It’s no secret that credit scores can open—and close—doors, especially when it comes to financial opportunities. But exactly why is it so hard to find an installment loan with bad credit? And what can you do to even the odds for yourself? It’s important to understand the role that credit plays in risk evaluation, and what constitutes bad credit in the eyes of a lender.
Why Is It Hard to Get an Installment Loan With Bad Credit?
The short story here is that someone with bad credit is seen by lenders as a risky borrower. That means if you have bad credit, the lender thinks there’s a greater-than-average chance that you won’t pay back the loan as agreed. Because of that, lenders are less likely in general to make loans to people with a low credit score.
But let’s look at this in more detail. First, let’s consider how someone ends up with a bad credit score.
Someone can start with a lackluster score simply because they don’t have much in the way of credit history. Your credit score is made up of a variety of factors, including how long you’ve had credit, whether you have different types of credit and whether you have a history of making timely payments. If you haven’t had credit that long, it’s a bit more difficult to have a good credit score.
In such a case, lenders may see you as a neutral risk. They don’t know whether you’re likely to pay back a debt as agreed because there isn’t a lot of data in your credit profile. This can make it somewhat challenging to get an installment loan. Lenders that work with people with no or little credit may offer you a loan, but the interest rate may be higher than they’d offer to someone with good credit.
If someone has bad credit, it’s often because they have missed payments, defaulted on loans or ended up in collections in the last few years. In this case, lenders do have data to tell them whether you’re someone who is likely to pay debts as agreed. It may seem unfair, but if you’ve missed payments or defaulted on a loan before, creditors tend to assume you might do so again.
In these types of cases, lenders are very hesitant to offer credit. In cases where they do approve you for an installment loan, the interest rate is typically higher than normal. You may also have to start small, taking out a little loan and proving over time that you have made changes and are now someone that can be relied upon to pay debts as agreed.
What Is a Bad Credit Score?
According to Experian, a bad credit score on the FICO scoring model is one that’s between 300 and 579. A score between 580 and 669 is considered fair.
On the other main scoring model—VantageScore—a score of 300 to 499 is considered very poor and a score of 500 to 600 is poor. Scores between 601 and 660 are considered fair.
If you have a score under 580 (FICO) or 600 (VantageScore), you have bad or poor credit.
It’s important to note that your score isn’t the same with all three of the major credit bureaus. That’s because not all businesses and lenders report everything to all of the bureaus, so the information in your various credit files can be different. Typically, the difference isn’t that much—around 40 points or so on average.
If you think you have good credit only to be denied for a loan because you have bad credit, there may be a negative item on one of your credit reports that you didn’t know about. You can check all your reports for free each year at AnnualCreditReport.com to get a full picture of your credit history.
Is It Possible to Get a Loan With Bad Credit?
Yes, it is possible to get a loan with bad credit. You may not get the best possible terms and you may need to start with smaller loan amounts. But some lenders, including Wise Loan, work with people who have less-than-ideal credit.
Can You Get an Installment Loan With No Credit Check?
Yes, not all lenders check your credit when evaluating you for a loan. Some base approvals on other factors, such as your income.
Are Bad Credit Installment Loans Just Payday Loans?
No. Payday loans are small, short-term loans that you take out against your next paycheck or two. They’re designed to be paid off in one or two payments within the next few weeks.
Installment loans are usually paid off in biweekly or monthly payments over the course of a few months or years. Because of this, they’re typically easier to manage financially than payday loans. Payday loans may take most or all of your next paycheck, leaving you in the same position you were before the loan.
Increasing Your Chances of an Installment Loan with Bad Credit
If you can wait until you improve your credit before applying for a loan, then that may open doors to more favorable terms. But building credit can take time, and sometimes you need the loan to help you improve your credit.
So, here are some tips for increasing the chances that you’ll be approved for a loan with bad credit:
- Do your research. Don’t apply for loans randomly. Every application could hit your credit with a hard inquiry, which potentially brings your score down a few points. That can make it harder to get a loan when you finally find the right one. Instead, read up on each loan and requirements, and only apply if you think you have a good chance.
- Be realistic. Don’t apply for more than you can afford. Lenders are unlikely to approve you if it doesn’t seem like you have the ability to pay them back.
- Have all your documentation ready. You may need to provide documentation of income, for example. And most loans require at least photo identification and a checking or savings account.