Credit is an essential part of paying for expenses as an adult. With the high cost of luxuries and essentials, loans can be a way to finance houses, cars, phones, etc. while spending only a fraction of the entire amount each month. For many people, the income brought in each month is more than their anticipated amount of monthly bills.

Relying on credit cards or other forms of borrowing can help alleviate monthly needs. However, borrowing from lenders requires minimum monthly payments with interest that the individual is required to meet. An individual who develops a history of not paying loans on time1 or honoring future financial obligations2 will develop a bad credit score.

What is “Bad Credit”?

A credit score refers to a number known as a FICO score. A FICO Score is used by financial institutions to determine a person’s creditworthiness. Financial institutions, lenders, and property owners will use a FICO score to determine whether an individual is eligible for financing and at what interest rate.3 The higher an individual’s FICO score, the better the indicator of an individual’s credit in theory. A credit score below 580 can be a sign of potential future financial problems for lenders.4

Consequences of bad credit include lenders being unwilling to provide different loans or any loans at all, offering only loans with high interest rates, having extra requirements of cosigners or collateral, making it difficult to find housing, or potentially even disqualifying candidates from certain positions or professions.5

Why Should People with Bad Credit Take Out a Loan?

Given all the hurdles and barriers, people with bad credit may think why bother taking out a loan. Some may feel fear of being rejected, embarrassment of needing help, or guilt of being in a tough financial situation. However, people with bad credit should know that they are not alone.

Many individuals find themselves with bad credit. For some, they fall into bad circumstances such as divorce, medical problems, educational debt, or death of a loved one. For others, they may simply have spent too much or taken on more they could afford with little financial knowledge at the time.

Whatever the circumstance might be, taking out a loan is actually a way to start to build back credit. An analogous situation is a friend you’ve been hurt by. When a friend hurts you, your natural inclination is to distance yourself. However, if you want to still have them remain a part of your life, you slowly start to see if they can do things to build back your trust.

Loans Allow People with Bad Credit to Build Their FICO Score

Financial institutions are much the same as friendships. If you can show them that you are able to take on small loans and repay them back, then your credit score will start to build gradually.

Loans offered to those with bad credit will typically be up to a limited amount. They also may require cosigners or be secured. Secured loans are loans requiring a collateral.6 These secured loans with limited amounts may not be large, but they are a start for people looking to build up their FICO Score.

Options for Borrowers with Bad Credit Scores

The following are some examples of loans for people looking to build up their credit.7 These loans have people with low credit scores in mind:

• aUpgrade – Minimum score of 560. Excluding their mortgage, interested borrowers are required to have a debt-to-income ratio of maximum 45% and minimum monthly cashflow of $800. Having a co-applicant/co-signer makes the loan more accessible. Loan amount ranges from $1,000 - $35,000
• aLendingPoint – Minimum credit score is 600. Prospective borrowers in Nevada and West Virginia are not eligible for Washington, D.C. loans. Loan amounts range from $2,000 - $36,500
• aUniversal Credit – Minimum credit score is 560. Loan amounts range from $1,000 - $50,000.
• aUpstart – Recommended score is 600, but lower scores are acceptable. Borrowers must have a full-time job, an offer to start within six months, a regular part time job, or any source of consistent income minimum of $12,000 yearly. No consigners or co-applicants allowed. Loan amounts range from $1,000 - $50,000.
• aAvant – Minimum credit score is 580. Minimum income requirement is $20,000. Child support, alimony, and income of other people in your household can be considered to meet the income requirement. No consigners or co-applicants allowed. Loan amounts range from $2,000 - $35,000.
• aLendingClub – Minimum credit score is 600. Applicants must have maintained the score for a minimum of three years. A 40% debt-to-income ratio is allowed for single applicants while a 35% ratio is allowed for joint applicants. Co-applicants are allowed but no cosigners. Loan amounts range from $1,000 - $40,000.

How to Use a Loan to Your Advantage

Successfully securing a loan after a history of bad credit can prove to be a challenge. Individuals who are able to overcome this hurdle should use the opportunity as an advantage to begin building up their credit score. The following are some ways to maximize the opportunity:8

• Make payments on or before the due date. Paying late results to credit score drop.
• Try to pay off the entire balance remaining on the account.
• Use websites to regularly check your score.
• Limit yourselves from making large purchases through credit cards with high interest rates.
• Have a family that you trust to co-sign the loan with you.
• Avoid no-credit-loans, as these have higher interest rates.