Getting bad credit peer loans is easy. More important is understanding your credit and getting back on track after the loan.
We’ve all been there. Maybe a missed payment hit your credit score or you’ve had bad credit for a while. You might just not have much credit history, a major factor in bad credit but really no fault of your own.
But what do you do when you’ve got bad credit and need a loan?
Banks will probably not even look in your direction. You could get a high-interest credit card but that might be part of the reason you’ve got bad credit in the first place. Besides the temptation from another credit card burning a hole in your pocket, this type of money will hurt your credit score even more.
Credit card debt goes on your credit score as “revolving debt” which is the worst kind and really dings your score.
I’ve been here before, five years ago when I destroyed my own credit score. I was able to get all the credit card debt I wanted…at super-high interest rates. The credit card companies will always give you money – at a price.
But that’s only a shovel to dig yourself deeper. You need a way out of your bad credit dilemma.
I was able to get back on my feet using peer to peer lending and learned a lot about debt. I learned what factors affected my credit score and how to play the system for personal loans at rates I could afford.
What does this mean to you?
It means you don't have to make the same mistakes I did looking for a peer to peer loan. I took out one loan before I understood the interest rate and hidden fees…and it almost set me back even farther. Fortunately, I learned quickly how to find better loans even on bad credit.
I am not advocating getting yourself in more debt, especially if your bad credit score means higher rates. If you can give yourself three months to fix your credit score with these credit score hacks then you could save thousands on interest.
But sometimes you just need the money, like now. Fortunately, peer loans have become a great way to get the money you need even if your credit score is less than stellar.
More important that getting a bad credit peer loan though is what you do with it and how to get your credit back on track afterwards. After detailing the process of getting a loan, I’ll share what I learned about bad credit and how to game the system to get back on track.
How Does Peer Lending Work for Bad Credit Borrowers?
There is a solution but it’s not from traditional bank loans. Banks are restricted from lending to bad credit borrowers because the loans don’t qualify for guarantee programs. Most likely, if you have a credit score below 660 FICO then the banks won’t help you.
The solution, the one I found after ruining my credit in 2008, is peer-to-peer lending.
P2P sites connect borrowers directly with investors. Since investors are more interested in the return on the loan, your credit score won’t hold by back from getting a loan.
Borrowers fill out an application on the lending site and their credit report is checked to determine an interest rate. Then investors help fund your loan, usually in less than a day. You make monthly payments directly to the site from your checking account and the platform splits the money between investors.
Getting a Bad Credit Peer Loan
Getting a bad credit peer loan is actually pretty easy and a lot like getting a traditional loan from a bank. PersonalLoans.com makes personal loans of up to $35,000 and for terms between three to five years. The interest rate on your loan is fixed and you will have several opportunities to reject the loan offer before taking the money.
Your monthly payment on the loan is made by check or automatic withdrawal and paying off your loan can actually help increase your credit score in more than a few ways.
1) Creating a listing on Personal Loans or other p2p lending sites takes a few minutes and involves your personal information and income. None of the information on this first screen affects your credit score.
The company will do a “soft check” on your credit to pre-approve your loan and assign an interest rate. This soft check on your credit does not affect your credit score as an inquiry so don’t worry about checking it out.
Your credit score and other factors will put you in a credit rating category. Depending on the loan term and how many you’ve had before, you will be able to see the range of interest rates that might be available. Credit rating categories D through HR (high risk) are generally what most would consider bad credit and will mean rates from 21% to around 36% on an annualized basis.
While you can’t change your bad credit immediately, there are some things you can do to get a lower interest rate on peer loans.
- Shorter-term loans are made at lower rates so if you can make the payments on a three-year loan then you’ll save money on interest
- Lower loan amounts mean lower rates, there’s less risk borrowers won’t be able to repay the loan. It’s just another reason to only borrow as much as you need.
