If you have strong credit, you likely have a better shot of qualifying for a personal loan with lower rates and more favorable repayment terms. But if you have a poor credit score of 550 or lower, you may have a more challenging time getting approved. However, it is possible.
The downside, though, is that if you’re approved, a lender will likely charge you a higher-than-average interest rate, says Jason Sohnen, certified financial planner and director of wealth coaching at OneEleven Financial Wellness.
Below we’ll cover how your credit score affects your personal loan approval chances, some lenders that offer bad credit loans, how to understand the application process and alternative options.
How Your Credit Score Affects Personal Loan Approval and Rates
When you have a poor credit score, it lowers your chances of qualifying for a personal loan. It also affects the interest rate you receive if a lender approves your application.
Generally speaking, the lower your credit score, the higher your chances of receiving a lender’s highest advertised rate. “You may also face the risk of paying high origination fees, which can significantly increase the cost of the loan,” says Stacy Dervin, a certified financial planner and founder of Tailored Financial Planning.
The average personal loan rate is 11.53% as of November 15, according to a Bankrate survey. Personal loan interest rates are trending higher over the past few months, increasing by about half-a-point since early July:
Personal loan rates vary widely based on creditworthiness. Borrowers with very good or excellent credit scores will see much lower interest rates than those with fair or poor credit. Often, borrowers with bad credit will apply for a secured personal loan that uses an asset as collateral in order to achieve lower rates:
Steps to Getting a Personal Loan With a 550 Credit Score
You can follow these steps to apply for a personal loan with poor credit:
- Research low-credit-score lenders. Compare rates, terms and fees from multiple lenders offering bad credit loans to ensure you find the best match for your financial situation.
- Add a co-signer. Some lenders allow you to apply for a personal loan with a co-signer. A co-signer is someone who agrees to repay the loan if you fail to make payments. Adding a co-signer with better credit than you and a stable income might boost your approval odds and help you qualify for a higher loan amount and a lower rate.
- Provide collateral. Although personal loans are generally unsecured, some personal loan companies provide secured personal loans. These loans require you to pledge collateral, like the money in your savings account or your certificate of deposit. Lenders may be willing to give you a lower rate for a secured loan than an unsecured one since it’s less risky for them.
- Submit loan application. Once you’ve found the best lender for you, submit a formal loan application. Many lenders will ask you to provide financial information like your bank statements, recent pay stubs and W-2s.
Three Lenders That Offer Bad Credit Loans
Some lenders offer personal loans to borrowers with low credit scores. While looking for a company that provides personal loans, compare rates, fees and repayment terms to find the right option for you. Here are a few personal loan companies to consider.
Upgrade’s minimum credit score requirement is only 560. This lender offers unsecured and secured personal loans with flexible repayment terms ranging from 24 to 84 months. This may be a good choice if you need to borrow a small – or medium-sized loan since loan amounts range from $1,000 to $50,000.
Upstart may be a good option if you have minimal credit history or poor credit since its minimum credit score requirement is just 300. With an Upstart loan, you can borrow from $1,000 to $50,000. And if your application is approved, you can receive funds as soon as the next day.
Upstart won’t approve your application if you have a current delinquent account listed on your credit reports or a bankruptcy within the past 12 months.
Avant approves applicants with credit scores as low as 580. Loan amounts range from $2,500 to $35,000. Once approved, funds can be deposited into your bank account as early as the next business day.
How to Improve Your Credit Score for Future Loans
Although it may be difficult for you to qualify for low personal loan rates with a 550 credit score, the good news is that you can take steps to improve your score.
“Paying your bills on time and not taking on new lines of credit are easy ways to boost your score,” says Sohnen.
Beyond that, here are some additional actions that can help you build and maintain a stellar credit profile:
- Check your credit reports for errors. An inaccurate, negative mark on your credit report, such as a reported late payment for an account you paid on time, can cause serious damage to your credit. To catch these errors, you can review your credit reports for free from all three major credit bureaus by visiting AnnualCreditReport.com. If you find any errors, dispute them with the respective credit bureau.
- Pay down debt. Your credit utilization ratio – which is how much of your available credit you’re using – accounts for around 30% of your score. As a result, paying down revolving debt such as credit card debt is a good idea if you want to make a huge positive impact on your credit score.
- Keep credit cards open. If you have credit cards, try to keep your accounts open. Closing a card will lower the amount of your available credit, likely raising your credit utilization ratio, which will decrease your score. That said, if closing your card keeps you from overspending on your card, it may be a good idea even though your credit may take a hit.
Compare Personal Loan Lenders
Personal Loan Alternatives
If you’re having trouble qualifying for a personal loan with a low credit score or you’ve concluded that such a loan is not the best fit for you, consider the following alternatives:
- Borrow money from a family member or friend. A family member or friend may be willing to lend you money with a more favorable rate and term than a traditional lender. If you find someone who agrees to lend you money, make sure to put the loan agreement in writing and include what would happen if you fail to repay the loan as promised, says Dervin.
- No-credit-check loans. While you may be tempted to apply for a no-credit-check loan, such as a payday loan, if you can’t get approved for a personal loan, consider the risks. These loans come with high fees and interest, says Sohnen. For example, some payday loans come with rates as high as 400%, according to the Consumer Financial Protection Bureau.
- Get help from a financial assistance program. If you’re looking for a personal loan because you’re struggling to pay your rent or utilities, you may qualify for financial assistance from another source. You can dial 211 to find an organization that can help you during your time of need.