5 Must-Knows Before Taking Out Loans With Bad Credit

Author: Tiffany Wagner

Borrowers with good credit scores usually get loans at affordable rates. And since their records prove they can make repayments in full and on time, lenders consider them credit-worthy. 

Conversely, borrowers with poor credit scores opt for unsecured personal loans. Unfortunately, they’re usually charged higher interest rates due to their credit risk. Even worse, they’re likely to end up in a debt spiral, where they take out another loan to refinance previous credit. 

A debt trap is the last thing you want to happen. So if you have bad credit and need immediate financing, here are some things you need to know. 

Be Aware of Your Credit (For Free)

Suspecting you have a poor rating is one thing, but knowing how bad it can be is another. Get your most recent credit rating before applying for any loan. 

Take advantage of those close approximations offered by some lending companies for free. They usually don’t have limits, so you can inquire as many times as you want. 

Aim for a DTI ratio of 35%

Your debt-to-income (DTI) ratio is another factor that lenders assess before they issue a loan. It’s the total percentage of your salary that goes toward paying back debt. 

Most lenders plump for borrowers with a DTI ratio of 35% or lower. Ideally, no more than 35% of your salary should go into paying your debt, including your existing and new loans. 

Know Your Options 

Most lenders see borrowers with bad credit as “default risk.” It’s one of the reasons why it’s hard for these consumers to take out a loan right off the bat. The good thing is some creditors pay more attention to other factors than your poor credit score. Here are some of them: 

Credit Unions

Credit unions are best for flexible interest rates, usually capped at 18%. They tend to accept riskier borrowers and charge lower fees than banks. 

A low credit score isn’t even a deal-breaker at this financial cooperative since they consider an applicant’s entire financial history rather than their credit. It’s just that borrowers have to join the union to apply for a loan with them.

Online Loans

Online loans can be your go-to financing if you’re more confident about your repayment ability than your credit.

One good example is installment loans from CreditNinja. While banks have to follow regulations, online lenders are more flexible. They focus more on your income, business, or assets than your credit. They’re even willing to work with borrowers with as low as a 550 FICO rating.


Looking for a cosigner is the best option for borrowers who don’t have a stable income and a good credit rating. 

Cosigners add strength to the loan application of a primary borrower and an extra layer of security on the lender’s side. However, while cosigners benefit both the primary borrower and the lender, it may put their credit at risk. Even worse, if the primary borrower doesn’t repay the loan, the cosigners will be held liable. 

Home Equity Loans

Your interest rate and repayment term are fixed with a home equity loan, and you can borrow money for up to 30 years.

Its interest can be tax-deductible as long as you itemize your taxes and spend the loan for your home’s improvement. However, some lenders ask for fees for this loan, and you may lose your property if you fail to repay. 

Look for the Best Interest Rate 

While most personal loan lenders offer fair credit to borrowers with poor credit ratings, some may offer higher interest rates. That’s why it’s best to compare lenders and opt for the loan with the best offer. 

Boost Your Credit Score

After finally taking out a bad credit loan, you’ll realize how hard it can be if you don’t have good credit. So, you’ll want to improve your credit score and hopefully find financing more easily next time. 

Understand how your score is generated, and the way to do that is by checking your credit report. Next, improve your payment history, current debt balances, length of credit history, new credit, and credit mix. Your credit score is calculated with these factors. 

Since other factors are hard to change, such as the length of your credit history, try to focus on other things that can make a significant impact within a short time, like making on-time payments. 

Final Words

Regardless of your credit score, you can always find a lender that can provide you with the best offer. Just because your loan application was rejected due to poor credit doesn’t mean all lenders will automatically turn you down. Don’t lose hope and apply to several lenders until you get the best offer. 

Featured image credit: Image Source

Tiffany Wagner is a freelance writer and seasoned contributor for various sites that talk about real estate and estate. Apart from writing, she’s also a library and coffee shop habitue. Tiffany likes to indulge in a hot cup of cappuccino while reading her favorite novel.

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