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Bad Credit Personal Loans

How Bad Credit Affects Your Personal Loans

    Having bad credit can be stressful, and needing a loan when you have bad credit is even worse. But don't worry. There are still ways to get the money you need, despite your credit record, and it doesn't have to be as painful as you might think.

Personal Loan Basics

    To understand how your bad credit affects your ability to get personal loans, it is important to become informed about personal loans. The more you know, the better you will be able to negotiate with a bad credit personal loans lender. Below are the basic facts about personal loans.

  • Personal loans, also known as signature loans, do not require collateral (Gitman). That means you do not have to put your house or any other assets on the line as security.
  • Personal loans usually have much higher interest rates than other types of loans (Weltman). So, you'll have to pay more money to get personal loans than for mortgages, home equity loans or equity lines of credit.
  • Personal loans are for smaller amounts of money, usually for no more than $10,000. Also, the loans have short term lengths. Some are due as soon as five years (Lister).
  • Personal loans are more difficult to get than other types of loans because they do not require collateral (Weltman). Because there is no collateral, a lender is taking more of a risk by giving out personal loans. As a result, lenders only give out the loans if they are sure you'll be able to pay the loans back.

How Bad Credit Will Affect Your Personal Loans

    Now you're probably wondering what all of that means for you. Think about it from the lender's point of view. Personal loans, even given out to people with good credit, are a risky venture because if a lender gives out a personal loan and the borrower can't pay the money back, there is no collateral to claim. Basically, that means the lenders lose their money. So, when you go looking for a personal loan, lenders will see your bad credit and will immediately see you as a risk. Would you give out several thousand dollars to a friend if he or she had a history of not paying back the money back? I didn't think so. Lenders will see you as that irresponsible friend, whether it is fair or not.
    Chances are that most lenders will turn down your application for bad credit personal loans. The ones that don't will require even higher interest rates and fees, which will make the loans almost as expensive as using credit cards. That leaves you in a tough position. You either don't get a loan, or you pay exorbitant fees and interest that put you in an even worse financial position. Luckily, you do have other options.

Your Best Course of Action for Bad Credit Personal Loans

    If you have bad credit, personal loans shouldn't be your first option when looking for financing. If you own any assets, such as a home, condo, car, boat or business, consider using your equity as collateral for a loan. Mortgages, home equity loans and equity lines of credit have much more reasonable interest rates and lower fees than personal loans. However, if you use any of your assets as collateral, make sure you can pay back the loans. If you default on your loans, your lender can take whatever you used as collateral. So, you could loose your home, condo, car, business or other assets.
    If don't have any assets that can be used as collateral and can't afford the high interest and fees of bad credit personal loans, you still have some options. However, you'll have to start with remedying whatever gave you the bad credit in the first place. Once you remedy the cause of your bad credit and ensure that it won't happen again, you can then try talking with a lender. If you can prove to the lender that your bad credit was a thing of the past and that you have the means to pay back the loan, you may get the loans you need (Antonini). In order to prove to a lender that you have changed and that you won't default on the loan, you will need written documentation. Try to anticipate the questions a lender will ask, such as what caused your bad credit and what has changed since then. If you can prove to a lender that you have the income and asset base to cover the loan, there is a good chance you'll get it.

    Although having bad credit makes it harder for you to get personal loans, it isn't impossible. However, getting reasonable terms on bad credit personal loans is much more difficult. Despite that, if you understand a lender's point of view and can prove that you are a safe investment, you'll have a much better chance of getting the loans you need.


Antonini, Orlando J. Getting a Business Loan. (Massachusetts: Thomson Crisp Learning, 1993). 67-70.

Gitman, Lawrence J. and Michael D Joehnk. Personal Financial Planning. (Ohio: Thomson South-Western, 2004), 277.

Lister, Kate and Tom Harnish. Finding Money: The Small Business Guide to Financing. (New Jersey: John Wiley and Sons, Inc., 1995), 13-17.

Weltman, Barbara. Idiot's Guide to Starting a Home-Based Business. (Indiana: Alpha Books, 2000), 140-143.