Applying for a personal loan with poor credit? Here's what you should know (2024)

When it comes to paying for some of life's biggest expenses — ahome renovation, a big medical bill, anemergency, aweddingor even a funeral —it can sometimes be easy to find yourself short on the cash needed to cover these costs. And if your savings don't stack up to the amount of money you'll need to cover such expenses, you may need to find a way to cover the difference.

This is where a personal loan can be helpful. Personal loans are actually one of the fastest growing debt categories in the U.S., in part because they offer flexibility that some credit cards don't: lower interest rates and the ability to receive a lump sum of money directly deposited to your bank account so you can use it as needed.

When taking on any form of debt, it's generally ideal to apply with good or excellent credit in order to score the best loan terms and conditions. But if you find yourself applying for a personal loan with poor credit, there are still options for you — you'll just need to keep a few things in mind before you begin the application process.

Yourcredit history and credit scoresare important because they provide lenders with clues to determine whether they think you'll be a responsible borrower who will pay back the loan on time and in full. Keeping your credit score healthy can really be an asset when you apply for loans for big milestone purchases like buying a home or getting a car.

While it is possible to get approved for a personal loan if you have poor credit, the final decision, for the most part, rests with the lender you apply to. Some lenders will tell you upfront what their minimum requirements are.Happy Money, for example, requires a FICO score of 640 (which is within the "fair" range) or higher for approval.

When applying for any form of credit, the better your credit, the more likely you are to get favorable terms — like lower interest rates. This is also true of personal loans. If you have poor credit, you are likely to receive a higher interest rate on your loan. This means you'll spend more money paying back the loan.

Of course, the exact interest rate you ultimately receive will depend on the lender's range, but you can compare personal loans before you submit your application. This way, you can be sure you're getting the loan with the best terms for you.

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It's also worth noting that in some cases, it may make more sense to use a credit card with a 0% APR intro period since you can fund your purchase and make payments toward the balance without being charged any interest for a specified amount of time. This option is only optimal if the credit limit is sufficient for covering your expense, and you're certain that you can repay the entire balance before the 0% APR period is over.

The amount of time you have to repay a personal loan is often referred to as the loan's "term." Much like interest rates and credit score requirements, loan terms can vary from lender to lender. The good news is that this information is generally offered upfront so you can immediately consider if the repayment timeline works for you.

Loan terms can be as short as six months and as long as seven years. When you take on a loan that gives you a longer amount of time to repay the balance, you'll likely have smaller monthly payments — just be aware, though, that a longer term means you'll end up paying more in interest over time. Shorter terms, on the other hand, could result in a higher monthly payment but less interest accrued over the duration of the loan.

There are a few ways that applying for and taking out a personal loan can affect your credit.

Much like with any other loan, mortgage or credit card application, applying for a personal loan can cause a slight dip in your credit score. This is because lenders will have to run ahard inquiryon your credit, and every time a hard inquiry is pulled, it shows up on your credit report and your score drops a bit. Keep in mind, though, that this dip is only temporary and continuing with good credit habits can increase your score again over time.

This being said, though, it's worth it to be as strategic as possible about when you decide toapply for a personal loan. Applying for a personal loan soon afterapplying for a new credit cardcould cause an even bigger drop in your credit score since a hard inquiry would be run for both applications.

On the plus side, taking out a personal loan can in fact help your credit score as you establish a track record for making on-time payments. This is especially true if you've been approved by a lender that accepts applicants with an insufficient credit file.Payment historyis the most important factor in calculating your credit score, making up 35% of it. Completing your monthly payments on time and in full can provide clues to a lender that you are very likely to pay back any money you borrow in the future. As a result of making consistent on-time payments, your credit score is likely to increase.

A personal loan can also helpimprove your credit mix. Your credit mix refers to the different types of credit accounts you have, including credit cards, student loans, mortgages, etc., and it makes up 10% of yourcredit score.

That's not to say that you should go out of your way to take on different kinds of debt, but having a variety of accounts can show lenders that you have the ability to manage multiple types of credit. This can make you seem more like a creditworthy borrower (just make sure you're not taking ontoo much debt).

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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every loan article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of loans. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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