Best Personal Loans for Fair Credit
Personal loan growth exploded over the past five years, climbing from $72 billion in 2015 to $143 billion to start 2020. 19.1 million people currently have unsecured personal loans. Yet, it only amounts to 1% of total consumer debt, compared to 7.27% of American credit card debt.
Consumers take out personal loans for a variety of reasons, with almost 26% using it for credit card consolidation. Given the numerous reasons for taking one out and options available, it's important to find the best personal loan for you.
Here we explore that question for fair credit consumers. However, much of this information applies to anyone looking for a personal loan.
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When you take a loan out, you and your creditor will agree to a few standard terms, including:
- Type of Payments: Here, you’ll be dealing with installment vs. revolving debt. The installment variety allows you to make monthly payments towards your debt, like a student borrowing. With revolving, you can borrow as much as you need to up to a specified limit, repay the outstanding balance, then borrow more, as you would with a credit card.
- Interest Rate: Generally, these have fixed interest rates, which means your monthly payments will always remain the same.
- Secured Vs Unsecured: Personal liabilities generally come in the form of secured or unsecured, which we’ll get into more later.
While it's a fantastic option when you need or want to make a large purchase, it is important to consider whether or not this purchase is worth adding. If you are interested in taking one out, there are a few things you should understand, beginning with secured vs. unsecured.
What Does it Mean to Have Fair Credit?
When lenders refer to fair credit, they're speaking about customers with some credit history, but lower-end credit scores. Typically, this includes FICO scores between 580-669.
People with fair credit may have missed a few payments or carry high balances on their credit cards month-to-month. The lower credit score makes it a bit more challenging to find a lender and a good interest rate. In lieu of higher rates, some lenders may charge higher fees for the loan.
Uses for Personal Loans
Borrowers often use personal loans as a short-term bridge for financial needs. The most common uses are for large purchases and debt consolidation. Here are some examples:
Debt consolidation – According to an Experian survey, 26% of respondents with a personal loan say they used it for debt consolidation. By combining debts like credit cards and payday loans, borrowers can create one monthly payment and potentially lower interest rates.
Medical expenses – Medical expenses continue to rise every year, with recent readings showing a 5.9% increase in costs. Insurance doesn't always cover all your expenses, and sometimes the deductible itself can be quite large before you reach the out-of-pocket maximum.
Education – Typically, borrowers get specific student loans for their education. However, they may not cover ancillary expenses such as rent and transportation to class.
Home improvement – If you aren't interested in tapping into your home equity, personal loans are a great option to pay for small to medium home improvement projects.
Business – Business loans often come with restrictions on usage. Personal loans can offer more flexibility beyond the purchase of hard assets such as equipment.
Weddings – Life events such as a wedding, even when planned, can be difficult to pay for. Short-term borrowing can help cover expenses that pop up at the last minute.
Big purchases –The same Experian survey noted that 28% of respondents used personal loans for large purchases. This can be anything from furniture to a car, or anything not covered by traditional lending.
Vacations – Sometimes the upfront cost of a vacation can be prohibitive, especially if down payments are required. That's where these products can help cover the immediate expenses.
Best Personal Loans for Fair Credit - Types of Collateral
You don’t exactly have a plethora of options when it comes to your liabilities. You’re either going to get a secured or unsecured, both of which have their benefits and drawbacks.
- Secured Personal Loans for Fair Credit
Secured obligations require you to put up a piece of your property, typically a car or house, as collateral. If you are unable to pay back your obligation, your lender will sell your property to pay off your debt.
While you might be hesitant to put up a piece of your property, doing so would make it much easier to take one out -- particularly if your credit score is on the lower end. A secured obligation will also allow you to take out a larger balance and at lower interest rates. Of course, you should only really consider this option if you are sure you will be able to pay it back.
- Unsecured Personal Loans for Fair Credit
Unsecured don’t require you to put up any collateral whatsoever. Instead, these are based entirely on your creditworthiness. Obviously, this might be preferable if you have a higher-than-average credit score; however, if you have a poor credit score, then you likely won’t be able to take out the unsecured version without a cosigner. If you are able to acquire one with a poor credit score, you can expect it to come with significantly higher interest rates as your lender is going to be looking to protect itself in case you are unable to pay it back.
If you default on your obligation and don’t have a cosigner, your lender won’t be able to take your property, but they may choose to send your debt to a collection agency or take you to court.
How Much Can You Afford to Take Out?
When determining how much you can afford to take out, there are several key factors you need to consider in order to evaluate the total cost.
- Determine How Much Personal Loan You Need
First, you need to decide how much you need. Most structures generally provide amounts up to $35,000. However, you should be sure not to ask for more than you need as this could lead to higher rates and less favorable terms.