- Repeat borrowers get lower rates. If you need to borrow a larger amount, you might try taking out a smaller loan first and pay it off in a year or two. Most peer to peer lending does not charge an early payment penalty so you can pay your loan off whenever. Most borrowers see significantly lower rates on their second loan. Paying off the first loan will also improve your credit score, adding to your payment history and paying down other debt.
You always want to look at the APR rate listed instead of the borrower rate. APR or annual percentage rate is the actual cost of the loan when you factor in compounding.
Rates can get fairly high for bad credit borrowers but are still well below rates on payday lending or credit cards. That’s why the most popular use of peer loans has been for credit card consolidation and to get out of the cycle of payday loans. Peer loans have fixed payments and a fixed payoff date, giving you a way out of never ending borrowing.
I checked my own rate on Lending Club and was able to get an 11.5% rate, way under the interest charged on my credit card. I used a short-term peer loan to pay off the credit card debt from a recent conference I attended.
Since peer loans do not have pre-payment penalties, I can pay off the loan early and not have to worry about the interest rate. Make sure you use a loan payoff calculator to find how much you can save and the interest you'll save with a consolidation loan.
Depending on how bad your credit actually is, you may have to work on it before even getting a peer loan. Below are the average credit scores on the Prosper Rating categories. Your credit score must be at least 640 to get a loan on the site and average credit scores are between 664 and 679 for the lowest three bad credit categories.
If your credit score is too low to get a peer loan, check out a recent post on fixing your credit score fast. I outline the 21 steps I used to add 140 points to my credit score. The list includes bad credit fixes that work in just a few months to some that take longer but add big-time to your FICO score.
If Personal Loans offers a loan rate and you accept the terms, you then complete a loan listing that will go on the site for investors to fund. The bad credit peer loan site itself does not actually make loans but offers investors the opportunity to loan you money and earn the interest on proceeds.
Investor demand for loans is very strong right now so you have a pretty good chance of getting your loan funded. Keep an eye on your loan listing and any requests by the p2p lending site for information. Getting documents submitted quickly is the best way to make sure you get your money as quickly as possible.
People think that all peer to peer loan sites are the same but there is actually quite a bit of difference between them. You can use those differences to get the best peer loan for your needs and at a better interest rate.
Warning Signs in Peer-to-Peer Lending
Any time your loan options are restricted because of bad credit, you can be sure that the payday loan and scammers will be sniffing around to take advantage. The peer-to-peer lending sites I review in this article are legit but there are some warning signs to watch for with other platforms.
- Don’t accept a loan from an unsolicited email. If you get an email from a lending site without having filled out an application, there’s a good chance it’s a fraud.
- Don’t accept very short-term loans of less than one-year. The lending sites are hoping you can’t pay it off in a year and will have to refinance.
- Don’t accept a loan with a balloon payment, i.e. a loan that isn’t completely repaid from regular payments.
- Don’t apply on lending sites that claim to not check your credit score. Even bad credit lenders need to check your credit to give you a fair rate.
All lending sites must show you an annual percentage rate (APR) somewhere on your loan, even if you’re charged a fee instead of an interest rate. Look for this rate and don’t pay anything over 36% unless you have no other choice.
How do P2P Lending Sites Work for Your Loan?
The p2p lending site will verify the information on your loan application through your credit report, electronic data and standard verification procedures. They may or may not call your employer to check your information but will certainly call you to verify it.
When your loan is funded, Personal Loans will deduct its fee and release the money to your bank account. The peer lending platform charges a fee of between 1% to 5% on your loan, which will come out of the money before it is deposited into your bank account. The rate is pretty standard and you are looking at the high-end 5% for a bad credit peer loan.
While there is nothing much you can do about the origination fee on a bad credit peer loan, there are two fees you can avoid. Most peer lenders charge a late fee, if your payment is more than 15 days late, and a failed payment fee if your check is returned or automatic withdrawal does not go through. Both these fees are $15 each on Personal Loans peer lending loans.
