Borrow Money With Bad Credit

If you've had financial problems in the past and need to borrow money, your options may be quite limited. If you have bad credit, any ordinary bank loans you apply for will only be available at a very high interest rate. If your credit is extremely poor, you may not be eligible for a traditional bank loan at all. Fortunately, there are still several options which may be open to you, even though some of these can carry considerable risk, such as requiring you to put up your personal assets as collateral. Before considering any of the following borrowing options, consider what led to your having bad credit and whether your situation has changed such that you now have a greater capacity to pay a loan back. You certainly don't want to do anything that would further compromise your financial situation and credit. You can obtain free counseling by going to credit.org to help you understand your options and determine the best way to go forward—taking on a new debt may or may not be it.

Steps

Getting a Loan from a Friend or Family Member

  1. Find someone to borrow from. If you have a friend or family member who is willing to loan you some money, this may be your best option, as someone you know is more likely to loan you money on flexible terms and/or at a better rate.
  2. Agree to terms. Make an agreement with your friend or family member about how much they are willing to loan you and their expectations about repayment, including any possible interest.
    • To ensure your relationship isn't harmed by this transaction, make sure to be open and honest with the creditor about your circumstances and when you expect to be able to pay them back.[1]
  3. Get it in writing. It's a good idea to put your agreement in writing. This way, there is no conflict later about what the terms of the agreement were.[2]
    • The lender may ask you to sign a promissory note, and may even want to get it notarized to bolster its legal standing.[1]
    • Treat the terms of a loan like this just as seriously as you would a bank loan.
  4. Ask about cosigning. If you need to borrow a larger amount than any of your friends or family have on hand or are willing to loan you, you may want to consider asking them to cosign on a bank loan.
    • If the individual you have asked to cosign the loan has better credit than you do, you may be able to get a much better rate if they also sign the loan.[3]
    • Keep in mind that if you fall behind on the payments of your loan, your friend or family member's credit score will be negatively impacted, possibly severely so. Don't take out a loan with someone else's name on it that you can't afford to pay back.
    • Your specific rate in this case can vary based on your family member of friend's credit score. Consult an online loan repayment calculator to determine your payments and repayment schedule.

Getting a Loan from a Credit Union

  1. Find a local credit union. Credit unions are small, local banks that are owned by members rather than shareholders.[3]
    • Because of this business model, credit unions tend to have lower fees and a different customer service model that evaluates loan applications based on more than just a credit score.
    • If your credit is poor, the rate will still be high, but not as high as it would likely be at a large bank.
  2. Open an account. Because credit unions are member-owned, you must become a member and be eligible for a loan.[4]
    • Opening an account at a credit union is the same as opening an account at any bank. Bring some cash and identification and a banker will help you set up a checking and/or savings account.
  3. Apply for a loan. Talk with a banker at the credit union about your eligibility for a loan, and fill out the necessary paperwork.
    • Because of the more personal approach taken by credit unions, the banker you talk to will be more likely to take into consideration your individual circumstances when applying for a loan. Even if a large bank has denied your loan application, a credit union may approve it.[5]
    • Nonetheless, you should not expect to receive a loan under the same terms and conditions as you would if your credit was good: bad credit will still mean that any funds you receive will only be granted at a high interest rate. This is because the bank is taking a greater risk on your loan than on a loan to someone with a better credit score.[6]
    • Your specific rate in this case can vary based on the loan offer your credit union makes. Consult an online loan repayment calculator to determine your payments and repayment schedule.