- Interest Rates for Personal Loans with Fair Credit
Your interest rate, or annual percentage rate (APR), is one of the most important factors when trying to evaluate the total cost. These vary quite a bit depending on your credit score, your income, and whether or not you are able to put up property as collateral. As most personal debts are unsecured, your lender is taking on a much larger risk, so your interest rates are likely to be higher than they would be for a home or auto.
Most of these contracts allow for payment terms anywhere from one year to 20 years. Just like with any other debt, longer repayment terms are going to lead to higher amounts paid in interest over time, so you need to figure out the shortest amount of time that you can repay without risking late payments.
- Check Your Credit Score
To get a better understanding of the types of offers you can expect to receive, you need to do a thorough review of your finances, including your credit score. Using a free tool such as Credit Karma or Mint can give you a good idea of the types you’ll qualify for. Generally speaking, a credit score of at least 680 should be good enough to get you a few reasonable offers.
Personal Loans Advantages and Disadvantages
If you decide on this option, it comes come with its own advantages and disadvantages. This pros and cons list should help you determine whether or not it's worthwhile for you.
- Pros of Personal Loans for Fair Credit
- Paying for Emergencies: Car accidents, illness, and natural disasters are just a few events that can present some unexpected expenses that you may not be able to afford. This options can offer a quick solution to help you stay afloat during these times.
- Fixed Interest: Thanks to the way these debts are typically set up, you can expect to make one standard monthly payment for the duration of your contract, making it much easier to budget around it.
- Improve Your Credit: Also, these can be a great way to boost your credit score by adding to your credit mix. Note that you should absolutely not take on this type of balance for the sole purpose of boosting your credit, but it can be an added benefit.
- Cons of Personal Loans for Fair Credit
- Can Damage Your Credit: While paying off your obligation on time can help boost your credit, neglecting to make regular payments can ruin your credit score.
- Borrowing Too Much: Taking out more than you need can cause you to develop poor financial habits. Relying on credit to pay for all of your expenses just because it’s easy to obtain can restrict your ability to grow financially.
- Higher Interest Rates: While fixed interest rates are a huge positive, the fact that most of these debts are unsecured means that your interest rates are likely to be significantly higher than a secured one.
All things considered, they provide incredible benefits while the disadvantages generally only present themselves when handled irresponsibly. As long as you have done your research and accurately evaluated how much you can afford, you should be able to avoid any of the cons associated with taking one out.
How to Get a Personal Loan for Fair Credit
Once you fully understand the pros and cons and have evaluated how much you can afford to take out, it is time to begin the process of applying. Here’s how you can expect this process to play out:
- Finding a Lender for Personal Loans for Fair Credit
First things first, you need to find a lender that fits your specific needs. If you are in a good financial situation with a high income and credit score, your priority is probably to find the best offer possible. On the other hand, if your credit score is less than ideal, your only goal might be to just get approved.
Next, you should read reviews to ensure that each lender you look at is credible. Unreliable lenders may entice you with offers such as ‘no credit check loans,’ but are sure to take advantage of you. Reviews can help you avoid costly scams and prevent you from wasting your time.
Lastly, you should compare every lender you look at to find the best offer available. Banks, credit unions, and private lenders will all have their own fees, terms, and interest rates. You should never limit yourself to just one option.
- Completing Your Application
Once you’ve found the perfect lender for you, you need to fill out an application. Your application will ask you for information such as:
- Your Social Security number
- Proof of employment
- Proof of income
- Proof of identity, including your driver’s license, passport, or birth certificate
- Bank account information
In addition to this information, your lender will perform a hard credit check and may even ask for additional documentation such as bank statements and proof of education. Lenders looking at your life this thoroughly are usually prepared to offer better terms than those with a less complete picture of your life, but its extra important you feel you can trust any company you give that much info to!
After your application is completed, you can stay in contact with your lender to receive updates on the progress of your application. You can typically expect your application to be processed anywhere from one day to two weeks.
- Signing Your Agreement
Finally, after your application has been approved, your lender will provide you with a formal offer.
In this offer, you’ll find all the details and terms, including:
- Total fees
- Interest rates
- Disbursement details
You should carefully review this document to ensure that all of the details are as expected. If you agree to all of the terms in the offer, then it’s time for you to sign the agreement Once the agreement is signed, you can expect to receive your funds shortly after.
Best Lenders for Personal Loans
As APRs can range from 4% all the way up to 35%, it is crucial that you do your due diligence to find the best lender possible. Additionally, you’ll find that some lenders are much more flexible than others. For example, one lender may only offer options from $10,000-$20,000 to be paid off in up to three years, while another lender may offer up to $50,000 to be paid off over five years. Depending on your needs, you may need a lender that offers more flexibility.