Monthly payments on your loan are exactly like a traditional bank or credit card loan. Just sign up for automatic withdrawal or mail a check each month. You can pay off your loan early at any time without any pre-payment fees.
Personal Loans Complaints and Shopping Your Loan Around
One of the most common complaints I get from readers is the credit score needed for a loan on Lending Club. You will generally need a credit score of 640 or higher to get approved for a loan and rates can be fairly high for bad credit borrowers.
I always say shop around for your personal loan, even if you have good credit. On almost all of the online loan platforms, you can check your rate without affecting your credit score so it doesn't hurt to try out a few different options.
If you have a higher credit score and need a personal loan, you might want to start at some of the peer loan sites for better credit borrowers. Peer lending sites like SOFI and Upstart can be more difficult to qualify for a loan because of their higher credit requirements but rates are usually lower than at bad credit peer loan platforms. SOFI specializes in student loan refinancing and can even originate home loans. Upstart specializes in personal loans to borrowers with no credit and recent college graduates.
For borrowers with credit scores below the cutoff, I usually recommend PersonalLoans which is like a LendingTree for personal loans. You enter your personal information and how much you need and the site will look for the best rates from different lenders. The website sources from traditional bank lenders as well as peer networks and credit scores as low as 600 are accepted.
Compare Peer-to-Peer Lending Sites for Bad Credit
Comparing peer-to-peer lending sites and bad credit options starts with understanding which sites will accept applications from borrowers with your credit score range.
There are three types of p2p lending sites. I've linked reviews for each personal loan site below so you can get more information before you apply.
- Sites like SoFi and Lending Club generally only accept applications from borrowers with a 640 credit score or higher. Rates are usually lower but it’s more difficult to get a loan.
- Sites like PersonalLoans and Upstart will lend to bad credit borrowers with credit scores of 520 FICO or higher. Rates are a little higher but you can refinance with no pre-payment penalty when your score increases.
- Sites like BadCreditLoans will accept applications from very bad credit borrowers. Rates are usually the highest here but still well below what you’ll find at payday lenders and no credit check sites.
Applying for a peer-to-peer loan doesn’t affect your credit score until you accept the loan so it’s always best to try a couple of sites to find the best rate. None of the p2p sites charge a pre-payment penalty so you’ll want to pay off the loan as quickly as possible.
I’ve used this strategy to lower my monthly payment on a loan and still save on interest. Get a loan on a longer payment period, either 36- or 60-months. Longer-term loans will have lower monthly payments though rates may be a little higher.
After paying on the loan for 18-months, your credit score should be quite a bit higher than where it was initially. You can then apply for a debt consolidation loan on another p2p lending site for a much lower rate.
Which Loan Company is Best for Bad Credit?
While most of the loan companies in the list will work for bad credit borrowers, there are a few that stand out as specializing in bad credit loans. I’ve used a few of these sites for loans when I destroyed my credit in 2009 and have received recommendations from readers over the last five years running this blog.
By far, the most often recommended is PersonalLoans.com and this is the one I’ve used the most as well. There are a few reasons I like the site above the rest in the list of online lenders.
- The credit score requirement is lower, around 540 FICO for small loans
- The website is a loan aggregator which means it shops your loan around to different loan companies so you don’t have to do it.
- Rates seem to be lower on the platform versus the other bad credit lenders
That said, there are a few other loan companies that will help even the worst credit score borrowers including BadCreditLoans.
Can I Get an Emergency Loan with Bad Credit?
Emergency loans is basically what these companies do best. Even if your loan application is verified, which only about one-in-five of the applications get verified through employer or bank statements, you’ll usually have the money in your account within a couple of days.
The most important thing to remember in getting a personal loan is to borrow as little as you need and ask for as little time to repay as you can cover. Even if you have very bad credit, you can usually get a loan for a couple thousand on one-year terms. Ask for a larger loan though with five-year payment terms and you run the risk of getting your loan denied.
