Even if you have a low credit score, you can still get a personal loan – but “if you are in this situation, you must be prepared to pay a higher interest rate and possibly other charges such as origination fees, late fees or prepayment penalties”, says Kaitlin Walsh-Epstein, senior vice president of growth and marketing at Laurel Road. Here’s what you need to know if your credit score isn’t great and you’re considering a personal loan.
What is a personal loan and what should people with credit problems use it for?
A personal loan is a loan issued by an online lender, bank or credit union, usually for a lump sum ranging from around $1,000 to $100,000 that you often repay at regular intervals, such as monthly, over a period of one at seven years old. For those with credit issues, a personal loan might be a good idea to consolidate high-interest debt, for example, but only if the rate you get on that loan is lower than the rates you pay. “The best personal loans help you achieve a financial goal, like getting rid of credit card debt, but be sure to compare them with other financing options to find the right fit,” says expert Annie Millerbernd. in personal loans at NerdWallet. Experts say it can also be a good idea to use personal loans to pay off medical debt or an emergency that arises. But don’t use a personal loan to fund discretionary expenses like weddings and vacations, experts say.
What interest rate can I get on a personal loan if I have fair or bad credit?
The average personal loan rate for someone with a fair credit score (601-660) will be around 26-27%, according to Bankrate data, while average rates for someone with a fair credit score mediocre (below 600) are still above 29-30%. That said, these rates are averages, and lenders will also judge those with less than ideal credit based on factors such as income, work history, and assets. If you are offered a high rate like the one above, you might be better off with another type of loan product.
How to get a lower interest rate on a personal loan?
If you suffer from a low credit score, finding a co-signer or co-borrower can help. “Some lenders will allow this as an option when you apply for a personal loan,” says Walsh-Epstein.
Another thing to do is work on increasing your credit rating: “First, examine your spending habits and rethink how you pay, primarily to ensure you maintain lower credit card balances. Second, establish a solid payment history by setting up automated payments on your regular expenses such as bills, credit cards, and student loans,” says Walsh-Epstein. Automatic payments can help control monthly spending planning and avoid late payment fees. “Third, when you can afford it, make more frequent payments to reduce your overall debt and improve your credit score.”
It can also help to streamline your lines of credit and exercise caution when opening new credit cards. And keep in mind that the length of your credit history can be more than 10% of the weight in determining your credit score – so if you’re considering closing unused credit cards, close the most recent ones first. . Finally, Walsh-Epstein says, “Consider refinancing your debt to maximize total debt savings, pay off debt faster, and restructure debt to match your income, which helps support the goal of growing your credit score”.
What costs should you pay attention to with a personal loan?
Borrowers with fair or bad credit should watch out for origination fees with online lenders they’d like to work with, says Millerbernd. “Fees can range from 1% to 10% and typically the lender deducts the fee from the loan proceeds,” says Millerbernd. If you get a loan with an origination fee, check the numbers to make sure you’ll have enough money left after the lender takes their cut.
Can applying for a personal loan affect your credit rating?
Be sure to watch out for serious credit inquiries to avoid further hurting your score. “If you find an option that suits you, then you will need to apply for a loan, which may involve a credit check. Make sure it’s a ‘soft check’ from a trusted lender so it doesn’t further impact your credit score,” says Walsh-Epstein.
How to apply for a personal loan
Personal loans can be quite easy and quick to obtain – and it is possible to apply, be approved and receive funds within 24 hours. Still, experts say it’s wise to do a side-by-side comparison of interest rates and fees from 3-5 lenders to make sure you’re getting the best possible deal on your loan.