Sometimes it’s the people who need loans and credit the most who have the hardest time getting them. If you have a poor credit score, you might think it’s impossible to get a loan, whether for emergency car repairs, sudden medical bills, home repairs or even to purchase a home.
If you’ve been denied credit in the past, you might think securing a loan or a mortgage is out of your reach, but don’t worry — you have more borrowing options than you might imagine. Many loans are available to those with poor or bad credit. Here are a few of your best options if you’re struggling to get a line of credit with your current credit score.
1. Home Equity Line of Credit
If you already own a home and have equity in it, you might want to consider getting a home equity line of credit. Doing this isn’t without risks since you are putting your home up as collateral. Still, HELOCs are among the best loan options if you have poor credit.
If you need a bad-credit loan, it’s possible to secure a tax-deductible line of credit at a reasonable interest rate and with no restrictions on how you spend your money. Keep in mind, there are limitations on claiming your line of credit as a tax deduction.
To qualify for a HELOC, you will need a loan-to-value ratio of about 80 percent, meaning you need to have an equity stake in your home of at least 20 percent. Even if you haven’t paid off a significant portion of your mortgage, your home’s value could have gone up since the Great Recession. Your lender will also want to see that you have a strong employment history and a low debt-to-income ratio.
If you do find yourself able to qualify for this type loan, be sure to comparison shop lenders to ensure you’re getting the lowest rate available to you. As with most bad-credit loans, interest rates on HELOCs tend to run higher.
Pros of a HELOC:
- You’re allowed flexibility in how you use your funds.
- You’ll likely pay a lower interest rates than with credit cards.
- Adjustable-rate HELOCs offer even lower rates.
Cons of a HELOC:
- You must pay closing costs.
- Your home must serve as collateral.
- The bank can cancel your line of credit.
- You might face fees if you don’t immediately use the line of credit.
2. Bad Credit Loans
If your credit is bad, getting a bad-credit loan might be your only option. Although it’s much easier for those with bad credit to qualify for these loans, be careful not to get caught in an endless cycle of debt. Because most bad-credit loans have ridiculously high interest rates, you’ll want to be careful before going this route. Make sure it’s worth it for this type of loan.
Pros of a bad-credit loan:
- Even those with bad credit can qualify.
- It’s easy to get preapproved.
Cons of a bad-credit loan:
- Interest rates are extremely high.
- Usually, a limit exists to the amount you can borrow.
3. Credit Union Loans
It’s much easier to get a loan from a credit union than from a bank, as credit unions’ credit standards are often more relaxed. At some credit unions, almost anyone is able to join; membership eligibility is often as simple as residing in a particular location or being the member of a type of profession. Because credit unions are not-for-profit entities, they can offer loans and other financial services much more cheaply than profit-driven banks, and their level of customer service is often much higher than banks’.
Pros of a credit union loan:
- Credit unions offer more relaxed lending standards than traditional banks.
- Fewer penalties and fees are assessed than at traditional banks.
- Unsecured loans for people with bad credit are available.
Cons of a credit union loan:
- Your credit score and loan type limit how much you borrow.
- Unsecured personal loans have shorter loan periods.
Credit Union Loan Rates vs. Bank Loan Rates
|Type of Loan||Credit Unions (National Avg.)||Banks (National Avg.)|
|Unsecured Fixed Rate Loan, 36 months||9.24%||10.14%|
|Home Equity Loan, 5 Years, 80%||4.40%||4.97%|
|Home Equity Loan, LOC, 80%||4.07%||4.39%|
|Used Car Loan, 48 months||2.79%||5.09%|
|New Car Loan, 48 months||2.61%||4.58%|
|Data from NCUA.gov for June 24, 2016|
4. Peer-to-Peer Loans
Peer-to-peer loans represent a newer, but equally reliable way to borrow money. These types of loans are typically fielded from peer-to-peer lending sites such as Prosper, Lending Club, Peerform and others. These websites enable prospective borrowers to obtain loans from individual lenders rather than from banks or other financial institutions.
P2P lending has become an increasingly popular way to obtain bad-credit loans, though these sites do have requirements for potential borrowers. Still, depending on your credit history, employment history and other factors, you can qualify for loans with rates as low as 5.49% APR from leading P2P lenders. Keep in mind, though, that P2P loans are unsecured.
