Bad Credit Loans – All You Need to Know About Getting a Loan with Bad Credit

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Bad Credit Loans – All You Need to Know About Getting a Loan with Bad Credit

There used to be a time when bad credit loans were unavailable to people who had problems with their credit. If individuals needed money, they would have to get loans from friends and family or find other means to get cash. Bad credit is not ideal-having a good credit rating is far better from a financial standpoint. However, circumstances like job loss, death, or divorce can send credit into a downward spiral.

There are options and information available to consumers who need personal loans. In this article, topics about bad credit loans include:

  1. Definition of Bad Credit
  2. Credit Reporting Agencies
  3. FICO Score
  4. How to Get Approval for Bad Credit Loans
  5. Improving Credit Rating


Definition of Bad Credit

It is a difficult situation to apply for a personal loan and be denied due to bad credit. Often, lenders just deny a loan without explaining exactly how the decision was made. Sometimes they state negative information from credit reporting agencies or a low FICO score as reason for denial. It is possible to dig deeper to find out why a loan did not get approval.

A credit score is the number lenders use to determine if a borrower can or will pay back a loan. It is the measure of credit risk formula which is calculated from the borrower’s credit report. Most lenders make a decision on whether to approve or deny based on the number. The lower the number, the greater the risk and chances the borrower will not get the loan.

With few exceptions, individuals are considered to have bad credit if their rating is below 600. Some of the factors that can cause this level of credit are:

  • Missing payments on a personal loan or auto loan
  • Making late payments on any credit account
  • No or too few credit references (open credit accounts)
  • Misuse of credit cards (for instance, maxing out the credit limit on a consistent basis)

Damaged or bad credit can negatively impact the chances of approval on numerous lines of credit. It can also raise the cost of auto insurance, since insurers check credit before writing a policy. Interest rates are much higher for people with bad credit. Down payment on rental property and utilities cost more for people who don’t have good credit.


Credit Reporting Agencies

Credit reporting agencies gather details about whether credit accounts of individuals are paid (or not paid). Utility companies, apartment or home rental companies, and other bills might also send credit activity to a credit reporting agency, especially if these accounts are paid late. The information in a credit report is what is used to create credit scores.

The three major credit agencies are Experian, TransUnion, and Equifax. They operate as for-profit businesses and are not government owned. They have relationships with lenders, financial organizations, and credit card companies to which they report. Creditors may report credit history to one, two, or all three credit reporting agencies.

Negative information on credit reports include:

  • Late or missed credit payments
  • Accounts that were charged off by a creditor
  • Bankruptcy
  • Collection accounts
  • A large number of hard inquiries (which could mean the borrower is applying for too much credit)

In addition, tax liens, foreclosures, and judgements (lawsuits) that have been awarded to a creditor for a defaulted debt all are listed on a credit report. This type of information is calculated and can result in bad credit ratings, also referred to as low FICO scores.


FICO Score

A credit rating comes from the information on the credit report. It is commonly called a FICO score, shortened from Fair Isaac Co., the business from which it originated. It is the company which is most used to analyze information to predict how a person will pay their bills. FICO is not a credit reporting agency in and of itself. There are other companies that lenders use to evaluate information contained in credit reports, such as VantageScore.


FICO generates credit scores based upon the following:

  • The borrower’s history of paying bills
  • Type of credit accounts in the credit file (credit cards, personal loans, auto loans, etc.)
  • How long the borrower has credit

Each of these, and other factors, make up a percentage of the creditworthiness of the borrower. When factored together, they result in a three-digit credit score. That score helps lenders decide if they will offer credit to a borrower. But a low FICO score does not mean a person cannot get credit at all.


How to Get Approval for Bad Credit Loans

In some areas, between 25 to 30 percent of borrowers have a credit score of 600 or below. That’s a lot of consumers who need financing for auto loans, mortgage loans, personal loans and other forms of credit. Therefore, the market has opened to enable some of these people to get approval loans who otherwise would not qualify.

Many lenders will look at other factors besides a credit score when considering approving a bad credit loan. Some even cater to people with damaged credit and relax their requirements for getting approved. Along with credit scores, some creditors will consider:

  • The income of an applicant
  • How long the borrower has been employed
  • Assets, such as savings accounts
  • History of paying bills like utilities and rent

People with bad credit do pay the cost for approval in the form of higher interest rates and fees, however. This is not unusual since bad credit loans are not usually given by banks, credit unions, or larger financial institutions. More commonly, these loans are offered by online lenders, small finance companies, or in the form of payday loans.

Even with bad credit, the highest interest rate is about 36%. This is a high interest rate for anyone with good or even decent credit. However, lenders that do not consider credit at all (such as pay day loans), often charge an extremely high rate-sometimes over 1,000% for pay day loans. Borrowers who need an emergency loan should be cautious that they are not trapped into a cycle of debt.

So, while it is certainly possible to get a personal loan with damaged credit, it is important to search for a lender who will approve bad credit loans with the lowest interest rate and fees possible. In the meantime, there are ways credit ratings can be improved over time to help qualify for loans at a lower cost.


Improving Credit Rating

Credit bureaus do not leave negative information on a credit report forever. Over time, damaging items fall off of the report, which brings up the credit rating. A good start to working toward a good credit score is to get a credit report. The report will let anyone with bad credit see where to begin to turn their credit around. The report will also reveal if there are any errors on the report which should be removed, such as:

  • Credit used by someone else (identity theft)
  • Incorrect personal information due to a mix-up with names or addresses
  • Paid accounts reported as unpaid
  • Outdated information still on report past the legal date it should removed
  • Negative credit history of ex-spouse included in borrower’s report

Consumers are entitled to one free report from each credit reporting agency every 12 months by federal law. They can also buy additional reports during the year from each credit bureau to stay on top of what is being reported to lenders.


Here are five of the top ways to build credit:

  1. Commit to a habit of paying all bills on time consistently.
  2. Get approved for a secured credit card. Use it and pay each month to establish good credit.
  3. Consumers can sometimes get credit for rent they pay on time through companies like RentTrack.
  4. Try to get approval for bad credit loans with the help of a co-signer.
  5. Apply for a credit builder loan, in which the lender holds on to the money borrowed until it is paid. It works sort of like a forced savings program, but payments are sent to credit bureaus.


The path to reversing bad credit takes work, but is well worth the effort. Many people have had success with credit counselors to manage their credit better.  With a higher credit score, it is possible to qualify for more loans with lower interest rates and better terms.

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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.