It’s possible to receive a personal loan with bad or low credit

For those that are wondering where the average lies in the United States for credit scores, it’s around 711, based on this report. This also puts you in the ‘good’ section of creditworthiness, and it should be easy for you to obtain credit.

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For those that find themselves below average and have especially low credit at around 600, getting a personal loan becomes much more difficult, and they tend to come at higher rates. But, of course, that’s if you can get a loan at all.

Let’s review an example below. We will have two different borrowers with different credit scores and how much interest they will pay over a seven-year repayment plan. They’re both borrowing $10,000.

  • The borrower with excellent credit (which is around 800) receives a rate of 5% and will pay about $1,872 in interest for seven years.
  • The borrower with low credit (a score of 600) receives a rate of 9% and will pay almost double the interest at around $3,515, borrowing the same amount of money over seven years.

The better rate for the first borrower is due to their great credit history. Meanwhile, borrowers with low credit scores may have some issues with their history and thus appear as riskier candidates to offer a loan, hence the higher rate to compensate for the risk.

How best to approach loans when having low credit

While it’s still possible to get loans with a score of 600 and thus have low credit, your real focus is to get a better credit score. If you’re looking to start getting much fairer terms, then building up your credit to about 670+ is ideal.

Having a score below that number can lead to auto rejection or personal loan terms that come at much higher interest rates, making your cost of borrowing higher as well.

Ann Martin, Director of Operations at Credit Donkey, stated, “There is a significant difference when looking at a low FICO score and a FICO score of around 700 and above. Having that score of 600 will cost you more, and when you improve it, numerous cost-effective options will be available.”

Martin states, “If you want to know where to get to, then 670 is a good number; that’s when you can start to get better access to traditional types of credit.” Traditional credit looks like credit cards and auto loans that come with the right type of interest rates, so you aren’t paying too much per month.

Let’s see what to do if you aren’t in the 670+ range.

These days – you can speak to a lender. Matthew Jimenez, who owns My Credit Repair Clinic in Miami, Florida, said this, “With a low credit rating, getting loans isn’t easy because you appear as a risk. Speak to lenders directly and explain your situation to them; they can give you both advice and may also be willing to accept the risk with that personal conversation.

Understand your options. There are still other ways beyond simply applying for a personal loan. For example, Jimenez recommends that you “consider getting a co-signer, as well as continuously work to improve your credit score. Secured loan options also require you to lock in funds as collateral, but every repayment on time will help your score.”

Get that debt down. Have a plan, and don’t just keep applying for any type of loan, as that can actually harm you in the long run. Instead, start looking at why you have a low credit score and what you can do to improve it. Jimenez recommends “look at those debts that are still outstanding and get those amounts owed lower. Don’t forget to pay on time, and make sure you have an appropriate number of credit lines.”

Know how your score is measured. There are a range of credit scoring systems out there, but FICO is a good place to focus on. Once you understand how the scores are built, you’ll be able to focus on improving that score. Brian Martucci from Money Crashers, located in Minneapolis, said that “FICO is a pretty common scoring system that is often used, so start there.”

FICO scores look at your payment history and ensure you pay on time. It also takes on board the amount of your credit you’re utilizing. You want this number low if you want a high FICO score. Then they look at how old your credit history is, with you wanting a long history. From there, it’s about what types of credit you have; the more variety, the better. Finally, they will look at how many new applications you have made, which isn’t good if it’s high.

Martucci recommends consistently checking your report and seeing where you can improve upon it.

You want to keep your balances at a low level and pay down those large debts quickly. You can have an autopay to always pay your bills without issue to improve your payments. Try not to close out credit cards you’ve had for a while, as they will improve your history. And as mentioned above, stay away from always applying for fresh credit.

Discipline helps with Low Credit

Once you understand the situation low credit brings, you can build the right plan to get a better credit score. That means always communicating with lenders and explaining yourself, as well as doing the right techniques to improve your credit score.