is in the "Good" bracket, you should be able to get loans from a major lender. If it's in the "Fair" bracket, you may find it useful to talk to your current bank. They have a good insight into your income and spending habits and might be more willing to offer you a loan instead of a third party.

2. Work out your budget

Make a list of your income and expenditure. How much money do you have left at the end of each month? Will you be able to pay back the loan, plus interest, in the time required? What happens if you have another emergency during that time? Don't borrow money unless you're sure you'll be able to pay it back.

Be honest about how much money you spend each month. If you're sitting down to balance the books and wondering where your money went, start making a note of what you spend money on every day. This may not help you with the current emergency, but seeing how much those daily coffees cost could help you save money in the long term.

3. Always shop around for loans

There are lots of bad credit lenders out there. The challenge isn't so much "how can I get a loan with bad credit" but "who should I borrow from?" Don't just pick the lender that shows up at the top of the search results. Look at other options such as your current bank or your local credit union. Get quotes from as many different lenders as possible.

Try using loan calculators on the lender's websites to work out the different payment options. Paying back the loan very quickly may cost you less than paying it back over a longer period of time. However, paying the loan back quickly will likely require larger payments.

If you miss any of those payments you could be hit with late payment fees, so don't commit to a payment plan you can't adhere to.

4. Try to get a prequalified loan

If you apply for a loan that requires a hard credit search and you get rejected, this could lower your credit score and make you less attractive to future lenders. Getting prequalified for a loan reduces the risk of this happening. Note that being prequalified for a loan doesn't always mean you'll be accepted when you apply.

Being prequalified means the lender thinks you meet the criteria. You might still be declined later if you're unable to supply the documentation the lender asks for or if there are discrepancies between your application and your current financial situation.

5. Consider a secured loan (but only if you can afford it)

Lenders are more willing to offer a borrower with a poor credit score a loan if it's secured on something because this means they're guaranteed to get their money back even if you don't keep up with the repayments. Secured loans can be a lifeline for people who really do need a loan in an emergency.

Don't take out a secured loan for discretionary things like gifts or vacations. You might feel confident that you can make the repayments today, but if you lose your job or get sick and are unable to make the repayments, you could see your home or vehicle repossessed. That's just gonna make a tough financial situation even worse!

6. Get a cosigner or guarantor if possible

Having someone cosign on a loan is another way to give lenders reassurance that the loan will be paid back. However, guarantor loans can be expensive, and the companies usually require the guarantor to have a good credit rating.

Asking someone to cosign a loan for you means asking them to take the risk of being asked to pay back not only the amount that you're borrowing but also the interest.

While a cosigner is responsible from day one of the loan, a guarantor works a bit differently. A guarantor is responsible for making payments on your debt when the primary borrower (you) can’t make your payments.

You'd have to be really close to someone for them to want to do that. Do you really want to risk losing one of your BFFs over money?

7. Make sure you have everything you need before you apply

If you've found a lender that you think offers good value and is likely to accept you, get your documents together before you apply. Bad credit lenders often ask to see payslips or bank statements as proof of income. That way, they can feel confident that you have the ability to pay back the loan each month.

8. Some lenders offer loans with no credit check or no hard score requirements

As a borrower with a poor credit rating, you're more likely to get accepted by a lender that either does not do credit checks, or that has no fixed score requirement. These lenders are the most likely to want to see your income and expenditure to determine whether you can truly afford the loan. Work out your budget carefully, and apply only for the amount you need.

Think carefully before taking out a loan

If you find yourself wondering "how can I get a loan with bad credit?", think carefully about your options before you apply for a high-interest loan. Getting a loan with bad credit is possible, but the loan will most likely be very expensive.

Try to avoid falling into the trap of taking out a loan because you're a little short before payday, and then needing another loan the following month because you're short again after paying back last month's loan. It's better to live frugally for a little while to avoid borrowing than end up in an endless cycle of debt.

If you're caught short and need an advance to cover small expenses before payday, you can take advantage of Varo Advance.¹ You can start with an advance of $20-$250 and work your way up to $500 over time. Qualify for higher limits based on your income and regular use of your Varo account.

There are no pesky monthly account fees to open a Varo Bank Account. If you're looking for a bank that suits your busy lifestyle, with no hidden fees, check out what a Varo Bank Account has to offer.

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