Getting a Peer to Peer Loan or Unsecured Personal Loan

  1. Visit a peer to peer loan site. Since 2005, a number of companies have emerged that allow borrowers to connect directly with individual loan providers. The potential advantage is that a borrower typically gets a better rate and is more likely to get a loan, even with bad credit, whereas the creditor gets a better return on their money than a bank.[7]
    • Some of the sites that provided this peer to peer loan service include Prosper, Lending Club, and Peerform.[8]
    • Another option is to use loan shopping websites like MoneyLend, LendingTree, and eLoan.
    • These websites allow you to enter the amount you hope to borrow, your reason for borrowing it, and your overall credit status, and based on this information will tell you whether a loan will be available to you and will quote you an approximate interest rate ranging from 5.9% to 36% or more depending on your circumstances.
    • The following is an overview of the generalized process of applying for a loan through one of these sites. Actual steps may vary depending on the type of loan sought and the lending site.
  2. Create an account. Once you've determined that you want to borrow using peer to peer borrowing, you'll need to create an account, providing your personal information for the purposes of credit screening.[9]
  3. Request a loan. Once your account is set up, you can make your actual loan request, specifying what the loan is for and how much you need.
    • This is your opportunity to make yourself appealing to potential lenders. Any information you can can include that will make you seem like a safer investment, like a history of repaying other loans or innovative business plans you plan to use the money for, should be included here.[9]
  4. Wait for an offer. At this point, you have to wait for a creditor who thinks you are a good investment to make you an offer. You might get one offer for the full amount, or you may have to combine several smaller loans.
    • As in the case of a loan from a financial institution, you should still expect the terms and conditions of any offer you receive from a peer-to-peer loan site to be less favorable than it would be if your credit was good.
    • For example, many of these companies present information like "rates starting at 5.5%" or other promises. The reality is that many of the annual rates given in their loan terms average between 12% and 16%, with riskier loans asking up to 36%.[8]
    • Specifically, a common rate for one of these services might be 15% interest plus a 1% origination fee. So, if you borrowed $10,000 under these terms and paid it back over two years with $500 monthly payments, you'd end up paying $1,715.56 in fees and interest. This represents almost one-fifth of the original loan amount.
  5. Make an agreement. Once you have attracted a creditor or creditors, you'll make an agreement with them and receive your funds.
    • Typically the website will monitor the status of the loan as you pay it back, and will handle the billing as well.[9]
    • Keep in mind that some sites may charge a "sourcing" or "origination" fee. Be sure to check the terms of service before securing a loan.[10]

Getting a Secured Loan

  1. Get a home equity loan. Another option is a secured loan in which some property you own is used as collateral. One such loan is a home equity loan, which is a loan taken out against the value of your house.
    • The equity in your home is the amount your home is worth minus the amount you still owe on your mortgage.[3] For example if you have a $100,000 home and you still owe $30,000 to the bank for it, your home equity is $70,000.
    • Rates for these loans tend to be low, because the value of the loan is secured by your home. This means that even if your credit rate is bad, these loans are less risky for the bank. The interest is also often tax deductible.[3]
    • Using the above equity values, and assuming an interest rate of 5%, imagine that you borrowed $20,000 with a five year term using a home equity loan. You would pay $377.42 per month and end up paying $2,645.52 in total interest over the term of your loan. This places this type of loan among the safest and least expensive options for someone with bad credit.
    • Talk to your banker about a how to apply for one of these loans. However, keep in mind that you may get a better deal at a credit union.
    • Be careful! If you fail to make your payments, you could lose your home.[11]
  2. Get an automobile title loan. A car title loan works similarly to a home equity loan, insofar as your vehicle is used as collateral to secure the loan. Before even investigating this possibility, know that automobile title loans can be incredibly expensive as they may charge up to 300% interest![12]
    • Unlike a home equity loan, a car title loan is usually at a higher rate and for a shorter time period, typically 30 days.[13]
    • To get a car title loan, find a car title lender and bring your car, the title, and your identification. The creditor will take the title to your car and return it to you after you have paid back the loan and interest.[14]
    • Some car title loan agents will also require a copy of your keys, in case they need to repossess the car.
    • Check your state's regulations for car title loans. Some states, such as Illinois and California, have specific regulations in place for car title loans and other states don't allow them at all. Check your state's Department of Motor Vehicles website for more information.
    • Make sure to ask about the full dollar amount you'll need to repay and also when the term ends. Don't borrow more than you can repay in 30 days or you will lose your car.[14]
    • A study revealed that the average title loan borrower pays $2,142 in interest on a $951 loan. This is typically a case of rolled-over fees due to an inability to pay on time.[12]
  3. Visit a pawn shop. If you need a small amount of cash quickly, you can take a valuable item to a pawn shop and use it is collateral for a loan. The typical pawn shop loan about $150 dollars.[15]
    • When you pawn an item, a pawnbroker agrees to pay you a certain amount of money for it. He or she will then hang on to the item for a predetermined amount of time, during which you can retrieve the item by paying back the loan, plus interest. If the term passes and you do not pay back the loan, the broker will sell the item to recoup costs.
    • Try not to pawn anything you'd be heartbroken to lose. Once the term is up and the pawnbroker sells the item, there is no legal recourse for you to get it back.
    • Don't expect to receive market rate for the item. The pawnbroker bears the risk of selling the item at market rate down the line, and the profit comes from taking the risk.[15]
    • Keep the item ticket. When you pawn something, the pawnbroker will give you a ticket or receipt, which you can use to purchase the item back later. Keep it in a secure location, and keep track of how long you have to get the item back.
    • Rates for pawn shop loans will not affect or be affected by your credit score, no matter how bad it may be, because the loan is considered to be already paid for by the object you have pawned.[15]
    • Depending on your state's pawn shop regulations, these loans may charge rates ranging from 12% to 240% per year. For the high end of that spectrum, you would owe back double the actual value of your item in five months![16]