Alternatives to Bad Credit Loans
Depending on how bad your credit is, even peer lending can be expensive. Most sites start around 7% interest but can go as high as 36% annually for really bad credit borrowers.
That means you need to explore all your options for a loan.
Money that you don’t have to pay back is always going to be a great choice…if you can get it. Social lending sites like GoFundMe allow you to start a project and collect money from donors. Most of the money comes from your own social network so a lot of these don’t go far unless you have a super-supportive network but it might be worth a try.
It’s tough asking friends and family for a loan but this might be a better option if you have really bad credit. Getting enough for a few months can give you time to increase your credit score enough to get a better rate on peer-to-peer sites.
Secured loans are always going to be the lowest rates but you have to put up your house or car as collateral. Whereas bad credit loans might charge between 14% to 24% rates, you might be able to get a HELOC or loan on your car for 9% even on bad credit. Just make sure you are absolutely able to make payments, otherwise you’ll risk losing your home. When in doubt, go with the unsecured p2p loan so you don’t have to worry about collateral.
Are Direct Lenders Better for Bad Credit?
There’s one difference I really haven’t pointed out between peer-to-peer lending and other online loan sites. There is a subtle difference here that might be important for some borrowers and really reinforces that idea of shopping your loan around.
The difference is in WHO is actually making the loan on the website. Most p2p sites are only middlemen or facilitators to your loan. They might have investors on the site that fund loans as an investment. Other peer lending sites are more like loan aggregators, passing your application on to their list of lenders.
Still other websites are direct lenders themselves. Whereas the other websites do not directly make loans, these sites are more like traditional banks that review applications and make money on the interest.
I’ll admit, it’s a difference that may not seem all that important. You don’t care where your money comes from, as long as your application is approved.
But it can sometimes make a difference in the rates and terms on your personal loan. The true peer-to-peer lending sites with investors funding your loan tend to offer lower rates because investors are competing for loans. This is the case with the loan aggregator sites as well because the lenders compete.
On the other hand, while direct lenders might charge higher rates on loans, they can usually get your money deposited much faster as well. They’re the only ones making the decision. If you qualify for a loan, most will deposit your money within 24 hours. This is why it’s important to apply on at least a few different p2p and online loan sites. You may not know which are direct lenders or other types of sites but you’ll still be able to compare rates and other terms.
Getting your Credit back on Track with Peer Lending
One of the best things about peer loans for people with bad credit is that they can actually help you improve your credit score.
First, the regular payments you make on your peer loan will go on your credit report and improve your credit payment history. This is the biggest factor that credit rating agencies look at and will help boost your credit score over time.
One factor that most people don’t consider is that peer loans go on your credit report as “non-revolving” debt since they have a fixed payoff date and other terms.
Credit rating agencies like this type of debt better than credit card or “revolving” debt because you cannot continuously keep borrowing on the credit line.
Paying off your credit card debt with a peer loan will help increase your credit score by changing your bad revolving debt for not-quite-as-bad non-revolving debt. Of course, having more debt than you can afford will still be a problem no matter what type it is.
After you’ve gotten your peer loan and the money you need, sit down and really think about how you got into your bad credit situation in the first place. You’ve got the opportunity through the peer loan to get back on track but it could make things worse if you just use it for frivolous spending.
Check out a prior article on the site about setting realistic financial goals and a budget you can actually keep for more ideas on putting your financial house back in order.
I get a lot of questions about debt and paying down debt with a peer loan. The first thing I ask people is whether they want to be debt free or just free of bad debt. The question usually gets a puzzled look and silence. Understand the difference between good debt and bad debt first, then figure out how to pay off bad debt while using good debt to meet your financial goals.
Having bad credit is not the end of the world. Most of us have been there and fortunately, there are things you can do about it. Your options are probably more limited but there are still some doors open to you and a bad credit peer loan may be one of the best options. After you get your peer loan, just make sure you use it wisely and get your credit back to where it should be.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.