Unsecured Loans for Bad Credit Borrowers

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In this guide, we’ll outline the unique benefits of an unsecured personal loan and whether or not taking one on is the best choice for you. This type can be the best option to cover various expenses, but the biggest challenge is that you usually need a good credit score for it to make sense. We’ll go through the pros and cons of unsecured loans for bad credit borrowers and show you how you may still be able to qualify.

 

 

What We’ll Cover 

  • What is it?
  • What are the reasons to pick an unsecured loan?
  • What scenarios are not ideal for an unsecured loan?
  • Pros and cons of unsecured loans for bad credit borrowers
  • How to get a better rate
  • How to apply including calculator
  • FAQ’s
  • Summary

What are Unsecured Loans for Bad Credit Borrowers?

Unsecured loans are synonymous with personal loans and can be used for a wide variety of purposes. They can be attained through banks or online lenders. They differ from secured loans in that they do not require collateral. Most lenders are looking for a credit score above 660 to qualify, but there are some options for borrowers with low credit. Lenders typically cap unsecured loans between $20,000 and $50,000. Minimums usually range between $1,000 and $5,000, with some lenders offering loans for as little as $500.

In this article, we’ll cover the limitations for low credit borrowers and how to qualify for the best loan possible. For more information about personal loans more broadly, click here.

What are the Reasons to Pick an Unsecured Over Other Types of Loans?

Unsecured loans for bad credit borrowers are best used for debt consolidation, covering unexpected life events (think divorce or funeral costs), some home renovations, or in some cases when you just need an extra chunk of cash. Because unsecured loans are not backed by collateral, lenders rely more on your credit history to assess risk. If your credit is good, you’ll get a reasonable interest rate without having to back the loan with assets. Besides the flexibility they offer, one of the most important reasons to pick this type is that your assets are not at risk if something happens and you do default.

What Scenarios are Not Ideal for Unsecured Loans for Bad Credit Borrowers?

In contrast to unsecured loans, there are those such as mortgages and car notes that are backed by the assets themselves and thus have better terms, even for low credit borrowers. Specialized loans, such as student loans, are always a better choice for their respective purposes as they use factors other than your credit history to get you a good interest rate and repayment terms.

If you’re looking for a flexible way to access additional funds, even if your credit is poor, personal loans can be a great option. Here is a further breakdown of the pros and cons.

Pros & Cons of an Unsecured Loan

                Pros Cons
Wide range of loan amounts and purposes Loan amounts may be modest for low credit borrowers
No risk of personal assets being seized Lender can put a lien on assets (but cannot take possession of them) if you default
Streamlined application process Rates typically higher than secured loans, especially for low credit borrowers
Quick access to funds, sometimes within 24 hours  

Now we’ll go through how to improve your situation and get the best loan.

How to Get a Better Rate

There are, of course, many ways to improve your credit score over time, like making sure you make all of your payments consistently and improving your credit utilization rate as you pay down debts. It is also wise to check your credit report to make sure there isn’t a delinquent bill you overlooked.

If you’ve been on top of your credit score, and there’s just not much time to wait for it to improve before you need the loan, consider using a cosigner with a solid credit score to help you qualify. A good cosigner means that there is less risk associated with the loan for the lender, as their score offsets yours. Naturally, it means you’ll get a better loan. This will help the interest rate, as well as allow you to qualify for more.

Lastly, be sure to shop around with two or three lenders to make sure you’re choosing the best possible loan. Next we’ll show you how to apply and compare rates.

How to Apply

As you weigh your options, use this calculator to help you decide how much to borrow. You can also pre-qualify with a reputable lender, who may be able to help even if your credit is less than ideal.

 

 

Once you’ve taken those steps, it’s time to fill out the application. Here is what you’ll need.

Checklist

  • Personal identification
  • Proof of residence
  • Credit score and credit report
  • Employment and income information including W-2 (or 1099), bank statements, pay stubs, and proof of employment 
  • Cosigner information (the same documentation you provide)

If you’re still concerned about whether an unsecured loan is right for you, here are some frequently asked questions you may be wondering about yourself.

FAQ’s

Q: Are there fees in addition to the interest rate that I need to worry about?
A: As with most loans, there are origination fees that are usually based on a percentage of the loan amount. These will vary by lender, so do your research.

Q: If my interest rate is automatically higher, why bother with an unsecured loan?
A: The main benefits are the flexible range of reasons you can use to borrow, and the quick turnaround time to access the funds. You also won’t carry the risk of having to surrender your asset(s) if you default on your loan. Remember, a good cosigner can help improve the lender’s outlook and earn you a better rate.

Q: In what case is a personal loan better than a credit card?
A: Personal loans allow you to borrow more than you can typically charge on a credit card. You also won’t have to worry about fluctuating interest rates often associated with credit cards. Many people with high-interest debt, like consumer credit cards, take on a personal loan (AKA consolidation loan) in order to be freed from high and variable rates.

Summary

A personal loan can be a lifesaver for surprise life events, consolidating debt, or even a big purchase you weren’t able to budget for. Even with poor credit, you may still be able to qualify, and a co-signer can help you improve your interest rate and loan amount. If you still have questions, we’re here to help you every step of the way.