Getting a Cash Advance, Payday Loan, or Tax Refund Loan

  1. Figure out if you have any other options. The following options can be extremely expensive and/or risky. Most experts consider these to be predatory lending practices and do not recommend them. Information about these are included here to give the reader greater understanding of how they work and the risks that come with them. Think seriously before considering any of these options and discuss them with a counselor for free by going to Credit.org.
  2. Get a refund anticipation loan (RAL). If you have not had success with other methods and are expecting a refund on your federal income tax, it's possible to get a loan based on the anticipated refund. Contact a large tax preparation firm for a refund anticipation loan. These loans are no longer offered by banks.[17]
    • Refund anticipation loans use your anticipated tax return as collateral. They typically come with very high interests rates, in addition to other possible fees.[18]
    • RALs are typically available starting in January at the end of the fiscal year, up until April when taxes are due.[18]
    • If you file your taxes online through the e-file system, you can often get your refund almost as quickly as you can get funds through one of these loans.[17] Consider carefully whether you really need one of these loans, as they take a substantial portion of your refund.
    • For example, it is common for a loan of this type to charge a $50 fee and up to 36% interest per year. Using this information, if you borrowed $2000 for 15 days using this type of loan, you would owe $80 in interest and fees.[19] This places RAL's in the same group as other very high-rate loans.
  3. Take out a cash advance. You can use your your credit card at a bank to get a small loan that will be applied to your credit card bill.
    • If you have a credit card issued by a major corporation (such as Visa, Mastercard, Discover, or American Express), you should be able to take it into your local bank branch and ask for a cash advance, though these funds come at a much higher interest rate than your usual credit card transactions.[20]
    • Try to pay back the cash advance by your next statement. If you fail to do so, the interest will carry over to subsequent payments.
    • Be warned that these cash advances generally charge around 24% annual interest, along with a 5% fee.[20]
    • For example, if you take out an average-rate (24%) cash advance for $1,000 and pay it back over a year with $100 payments, you will end up paying about $190 in fees throughout the life of the loan.[20]
  4. Get a payday loan. A final possibility if none of the previous methods have worked and you need some cash quickly is to get a payday loan. There are numerous businesses, both "brick and mortar" and online that will offer you a loan against your next paycheck. These extremely high-rate secured loans should be used only as a last resort.
    • To get one of these loans, you'll need to provide the lender with a post-dated check, or with your account number and routing number. If you do not return to repay the loan on payday, or if you don't transfer the funds back to the lender electronically, the lender is entitled to deposit the check or withdraw funds online.
    • Because they have high default rates, most lenders put very high interest rates on these short-term loans. The average annual percentage rate on a payday loan is 390%.[11] Avoid taking out one of these loans, but if you must, pay it back quickly, as the interest will quickly accumulate.
    • Beware of the payday loan trap. Many people who take out payday loans fail to pay them back. By doing so, they end up taking on even more debt. More than 60% of payday loan borrowers end up paying more in interest than they originally borrowed. This traps these lenders in an endless cycle of debt.[21]
    • For example, on a $500 payday loan, assuming 300% interest, a borrower can expect to pay $125 per month in interest alone. This means that at the end of the first payment period (usually two weeks), the borrower must repay the full amount of roughly $560 or be forced to accept even higher payments on the next cycle.

