Best Personal Loans for Bad Credit

After surveying the personal loan market, we found a few lenders that are best equipped to handle borrowers who have bad credit scores. Here are our best picks, and some tips for getting a personal loan.

Here are The Ascent's picks of the best personal loan companies for people with bad credit:

• Freedom Plus - Cosigner option
• Upstart - Little to no credit history
• Lending Point - Borrowers with poor credit scores

Let’s be clear: Your credit score is one of the most important factors for a personal loan, so having bad credit can make it harder to get a personal loan. Remember, a personal loan is not backed by collateral like a mortgage or car loan, so the lender relies on your ability and willingness to make payments to determine whether or not to approve you for a loan, as well as how much to lend to you.

There are a few things you can do to maximize your approval odds for a personal loan:

1. Pay off small balances -- Having a lot of small balances can hurt your approval odds because it negatively affects your debt-to-income ratio. If you have $100 of credit card debt on five different cards ($500 total), your minimum payments per month will likely be about $100 to $125, since most card companies require a minimum monthly payment of at least $20 to $25, regardless of your balance. Having a $500 balance on one card would likely require a minimum payment of just $25. All else equal, a borrower who has $25 of minimum debt payments is a less risky borrower than someone who has $125 of minimum payments on other obligations.
   
2. Report income accurately -- Most lenders ask you to provide your monthly or annual gross income when applying for a loan. Gross income is not how much you receive in your paychecks. Your gross income is how much you earn before deductions for taxes, retirement, insurance, and other items that are subtracted at payday. In some cases, the income of a spouse can also be included when a lender asks for household income, which can help you report more income. (Lenders often verify how much you earn, but only after the initial application, so underreporting your income because you list your net income instead of your gross income can result in a denial when you might otherwise be approved.)
   
3. Shop around -- All of the lenders we chose as our best picks for bad credit personal loans allow you to get a quote for a loan without taking a hit to your credit report. FreedomPlus, Upstart, and LendingPoint do what’s known as a “soft pull” of your credit to give you a quote, so you aren’t harmed by shopping around and getting a quote from all three, if you’d like. Only upon accepting a quote will a lender make a “hard pull” or “hard inquiry” to confirm your information.
   
4. Make use of your savings -- Having bad credit doesn’t always mean you’re in a bad financial position. Many people have bad credit because of bad luck -- medical bills, unforeseen large expenses -- or because of things that have happened in the distant past. Some lenders, including FreedomPlus, give borrowers discounts when they have meaningful retirement savings, for example. Having money in a 401(k) or in an IRA brokerage account doesn’t help your credit score -- it isn’t even a factor in credit scoring -- but it can help you get a personal loan.

If you can get a cosigner for a personal loan, you can benefit by potentially getting a larger loan, a lower interest rate, and a longer repayment term. In short, having a good cosigner can simply make it easier to qualify for a better personal loan than you might otherwise qualify for on your own.

Convincing someone to cosign for your personal loan will not be easy, though. The reason that lenders are willing to offer better terms to borrowers who have cosigners is because if the main borrower does not repay the loan, the cosigner is on the hook to make payments. Thus, if you fail to make payments, the cosigner is legally responsible to pay the balance, and the late payments will show up on your credit report, as well as the credit report of your cosigner.

The vast majority of online personal loan lenders do not allow applicants to have a co-borrower or cosigner. From our dive into personal loans, we’ve discovered that FreedomPlus is one of the few that accepts cosigners for personal loans, offering lower interest rates to borrowers who have a co-borrower sign with them.

An ideal cosigner has:

• A healthy income -- Ultimately, the purpose of a cosigner is to have another person who can make payments if you cannot. A cosigner who has a high annual income is best, all else equal.
  
• A high credit score -- Having a cosigner who has bad credit usually won’t help you qualify. Ideally, your cosigner would have a prime credit score of 700 or better.
  
• Little debt of their own -- A cosigner who has very few recurring obligations (mortgage or rent payments, car loans, student loans, credit cards, and so on) is better than someone who has substantial debt of their own.

If you have someone who is willing to take the risk by cosigning for you, you’re in a better position to get approved for a personal loan.

If you have bad credit, you’re unlikely to get the lowest possible interest rate on a loan. The simple reality is that the best personal loan rates are usually reserved for people who have the highest credit scores.

As you shop around for a loan, here’s how to pick one that offers the best deal for your needs:

1. Focus on APR -- Interest rates are only one piece of the puzzle. Always compare loans based on the Annual Percentage Rate, or APR, which calculates the true cost of a loan including interest, any fees (like origination fees), and other costs. A loan with a 12% interest rate and no origination fees can have a lower APR than a loan with a 9% interest rate and a 5% origination fee.
   
2. Consider shorter loan terms -- It’s generally easier to get approved for a two-year loan than a five-year loan, though a shorter loan will require higher monthly payments. You can save hundreds of dollars in interest and pay off your debt faster by getting a shorter-term loan, though it may require making a few sacrifices in your budget.

Consider starting small -- If you need a personal loan to consolidate debt, you don’t have to refinance all of your debt at one time. If you have $10,000 of credit card debt, you might find it difficult to get a $10,000 loan to cover it. By applying for a $5,000 loan, you can make a big dent in your debt load, and when the personal loan is paid off, your credit score should be higher, allowing you to qualify for a better loan on better terms.