Pros of P2P loans:
- This type of loan might be easier to obtain than one from a traditional bank.
- Interest rates are lower than that of credit cards.
- You’ll pay fewer potential fees.
- You can explain to investors why you have poor credit.
- You’ll typically be able to borrow a higher amount than with a traditional bank loan.
Cons of P2P loans:
- Lending sites have strict qualifications for borrowing.
- You need to raise loan funds from various borrowers.
- Rates can be as high as 36% APR.
- Depending on the lender, it can take two weeks or longer to receive funds.
Top P2P Lender Rates
|Lending Club||Upstart||Prosper||PeerForm||CircleBack Lending||SoFi||Pave||BorrowersFirst||Funding Circle|
|APR||5.32% to 30.99%||6.49% to 30.01%||3% to 36%||7.12% to 29.99%||6.63% to 34.93%||5.95% to 12.99%||7.18% to 24.31%||5.99% to 26.99%||5.49% to 21.29%|
|Loan Terms||3 or 5 years||3 or 5 years||3 or 5 years||3 years||3 or 5 years||3, 5 or 7 years||2 or 3 years||3 or 5 years||1 to 5 years|
|Loan Amounts||$1,000 to $300,000||$1,000 to $50,000||$2,000 to $35,000||$1,000 to $25,000||$3,001 to $35,000||$5,000 to $100,000||$3,000 to $25,000||$2,500 to $35,000||$25,000 to $500,000|
|Data accurate as of Aug. 24, 2016.|
5. Cosigned Loans
If a friend or family member with good credit is willing to cosign for a loan, you can get in on a good interest rate and loan term. Getting a cosigner when you have poor credit and need a loan might not be easy, unfortunately. You have to convince someone close to you that you’re trustworthy of a loan despite your poor credit history. Additionally, if you fail to pay back your debt, your friend or loved one will be responsible for the debt, and your lack of payments will affect both your cosigner’s and your credit scores.
Pros of a cosigned loan:
- Qualification and terms are not entirely dependent on your credit score.
- You can get a lower interest rate than you would without a cosigner.
- More flexible terms might be possible.
Cons of a cosigned loan:
- You’ll put someone else’s credit score at risk.
- You’ll put your relationship at risk over a loan.
- It might be difficult to convince someone to cosign for you.
6. Secured Loan
There are many types of secured loans, similar to a HELOC, in which you offer up something you own as collateral. Getting a secured loan backed by some valuable assets — whether it be your home, your vehicle or something else — can be easier for someone with poor credit.
Pros of a secured loan:
- Even those with bad credit can qualify.
- Repayment period is longer.
- Low interest rates are possible.
Cons of a secured loan:
- Collateral is required.
- Longer term means you could get stuck in debt.
7. Loan From a Family Member or Friend
A loan from someone you know is probably the most difficult type of loan to ask for. Asking for a loan from friends or family doesn’t depend on your credit score, but it can put an important relationship at risk. Getting a personal loan from someone close to you should probably be your last resort. Only do it if you’re sure you’ve corrected your bad money habits.
It’s also highly recommended that you draft a loan agreement that clearly spells out the terms of the loan: interest to be charged, number and amount of payments and the duration of the loan. Doing this before you get the loan from a loved one will prevent hurt feelings, damaged relationships and even possible legal action. This kind of loan arrangement requires good faith on both parts and should only be entered into if you’re absolutely sure that you can pay back the loan in full and on time.
Pros of a loan from friends or family:
- Approval and terms aren’t dependent on your credit score.
- You could receive money instantly.
- You could have a flexible repayment plan.
- You might get a low interest rate, or even none at all.
Cons of a loan from friends or family:
- It can be hard to obtain.
- You put your relationship at risk.
- You’ll likely be able to borrow only a small amount.
- You could face legal action if you don’t pay back the loan in a timely manner.
Keep Reading: 8 Free Ways to Receive Money from Friends and Family
Get Your Credit Report and Improve Your Credit Score
The best thing you can do for your financial health and your credit is to obtain a copy of your credit report and start improving your credit score. Because even though you can qualify for these loans with poor to bad credit, you will get much better rates and terms if you have better credit. Instead of getting stuck in a cycle of debt, improving your credit score and your money habits will help you pay off your debts and allow you to manage your finances well.
Kristy Welsh contributed to the reporting for this article.