Tips

  • Whichever loan option you pursue, always ask about fees, interest rates, repayment schedules and deadlines. Keep all of this information in once place, where you can access it easily.
  • Have your information ready before applying, including identification, references, and banking information, as this will make the process faster and easier.
  • Exhaust all other possible options before pursuing one of the loans described in the final method of this article. These loans generally have the highest interest rates and fees.

Warnings

  • Because many of these loans are considered high-risk for the lender, interest rates will be higher than a typical bank loan.
  • Not all of these suggestions are available in every state or country. Be sure to check local laws and regulations with respect to lending and borrowing.
  • Many of these loans are meant to be short-term solutions. Try not to get caught in a cycle in which you're relying on these loans to pay your regular expenses––the high rates will wreak more havoc on your finances.

Related Articles

Sources and Citations

  1. ↑ 1.0 1.1 http://money.usnews.com/money/personal-finance/articles/2012/08/22/how-to-lend-money-to-family-and-friends
  2. ↑ http://www.money.co.uk/article/1007640-how-to-borrow-money-with-bad-credit.htm
  3. ↑ 3.0 3.1 3.2 3.3 http://www.debt.org/credit/loans/bad/
  4. ↑ http://www.carsdirect.com/auto-loans/requirements-for-credit-union-car-loans
  5. ↑ http://money.usnews.com/money/blogs/my-money/2011/11/14/7-ways-credit-unions-are-better-than-banks
  6. ↑ http://twocents.lifehacker.com/all-the-ways-bad-credit-can-make-your-life-difficult-1740467353
  7. ↑ http://www.slate.com/articles/technology/technology/2011/04/the_bank_of_mom_and_pop.html
  8. ↑ 8.0 8.1 http://www.gobankingrates.com/personal-finance/10-top-peer-to-peer-lenders-like-prosper-lending-club/
  9. ↑ 9.0 9.1 9.2 http://www.debt.org/credit/solutions/peer-lending/
  10. ↑ http://www.investmentnews.com/article/20151112/FREE/151119963/what-advisers-need-to-know-about-peer-to-peer-lending
  11. ↑ 11.0 11.1 http://www.usa.gov/topics/money/credit/loans.shtml
  12. ↑ 12.0 12.1 http://www.bankrate.com/finance/auto/consumer-perils-car-title-loan.aspx
  13. ↑ http://www.consumer.gov/articles/1013-car-title-loans
  14. ↑ 14.0 14.1 http://www.consumer.gov/articles/1013-car-title-loans#!what-to-know
  15. ↑ 15.0 15.1 15.2 http://www.nationalpawnbrokers.org/2012/6-things-everyone-should-know-before-going-to-a-pawn-shop/
  16. ↑ http://www.nolo.com/legal-encyclopedia/disadvantages-pawnshop-loans.html
  17. ↑ 17.0 17.1 http://www.responsiblelending.org/other-consumer-loans/refund-anticipation-loans/
  18. ↑ 18.0 18.1 http://www.revenue.wi.gov/faqs/pcs/ral.html
  19. ↑ http://money.cnn.com/2013/03/06/pf/taxes/tax-refund-loans/
  20. ↑ 20.0 20.1 20.2 http://www.creditcards.com/credit-card-news/cash_advances-cost-rates-1276.php
  21. ↑ http://www.cnbc.com/2014/03/26/payday-loans-trap-consumers-in-spider-webs-of-debt.html
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