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 loans for poor credit 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 for bad credit.
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!
If your credit is below the average credit score, it may be harder to qualify for unsecured credit cards, loans, and mortgages in the future. A low 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.
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 installment 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.)
An online lender 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.
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 and loan approval is not guaranteed.
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:
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 for poor credit because they feel they have no choice, she says.
According to certified financial planner Ian Bloom, it’s essential to shop around to find the right loan option for your unique situation. 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 on each loan option. Some sketchy companies operate in this space, according to Bishop. Whether you are looking to get a small business loan, an auto loan or a consolidation loan, it’s essential that you use a reputable lender.
“Before you provide your personal information, make sure the company’s legitimate,” Bishop says.
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 installment loan proceeds, think about setting up an emergency savings account to cover your next crisis.
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.
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.
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.
If you are looking to get small loans for bad credit, it’s important to be aware of the terms beforehand.
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.
If your first-choice lender turns you down for a personal loan, you could always apply to a different lender. Again, make sure the repayment plan fits into your budget and you are still able to make each monthly payment on time.
You could also use some of the alternatives noted above to get through the crisis without borrowing as much, or at all.
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 to their payday lender.
Even the higher-end bad credit loans would be a better deal, especially since they give you more time to repay.
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:
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.
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 ideas, see “How Long Does It Take to Build Credit?”)
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 within your repayment term, and also make plans to improve your finances so that you don’t have to borrow again.
If your goal is to learn how to build credit fast but you don’t need the money right away, then consider a credit builder loan. The main purpose of this loan is to help you build your credit. Your lender will then report your performance to credit bureaus, which over time can help improve your low credit score.
If you’re looking to build your credit, consider taking out a credit builder loan from Self Financial today.
Experian. "500 Credit Score: Is it Good or Bad?". https://www.self.inc/blog/personal-loans-500-credit-score
Credit Karma. "What does a 500 credit score mean?". https://www.creditkarma.com/credit-scores/500
Debt.org. "How Good is Your Credit Score?". https://www.debt.org/credit-score-grader/
Longtime personal finance writer Donna Freedman lives and writes in Anchorage, Alaska. See Donna on Linkedin and Twitter.
Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.