Personal Loans for a 500 Credit Score

Personal loans for 500 credit score

By Donna Freedman

Being hit with an unexpected expense can be scary – especially if it seems you have no way of covering it. If you have no savings and no credit card, a personal loan might be the answer to the emergency.

But what if your credit score isn’t great? While bad credit loans exist, are they really a good idea – and can you get one if you have a score as low as 500?

This is a complex subject, so we’ll walk you through step by step. Here’s what you need to know about personal loans with a low credit score.

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What does it mean to have a 500 credit score?

Under the FICO scoring plan, a credit score under 580 is considered to be bad credit. However, it doesn’t mean you’re a bad person! A credit score of 500 to 550 could be the result of one or more of the following issues:

You’re just starting out. Some young people haven’t had the time or opportunity to build a good credit score.

You’ve had bad luck. Illness, layoff, student loans, needing to help a family member – all these things could lead to cash shortages, which in turn can lead late payments, unpaid bills or charged-off accounts. All of those can hurt your score.

You’ve made mistakes. Overspending can also lead to a poor credit score, especially if other debts (student loans, car payment) keep you from making more than the minimum payment.

Can you get a personal loan with a 500 credit score?

Possibly – but the terms will not be favorable. People with higher credit scores get a much lower interest rate typically, because they’ve proved they can pay what they owe on time.

This might not seem fair if your bad credit score was the result of bad luck. However, from the lender’s point of view your score represents a risk of late payments or defaulting.

Banks generally won’t offer personal loans to people with lower credit scores. (One exception might be if you had a certificate of deposit with the bank that could be used as collateral.) Getting someone to cosign the loan will improve your odds.

On the other hand, credit unions are likely to “be more flexible,” according to Natasha Bishop, a spokeswoman for Apprisen, a nonprofit credit counseling agency in Louisville, KY. (In particular, ask if credit unions in your area offer “payday alternative loans,” whose interest rates are capped at 28% and can be for up to $2,000.)

Online lenders offering 500 credit score personal loans invariably charge very high interest rates. While these lenders might post interest rates as low as 5.99%, those aren’t for people with 500 credit scores.

What’s more likely is you’ll wind up toward the high end of the interest spectrum, which could be as much as 35.99%.

For example, OneMain Financial is known to work with bad credit borrowers and in fact has no minimum credit score to apply. However, even a borrower with a good credit score could wind up with a 24.99% rate, according to one example on the lender’s website.

Online lenders like Avant, Upgrade and LendingPoint require borrowers to have credit scores between 580 and 700.

Can you get a personal loan with a 550 credit score?

A 550 credit score sounds a lot better than 500, but it’s still a bad credit score. (It’s 30 points away from “fair” and 120 points away from “good.”) You might qualify for a personal loan with a 550 credit score but again, your interest rate will be high.

Here’s an example from One Main Financial, which works with people who have bad credit scores. If your loan amount was $1,500 at 35% interest, the repayment schedule would be as follows:

  • On a two-year loan, $88 per month ($2,112 total)
  • On a three year loan, $68 per month ($2,448 total)
  • On a four-year loan, $58 per month ($2,784 total)
  • On a five-year loan: $53 per month ($3,180 total)

In other words, you’d pay anywhere from $612 to $1,680 in interest on that original $1,500 bad credit loan.

“I would try everything under the sun before I did an online loan,” says Linda Jacob of Consumer Credit of Des Moines.

A certified financial planner and accredited financial counselor, Jacob has seen interest rates of 1,800% or higher on so-called “tribal” loans, offered through online lenders affiliated with Native American tribes. People with bad credit and a desperate need for cash will take on these loans because they feel they have no choice, she says.

The pros of getting a personal loan with a 500 credit score

Pro 1: It can keep you afloat during emergencies

If your need is critical – car repair, say, or avoiding eviction – then a bad credit loan will keep a roof over your head or allow you to keep working.

Pro 2: It could help you build credit

Paying promptly every month to pay down your loan amount will help improve your credit score, since on-time payments make up 35% of the score. If you don’t pay though, it could hurt your credit even more.

Pro 3: It could improve your “credit mix”

If you already have a student loan or credit card, taking on a personal loan improves your “credit mix,” which shows lenders that you can handle more than one kind of credit responsibly. The credit mix makes up 10% of your credit score.