Tips to Find the Right Personal Loan for Fair Credit
Here are a few tips to make shopping a much less stressful experience:
- Get Pre-Approved
Don’t make the mistake of taking the first offer that you come across. As with almost anything, it is important to keep your options open when searching for an option. Applying for pre-approval with multiple lenders is a great way to do this.
When you apply for pre-approval, you will have to provide fairly standard information, such as your name, birthday, contact information, and what you plan to use the money for. Additionally, lenders may perform a credit check. In this case, make sure it is a soft credit check to ensure that it doesn't affect your credit score. Generally, when you are a pre-approved, a lender will be able to send you a few offers based on the information you provided.
- Compare Interest Rates
If you have multiple offers from different lenders, it’s important that you make the effort to compare the interest rates between them in order to find the best deal.
Your interest rate, or annual percentage rate (APR), is one of the most important factors to consider when determining the long-term cost. Using a comparison tool is a great way to make sure that you find the best deal possible. You’ll find that, in many cases, it might be more cost-effective to take out a larger balance with a lower APR than vice-versa.
- Be Aware of Additional Fees
Beyond your interest rate and the length of your obligation, fees can add additional costs that you may not expect. Your lender may charge an origination fee of anywhere from one to five percent of the total balance. In some cases, your lender may not charge any additional fees at all; however, this may lead to higher interest rates.
A reliable lender will always be upfront about all of the fees associated. This will help you determine the full cost so that you can more accurately compare your offers.
What to Watch Out For When Applying For a Personal Loan
- Payday Loans
When you're shopping around for the best personal loan for fair credit scores, the most common thing to watch for is guaranteed loans.
Guaranteed loans are also referred to as payday loans. These are short-term loans where you get a cash advance, agreeing to pay back any principal plus interest from your next paycheck. Most payday lenders don't do credit checks, which makes them popular for borrowers with no or poor credit histories needing money for emergency expenses.
Borrowers give up a lot of personal information along with a personal check and electronic access to their bank account.
The major drawback of these loans is the excessive interest rates charged, which can be considered predatory. Annual percentage rates on these loans can be north of 400% per year.
- Using personal loans to pay off student loans
Many students exit college with debt that they need to pay off as they start to enter the workforce. However, using a personal loan to pay off student debt has several drawbacks, most of which are tied to the flexibility behind student loans.
First, not all lenders offer personal loans to pay off student debt. Ones that due tend to require excellent credit scores.
Second, interest payments won't be tax-deductible anymore.
Lastly, you forgo eligibility to apply for income-driven repayment plans offered.
- Credit report
Credit reports are a must when you apply for these products. Mistakes left unattended can cost you in higher interest rates, fees, or being denied altogether.
One common mistake borrowers make is too many credit checks. These make up 10% of your FICO score. Hard credit pulls fall into this category while soft credit pulls do not.
Before you apply for a personal loan, find out if they use a hard or soft credit pull for qualification. If you qualify with a soft credit pull, then lenders will move to a hard credit pull before completing the process. Be aware of how many times hard credit pulls are performed on you.
It may seem unusual that lenders would offer life or unemployment insurance as part of the loan. Life insurance covers the debt if you pass on early so your beneficiaries don't get saddled with your debt. However, this insurance can be expensive as is unemployment insurance.
While that may seem ideal, these typically add more costs than are necessary given the short-term nature of personal loans.
Frequently Asked Questions on Personal Loans
- Can I Qualify with Bad Credit?
If you have a poor credit score, you’re not completely out of luck. Many providers will have options for individuals with bad credit; however, these options will always be more favorable for the lender than they will be for you. You also, of course, may still be eligible for a secured, granted you have a property that you can put up as collateral. Note, of course, that if you are able to get approved then making timely payments for the life of the contract will be a great boost for your credit score in the long run.
- What Can The Money Be Used For?
Unlike many other types, such as student lending or mortgages, personal loans can be used for almost anything. Common uses include debt consolidation, home renovations, medical expenses, and paying for a vacation.
- How do I Know if I Qualify?
As you might expect, every lender will have its own requirements. However, certain requirements are fairly standard for almost any provider, such as:
- You must be at least 18 years old
- You are currently employed
- You have a bank account
- You have a valid work and home phone number as well as a working email address
Aside from these, you will need to contact your lender to learn all of the qualifications.
- How Long Does it Take to Receive My Money?
If the reason that you need money is time-sensitive, you might be concerned that your money will not be available in time for you to cover whatever expenses you may have. Fortunately, you can generally expect to receive your funding within one or two business days after being approved.
- What Happens if I Make a Late Payment?
If you expect that you will not be able to make a payment on time, the best thing that you can do is to contact your lender. Most lenders will work with you to set up a payment extension. After all, they would rather it take a little bit longer to get their money than to not get it at all.