Credit Loans

Can you get long-term installment loans with bad credit?

A long-term installment loan refers to funds that you receive as a lump sum and repay in monthly installments, often over a period of several years. Approval for such a loan depends on your credit score and other factors. Therefore, you may be wondering whether you can get a long-term installment loan with bad credit.

Based on the FICO Score (a commonly used credit scoring model), 16% of Americans have poor credit. If you fall within this group, you may be required to pay a fee or put up a deposit when applying for a long-term installment loan. Also, some lenders may not approve your loan application at all.

This guide covers various critical details to help you figure out the possibilities of getting a long-term installment loan with bad credit.

What is a Long-Term Installment Loan?

Understanding the key features of a long-term installment loan may help you evaluate your chances of receiving such a loan with bad credit.

A long-term installment loan is a type of loan in which a financial institution lends you a set amount of money upfront. You will then repay the loan over a steady number of payments called installments. For a long-term loan, you’ll typically pay the installments for several months or years, depending on the terms in your contract. This is different from short-term loans that may only last a few weeks in some situations. Each installment includes the repayment of a part of the principal amount borrowed, plus interest.

Your credit score plays a significant role in determining the interest rate (the interest charged, expressed as a percentage of the principal). This is because lenders typically use risk-based pricing when providing loans, which means different applicants receive different interest rates and/or other loan terms, based on an estimated risk that the customer will default on the loan.

Lenders consider applicants with higher credit scores as being less risky than those with lower credit scores. Therefore, if you have a bad credit score, you may receive a loan with a higher interest rate.

In some circumstances, long-term installment loans may help you better manage the required monthly payments. In general, installment payments for long-term loans are lower compared to short-term loans of similar amounts.

What is Bad Credit?

Your credit score is based on your credit report, which has information about your current credit situation and credit activity, such as loan paying history and credit accounts status. Since your credit score can affect the terms and interest rate of your loan, you need to know which level of scores are considered “bad” or “poor.” The specific “bad” credit score number depends on the credit scoring model, which includes both the FICO and Vantage Scores:

  • Fair or poor FICO Score: A fair score is between 580 and 669, and a poor score is between 300 and 2684. This is based on the credit scoring range of 300 to 850, with the higher number indicating greater creditworthiness.
  • Fair, poor, or very poor Vantage Score: A fair (601 to 660), poor (500 to 600), or very poor (300 to 499) Vantage Score may also be considered “bad.” Like the FICO Score, the Vantage Score ranges from 300 to 850, with the higher number indicating greater creditworthiness.

Can You Get a Long-Term Installment Loan with Bad Credit?

Getting a loan with bad credit may be difficult, and the available options may be limited. Fortunately, you can receive a long-term installment loan with bad credit, but it often comes with a higher interest rate and different terms compared to loans offered to applicants with better credit.

The interest rate on a loan for bad credit can be as high as 35.99%. The loan term (the total repayment period) can range from one to five years. 

The loan amounts you can expect to receive will depend on the type of loan, the lender, your income level, and other factors. Some lenders offer as much as $75,000.

Which Long-Term Installment Loans can You Get with Bad Credit?

Two key types of long-term installment loans exist for people with bad credit; they are mainly based on how lenders evaluate your credit score.

  • Installment loan, credit check: Here, lenders check your credit, but accept lower scores. Lenders also check other factors to evaluate your creditworthiness, including debt and income. The loan may provide different benefits like paying off debt or financing a purchase.
  • Installment loan, no credit check: In this case, lenders don’t check your credit. That means your creditworthiness is determined by evaluating other factors like your income, education, business plan, and debt.

Where Can You Get a Long-Term Installment Loan with Bad Credit?

Various lenders provide long-term installment loans for borrowers with bad credit. You can expect different kinds of benefits from each lender:

  • Online lenders: These lenders provide loans through online platforms. The application and approval processes are usually faster than banks or credit unions.
  • Peer-to-peer (P2P) platforms: P2P platforms help borrowers to receive funds from multiple investors. Therefore, instead of having one lender, you’ll have multiple lenders.
  • Credit unions: It may be easier to qualify for a $10,000 loan from a credit union than a bank. Since credit unions are nonprofit financial institutions, you may receive competitive interest rates. However, you’ll likely have to be a member for a few months before you can apply for a loan.
  • Family or friends: It may be easier to receive a loan from family or friends. In such a case, you need to evaluate the potential impact on your relationship in case you default, and preferably, set up a written agreement.

