Personal loans for bad credit: options, costs and red flags
Lenders do approve personal loans for borrowers with low credit scores, but they charge more to cover the extra risk. The difference between a fair offer and a very expensive one can be thousands of dollars over the life of a loan. Taking an hour to compare offers, and knowing which lenders to avoid, is the best protection you have.
Compare the APR, not the monthly payment
The annual percentage rate (APR) includes interest and most fees, so it is the best single number for comparing offers. A lower monthly payment can simply mean a longer term and more total interest.
The CFPB lists the fees personal installment loans can carry: origination and documentation fees, late fees, and optional add-ons such as credit or disability insurance. Ask for each fee in writing, and decline insurance add-ons you did not ask for.
What a high APR really costs
Consider a $5,000 loan repaid over three years:
- At 18% APR, the payment is about $181 a month and total interest is about $1,500.
- At 36% APR, the payment is about $229 a month and total interest is about $3,250.
Doubling the rate more than doubles the interest. That is why shopping around, or improving your credit for a few months first, can be worth more than any other step.
Where to look
- Credit unions: often more flexible with members. The NCUA has extended an 18% interest rate ceiling for most federal credit union loans through September 2027. Federal credit unions can also offer small payday alternative loans (PALs) at up to 28%, a far cheaper option than payday lenders.
- Online lenders: many show your rate after a soft credit check, which does not affect your score.
- Your own bank: existing relationships sometimes help.
- Secured loans: borrowing against savings or a car can lower the rate, but you can lose the collateral.
- A co-signer with good credit can unlock better terms, but they are fully responsible if you do not pay.
What lenders look at besides your score
Bad credit does not automatically mean a bad offer. Lenders also weigh steady income, how long you have been employed, your debt-to-income ratio and recent payment history. A low score caused by one old problem, with on-time payments since, may get a better price than you expect. Have pay stubs, bank statements and identification ready.
Red flags
- A “guaranteed approval” promise or no interest in your ability to repay
- A fee demanded before you receive the money
- Pressure to sign the same day, or blank spaces in the contract
- Very short terms with a lump-sum repayment, typical of payday and title loans
- A lender that is not licensed in your state
Active-duty servicemembers and their dependents are protected by the Military Lending Act, which caps the cost of most consumer credit at 36% APR.
Alternatives to borrowing
- Talk to the creditor: utilities, hospitals and card issuers often offer payment plans or hardship programs.
- Nonprofit credit counseling: a counselor can review your budget and may set up a debt management plan.
- Local assistance programs for rent, utilities or medical bills.
- Employer paycheck advances, if your employer offers them without high fees.
Consider building credit first
If the loan is not urgent, a few months of on-time payments on a secured card or credit builder loan can move you into a better price tier. The CFPB describes both options in its guide to rebuilding credit. Check your credit reports for errors too; disputing a mistake can raise your score.
If you are declined
Lenders that deny an application based on your credit report must send an adverse action notice explaining the main reasons and naming the credit bureau they used. You are entitled to a free copy of that report. Use the reasons to decide what to fix first, for example a high card balance or a missed payment, and wait before applying again: several applications in a short time add hard inquiries without improving your chances.
Before you sign
Read the whole agreement, confirm the APR, total repayment, fees and due dates, and set up automatic payments. A late payment on a bad credit loan can add fees and push your score lower.
Common questions
Can I get a personal loan with a 550 credit score?
Some lenders approve scores in that range, but expect high APRs. A co-signer or secured loan may lower the price.
Does checking my rate hurt my credit?
Prequalification with a soft check does not. A full application usually involves a hard inquiry.
Are payday loans ever a good idea?
They are among the most expensive forms of credit. A credit union PAL or a payment plan with the creditor is usually far cheaper.