How to get a loan with bad credit—and why you may need credit repair

credit repair for bad credit

While having a great credit score can make your life a whole lot easier, the opposite is also true. A bad credit score can make your life harder and more expensive. That’s because bad credit makes it more difficult to qualify for a loan for a car or mortgage, or even qualify to rent an apartment. If you do qualify with bad credit — you’ll typically pay a much higher interest rate and more fees.

But what is a bad credit score? According to myFICO.com, poor credit is typically considered any FICO score of 579 or below. However, you may also struggle to live the life you want with “fair credit,” or any FICO score between 580 and 669.

Bad credit loans and why you need credit repair

Why you should care about your credit score — especially if you’ve made some pretty bad credit mistakes in the past? Well, let me tell you, bad credit can affect your life in more ways than one. Here are some examples:

Loans for people with bad credit tend to come with insanely high interest rates that make paying them off expensive and difficult. This is especially true for bad credit loans with guaranteed approval — if a lender agrees to approve you no matter your credit history, there’s a good chance you’re going to pay very high rates.

If you plan to apply for a personal loan with bad credit, here’s what you have to look forward to: Bad credit loans from Prosper come with ongoing interest rates as high as 35.99% APR. On top of that, you’ll pay an origination fee of up to 5% of your loan amount!

Car loans with bad credit are just as bad. Bad credit at car dealerships tend to offer a very small selection of cars you can get access to with a “buy here, pay here” scheme. This means they offer in-house auto financing, which is convenient but expensive. Auto loan interest rates can be exorbitant at these dealerships since they’re taking a huge risk that you won’t repay your loan. Before you go car shopping, check auto loan rates online with LendingTree.

Home loans for bad credit exist, but they tend to make you jump through more hoops to qualify. You can get an FHA home loan with a credit score as low as 500, for example, but only if you put 10% of the purchase price down. If your credit score is at least 580, on the other hand, you can get an FHA loan with only 3.5% down.

While FHA loans aren’t really considered bad credit mortgages, they do require you to jump through some extra hoops. You must pay upfront mortgage insurance upfront and for the life of the loan, for example.

Renting with bad credit is also not for the faint of heart. Potential landlords will want to check your credit report before they approve you as a renter, and they may deny you outright if your credit is bad — or require you to get a co-signer for your loan. Apartments or houses for rent with bad credit are also not as readily available as units for people whose credit is better.

Startup business loans with bad credit also exist, but their terms aren’t very attractive. If you’re wondering how to get a business loan with bad credit, the answer is simple — plan to pay exorbitant interest rates and fees.

Emergency loans for bad credit are also sketchy — and that’s especially true when it comes to bad credit payday loans. Without exception, you should stay away from payday loans since they can charge interest rates as high as 400% and leave you stuck in a payday loan cycle that can be hard to break.

How to repair your credit

Whether your goal is applying for a debt consolidation loan, a business loan, or a home mortgage, it can be smart to repair your credit before you subject yourself to the bad credit loan process. After all, taking the time to fix your credit score can mean getting access to better interest rates and loan terms once you’re ready to apply.

If you have no credit, follow this guide on how to build your credit from scratch.

If you’re wondering how to repair your credit — and especially how to fix bad credit for free — there are some steps to take right away. Here are some moves to put on your to-do list immediately:

  • Step 1: Check your credit score and get a free copy of your credit reports. Before you take steps to improve your credit, you’ll need to know where you stand. I suggest getting a free credit score from CreditKarma.com or Credit Sesame.com. You can sign up for an account online and see your score in a matter of minutes. Second, head to AnnualCreditReport.com and get a free copy of your credit report from all three credit reporting agencies — Experian, Equifax, and TransUnion.
  • Step 2: Dispute incorrect information on your credit reports. Look over each of your reports to ensure the information and account details are correct. If you find any errors, take the time to dispute information on each of your credit reports, which you can do following the Federal Trade Commission’s step-by-step guide.
  • Step 3: Pay down debt to improve your credit utilization. The second biggest factor making up your FICO score (at 30%) is your credit utilization — or the amounts you owe in relation to your credit limits. Paying down some of your debt can boost your credit score as a result.
  • Step 4: Pay all your bills on time. The most important factor making up your FICO score is your payment history (at 35%). As a result, you should pay all your bills early or on time for the best results. Where a few late payments can wreck your score in a hurry, staying on top of your payments can make a huge positive impact. Tiller is one of my favorite budging apps that makes bill paying easy.
  • Step 5: Take a closer look at Self Lender. Another way to repair your credit is by working with Self Lender. This unique company allows you take out a short-term loan and repay yourself over time, reporting all your credit movements to the three credit bureaus in the process. The big difference is, you don’t get the money you “borrowed.” Instead, it is held in a Certificate of Deposit where it accrues some interest. The upside of this program is the fact you can start building a history of on-time monthly payments that will hopefully improve your credit score. Read: Self Lender review
  • Step 6: Consider a secured credit card. A secured credit card can also help you build credit. This type of card requires a cash deposit as collateral and usually offers a credit limit in the same amount. In other words, you may need to put down $500 as a deposit to get a $500 credit limit you can use. Secured credit cards report all your payments to the credit bureaus, however, so they can be used in the short-term to improve your credit history and score. Resource: Find the best secured credit cards
  • Step 7: Consider working with a third-party credit repair agency. Finally, don’t forget that third party companies can also help you repair your credit. Lexington Law and The Credit People are two popular companies that can help you remove incorrect information from your credit reports to improve your score. Hiring help does cost money, however, so you may want to try credit repair the DIY way first.

The bottom line

Having bad credit is far from ideal since it can prevent you from living your best life and make you spend more money on interest and fees. That’s why taking the time to repair your credit may be smarter than applying for a bad credit loan. By fixing your credit first, you can save yourself some grief and some cash.

Read: How to repair your credit

About Holly Johnson

Holly Johnson is a financial expert, award-winning writer, and Indiana mother of two who is obsessed with frugality, budgeting and travel. Her personal finance articles have been published in the U. S. News, Wall Street Journal, Fox Business, and Life Hacker. Holly is founder of of the family finance resource, ClubThrifty.com, and is the co-author of Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love. Learn more about Holly here.

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