The cons of getting a personal loan with a 500 credit score

Con 1: It might not fit your monthly budget

You have to factor a monthly payment into your budget for the next two to five years. If anything else goes wrong during that time, you might have trouble making payments. This in turn will further damage your credit score, or possibly lead you into collections if you default on the loan.

Con 2: Beware of temporary fixes for a long-term problem

The loan could be a band-aid for a bigger issue. If you need a loan because you’re behind on utilities or need emergency car repair, then borrowing is just a temporary fix.

Con 3: Tying your money up in loan repayments

Finally, there’s “opportunity cost” – the interest you pay is money you can’t use for other financial goals, such as building an emergency fund or saving for retirement.

How can you shop around for options?

According to certified financial planner Ian Bloom, it’s essential to shop around. Don’t just click on the first lender that shows up in your Google results.

“If you were going to buy a car or rent an apartment, you wouldn’t take the first one you saw,” says Bloom, of Open World Financial Life Planning in Raleigh, NC.

“You shouldn’t assume that the first interest rate you saw is the best. It probably isn’t.”

In addition to checking the interest rates from multiple lenders, look for user reviews and check the Better Business Bureau for complaints. Some sketchy companies operate in this space, according to Bishop.

“Before you provide your personal information, make sure the company’s legitimate,” Bishop says.

What should you get a personal loan for? What should you NOT get a personal loan for?

As noted above, a bad credit personal loan usually means paying a lot of interest. You should take one out only if you’re in crisis mode and have exhausted all other options.

The possibility of losing your job because your car broke down? Crisis. Wanting a fancy mattress or a new TV is not a crisis.

“It’s pretty much never a good idea to use a loan for consumption purchases,” says certified financial planner Tara Unverzagt, of South Bay Financial Planners in Torrance, Calif.

“If you don’t have money in the bank to buy a mattress today, why do you think that will magically change in a year?”

Many “crisis” situations are just the normal curveballs that life throws at us and should be anticipated. Irregular expenses like car repairs or medical co-pays shouldn’t be paid for by borrowing.

Instead of using loan proceeds, think about setting up an emergency savings account to cover your next crisis. Here’s how.

While some people use personal loans for debt consolidation, if you have bad credit, a debt consolidation loan could be more expensive than just paying off credit card debt, depending on the annual percentage rate and the loan term.

What are some alternatives to personal loans?

Using one or more of the following tactics might keep you from having to borrow at all. Even if you do still have to borrow, at least it will be a smaller bad credit loan.

Since some lenders have a minimum loan amount, if you only need a small amount of money – say a few hundred dollars or less – you might be able to free that money from your existing budget, rather than borrow it.

Here are some alternatives to personal loans:

1 - Track your spending

People who use debit more than cash can lose track of where their money is going. Tracking your expenses (by hand, spreadsheet or tools like MaxiFi or Mint) helps you cut waste, which Jacob calls “the leak in your wallet.”

For example, Jacob tracked her coffee consumption and realized she would be spending $1,100 in a year’s time. Instead, she switched to bringing coffee from home.

2 - Reduce expenses

Once you’ve eliminated wasteful spending, look for other ways to save money. One resource is SpringFour, which offers links to government and nonprofit agencies that can help you stretch your dollars. (The average SpringFour user saves $250 per month, though results vary.)

Or call 2-1-1, a national clearinghouse for assistance agencies.

3 - Increase your income

Getting a side hustle can help you pay off debt faster and also build an emergency fund so you won’t have to borrow in the future.

4 - Work with your creditors

For example, a utility company might set up a payment plan; call the customer service department and ask. If you’re $200 short on the rent, call your landlord: I’ll get my first side-hustle paycheck on the fifth of the month; since I’ve been a good tenant, any chance you’d waive the late fees?

5 - Get free credit counseling

Nonprofits like the National Foundation for Credit Counseling or the Association for Financial Counseling & Planning Education can match you with a counselor to help you budget and possibly to work with your creditors, which could lead to lower interest rates and/or minimum payments.

“I’ve seen interest rates go own to 1 or 2 percent,” says Jacob, who has worked to negotiate medical debt, credit card debt and even collections issues.

Debating if credit counseling’s the right move? Read our guide to help you decide.