How to Choose a Long-Term Installment Loan for Bad Credit

Just as long-term installment loans are available from different lenders, you will also find various loans with different features.

When choosing an option that suits you, you can consider the following key aspects:

  • The interest rate: Since you’ll repay the loan principal with interest and fees, finding out your interest rate beforehand will help you determine how much you’ll pay.
  • Lender perks: Some lenders may include features tailored to your purpose of borrowing the money. For example, if you’re consolidating debt, a lender may send the money to creditors on your behalf. Other lenders may allow you to reschedule your payment dates.
  • Fees: Fees can add to the total cost of your loan. Some types of fees may apply in case of certain situations, like early loan repayment.
  • Turnaround time: This refers to the time it takes to get your loan approved and arrive in your bank account. It’s an important consideration if you need funding urgently.
  • Loan term: This refers to the life of the loan during which you’ll be making monthly payments. Having a longer loan term would likely mean lower monthly payments, because the payments are spread out over a longer period of time. But this would also mean a higher total interest payment, since the loan accrues interest over a longer period.

How to Get Approved for a Long-Term Installment Loan with Bad Credit

Various strategies may help improve your chances of getting the lender’s approval for your loan application. Some of those may include:

  • Review the eligibility criteria: Evaluate all requirements before applying for a loan to make sure you are eligible. You’ll have a higher chance of getting a loan approved by fulfilling all requirements like minimum income, employment status, etc.
  • Submit all necessary documents: Provide all the documents required by the lender because they are essential in determining your credit worthiness.
  • Consider a joint application: In case you don’t meet the minimum credit score requirements, you can make a joint loan application with someone who has an excellent credit score. Here, you both receive the loan and are both responsible for repaying it.
  • Consider a guarantor or co-signer: A co-signer’s or guarantor’s excellent credit score may increase your chances of qualifying for a loan. In this case, you receive the loan, but the guarantor or co-signer is responsible for repaying it if you default.
  • Tap into your home equity: Your bad credit may not be a hindrance to receiving a loan if you have home equity. The home can serve as collateral for your loan.

If you still don’t qualify for a loan, you may try asking the lender for an in-person interview. The goal here is to prove that you’re creditworthy; therefore, go to the interview with all documents that prove you’re a good risk.

Important documents that prove your credit worthiness include:

  1. At least two years of tax returns, W-2s, and 1099 forms
  2. Your job history, including salary or pay stub information
  3. List of assets like home, property, car, and where you stand on paying them off
  4. Details of unsecured debt like credit cards and medical bills
  5. Whether you’re paying or receiving alimony or child support
  6. Bank statements for savings, checking, and CDs

Remember that lending institutions prefer stability. That means you can improve your chances of loan approval by showing that you’ve lived in the same house or city, and worked for the same employer or at the same job for several years.

How to Improve Your Credit Score for Better Installment Loan Terms

Understandably, lenders will likely give you a higher interest rate since your less than ideal credit means you’re more of a risk. However, if you don’t need funding urgently, you can first try to improve your credit score to get better loan terms.

Improving your credit score can take several months, but you can achieve it by focusing on critical factors that impact your credit score:

  • Payment history: Build your payment history by making all current payments on time.
  • Credit usage: Keep your debt level lower than your total credit limit, ideally less than 30%.
  • Length of credit history: After paying off your old accounts, keep them open.
  • Credit mix: This grows naturally as you use different credit facilities like mortgages and credit cards.
  • Recent credit: Open new, manageable credit accounts only when necessary.

In some cases, your bad credit score may be due to inaccuracies on your credit reports. Therefore, check your credit reports for any inaccuracies at all three credit reporting bureaus: Equifax, TransUnion, and Experian. If you see any errors, dispute the information and get it corrected.

References:

https://www.debt.org/credit/loans/bad/
https://loans.usnews.com/bad-credit
https://www.bankrate.com/loans/personal-loans/bad-credit-loans/
https://www.experian.com/blogs/ask-experian/what-is-a-bad-credit-score/
https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-report-en-309/
https://www.forbes.com/sites/markgreene/2016/12/29/how-much-does-your-credit-score-affect-your-interest-rate/#56e9c484b85b