If you have bad credit, you may be wondering if it’s possible to get a personal loan from a bank. The answer is more complex than a simple “yes” or “no”. In this article, we’ll help you understand if it’s possible to get a personal loan if you have bad credit – and the other alternatives that may be available to you.
Getting A Personal Loan with Bad Credit Is Usually Very Difficult
Bad credit usually will prevent you from getting a personal loan – at least, at the majority of traditional banks and credit unions. Why? Well, it’s simple. Your credit score determines your lending risk. To simplify things dramatically, a low score means that you have a history of failing to repay your debts. A high score means that you rarely – if ever – have had trouble repaying what you owe in a timely fashion.
Lending risk is very important for personal loans, even compared to other loans like mortgages and auto loans. This is because personal loans are unsecured. Unsecured loans are issued without any kind of collateral. This means that, if you default on the loan, the bank has very few options to get their money back.
This is in contrast to a secured loan, like a mortgage or a car loan. If you default on your mortgage or car payment, the bank can take your home or your car, and recoup most of their money. To boil all this down, what this means is that individuals with a bad credit score (600 or less) will have a tough time getting a traditional personal loan. There is no collateral to secure your loan, and because you have a high risk of not repaying, you’ll either be denied outright, or have to pay a very high interest rate.
What Other Options Are There for Getting an Emergency Loan with Bad Credit?
If you really need an emergency loan with bad credit, there are a few options that you can use.
- Payday loans – Payday loans typically have high fees compared to bank loans. However, they are easier to qualify for, as you can usually get payday loans online with any credit score, as long as you are employed and have proof of income.
- Home Equity Line of Credit (HELOC) – If you have a mortgage, you can take a loan out against your home equity. You can usually do this even with a sub-par credit score, because your home’s equity works as collateral, securing the loan.
- Credit card cash advances – Most credit cards allow you to take out a cash advance against your line of credit. However, these carry high APRs, and you will have to start paying interest on them as soon as you take them out.
- Merchant cash advances – If you run a business, a merchant cash advance may be an option. A merchant cash advance uses your credit card sales as collateral. You get a lump sum loan, and the lender gets a set percentage – usually 3-10% – of your credit card sales paid to them each day, until the loan and its fees have been paid off.
Know Your Options for A Loan with Bad Credit
While it is possible, it’s not easy to get a traditional loan with bad credit. So, make sure you understand what other options you have, and you’re sure to make the right choice for your particular situation.