6 - Borrow from family/friends

Explain why you need the money and draw up a document explaining how you’ll pay back the loan. (This will be easier to do once you’ve tracked your spending or talked with a credit counselor.)

Every dollar counts

Even if you still have to take out a personal loan, reducing the debt upfront means you’ll need to borrow less. Think about it: Wouldn’t paying back $1,000 (especially through one of those payday alternative loans from the credit union) be better than needing to pay back $2,000?

What if you can’t afford to pay back what you owe?

Never sign a loan whose payment doesn’t fit within your monthly budget. In fact, you should keep looking for a better deal if a loan would put a serious strain on your cash flow.

For example, suppose your salary covers rent, utilities, food and student loan payments with $300 left over each month. That doesn’t mean you should take on a $200-a-month loan payment. Car trouble, a sick pet or having your hours cut at work could leave you unable to cover the basics that month.

If the loan does fit your budget and something drastic comes up – a family emergency, a serious illness – contact the lender right away. According to Bishop, a few lenders might be willing to set up “hardship” plans if you work through a certified credit counselor.

Defaulting on a loan will lead to serious consequences. You could get sued, or have your salary garnished. A default also hurts your credit score.

What does the process of getting a personal loan look like?

Start with a payday alternative loan if they’re available in your area; the interest rate is capped at 28% and that might be the best deal you can get with a bad credit score. You will need to have been a credit union member for at least one month. If the local credit union doesn’t offer PAL loans, ask if there are any other personal loan options.

If you wind up looking for bad credit loans online, make sure you’re dealing with a legitimate company. Some online lenders let you prequalify with a soft credit pull, which doesn’t affect your credit report. If you decide to apply for the loan, the lender will do a hard credit pull.

In most cases the application is completed online. A notable exception is OneMain Financial, which lets you apply online but requires a visit to one of its bank branches to complete the loan. (They’re in 44 states.)

Expect to see a loan origination fee of 1% to as much as 8% of the amount you want to borrow. Some lenders also charge an application fee.

Read the loan agreement very carefully to make sure you understand what you’re signing. The language can be confusing, so make sure you know what you’re agreeing to do.

What are some red flags to watch out for?

A company that wants money upfront, before you’ve signed a contract, is probably a scam.

Make sure the loan carries a set interest rate (a fixed rate), rather than an adjustable one. Otherwise it could go up without warning.

Watch for sneaky fees. Jacob has seen loans that include a balance fee, assessed every two weeks throughout the life of the loan.

What if you’re denied a personal loan?

If your first-choice lender turns you down for a loan, you could always apply with others. Again, make sure the repayment plan fits into your budget.

You could also use some of the alternatives noted above to get through the crisis without borrowing as much, or at all.

What about payday loans?

Also known by names such as “cash advance” or “fast cash loan,” payday loans are short-term, low-amount loans that are easy to get and require no credit check – just a regular salary and an active bank account.

With an average interest rate of 400%, a payday loan is considered predatory. Many people wind up renewing the loans because they can’t repay them on time. Almost one-fourth of payday loans are renewed more than nine times.

Even the higher-end bad credit loans would be a better deal, especially since they give you more time to repay.

Personal loans and your financial future

In a perfect world you’d always be able to cover your bills. But life isn’t always perfect.

That’s why you should focus on these two goals:

1 - Save an emergency fund

Having a cash cushion can prevent the need to borrow in the future. Even if all you can afford is a small amount at a time, it will add up.

”Every time you get a dollar, put 10 or 20 cents into savings,” says Unverzagt.

2 - Improve your credit score

If you do have to borrow in the future, a better credit score makes you eligible for better interest rates. You’d also get more favorable rates for auto loans and mortgages.

Two easy ways to build credit are to make sure you pay on time and to keep your credit usage low. (For more tips, see “How Long Does It Take to Build Credit?”)

Bottom line

When you have a bad credit score, borrowing money is always going to cost a lot of interest. However, when you’re in a crisis situation you might not have much choice.

If you’ve exhausted other options, then do your research and get the best possible loan rate from a legitimate lender. Make payments promptly, and also make plans to improve your finances so that you don’t have to borrow again.

About the author

Longtime personal finance writer Donna Freedman lives and writes in Anchorage, Alaska.

Written on June 30, 2020

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