Loan alternatives for borrowers with poor credit

Quick insights

• If you have a poor credit score and are looking for a loan, there are alternative lending options available.
• Depending on your situation, you may be able to use a secured credit card, credit unions, a support system or payment plans as an alternative to taking out a traditional bank loan.
• It can be important to improve your credit score to help increase your chances for future loan and credit-line approvals.

When you’re in a financial pickle, your first thought might be to turn to a loan. You might need a loan for sudden expenses, such as unforeseen medical bills. But how do you apply for one when you have a poor credit score?

A poor credit score is generally anything around 580 or lower, according to the FICO^® and VantageScore^® models. If your score falls in this range, it can be indicative that you haven’t been able to pay your bills on time, therefore, lenders may deny you more lines of credit or give you higher interest rates and lower credit limits. If you’re curious about what your current credit score is, you can view it by enrolling in Chase Credit Journey^®, a free online platform anyone, including non-Chase cardmembers, can use.

If you’re in need of a loan but are struggling to be approved  because of a poor credit score or other factors, you might want to consider exploring other options. Afterall, loans are just one of many different financial paths you can take.

Note that even if you do get approved for a loan with a poor credit score or other factors, you may be setting yourself up for more debt and hurting your score further if you aren’t careful. Maintaining a healthy credit score is an important part of building your credit profile.

What to do if you have a poor credit score and can’t get a loan

There are a few alternative loan options you may want to consider if you have poor credit. Let’s explore them in detail below.

Secured credit cards

Secured credit cards are different from a normal credit card because they require an upfront cash deposit, whereas most credit cards will extend you an unsecured line of credit. The deposit amount is sometimes equivalent to the amount of credit you get approved for.

By providing this deposit upfront, you’re potentially lowering your risk for the lender and helping to “secure” the credit. These cards are generally used to help establish or improve your credit history. Keep in mind that you may need to cover fees and maintain a healthy credit utilization ratio while using these cards too.

Note: Chase does not offer secured credit cards.

Credit unions

Credit unions are a type of financial institution run by its members and considered to be not-for-profit, meaning the profits are returned to members of the credit union. This can translate into lower fees and interest rates, or higher dividends on deposits, which may benefit the members and consumers.

You may want to consider applying to be a member of a credit union so that you can benefit from these lower rates (without necessarily needing a good credit score) and help build your credit back up. Some loans may be specialized for those who are looking to rebuild their credit.

Family and friends

Everyone’s family and social circle is different, but if you have a support system you trust, it may not be a bad idea to consider borrowing from your friends and family. Taking this path may help you avoid the traditional fees that come with loans, and you may have a more flexible arrangement or repayment plan. However, it can be essential to review expectations with your trusted partners to make sure your finances and relationships remain healthy and positive. For example, you may want to consider writing up a repayment agreement to hold each other accountable.

Payment plans

Rather than take out a loan to pay for an expense, you may be able to request a payment plan for whatever you purchase. This allows you to break up a large expense and pay for it over time rather than all at once.

For example, you may be able to request a payment plan from your medical provider for your medical bills. This may consist of setting up a fixed amount of funds to pay back each month.

Getting your credit back on track

While there are loan options available to you when you have poor credit, raising your score could help you access more and better choices in the future.  Credit scores are a major part of your credit profile and can help determine your eligibility and interest rates.

To help you get your credit back on track, consider the following strategies:

• Make your payments on time. Payment history is a larger factor used to calculate your credit score, so prioritizing your payments could be a good first step.
• Lower your credit utilization ratio by lowering your credit card balances and managing your spending. Your credit utilization ratio (The amount of credit you owe against the total available) should be about 30% or lower.
• Review your credit report so you can spot any inaccuracies. You can report errors to the credit bureaus which can be removed.
• Set up an emergency fund, which you can start by putting a small amount of money away each week or paycheck. As this builds over time, you’ll have a pot of money to pull from if there’s an emergency, such as sudden medical bills or an urgent car repair. An emergency fund can help you stay out of debt which can help protect your credit score.
• Avoid applying for new lines of credit. Even if it feels like the right thing to do in the moment when you’re desperate for more funds, doing so could further hurt your score and put you into more debt. Consider other alternatives if possible.
• Consider enrolling in Chase Credit Journey. Build your credit confidence with Credit Journey^® by receiving your free credit score with no impact and a personalized action plan built just for you provided by Experian™.

Conclusion

There can be ways to access funds outside of a traditional loan from a bank, even if you are in a situation where you have poor credit. While these alternatives can help you in the short term, it can be beneficial to build a long-term plan to help improve your credit score. Doing so can help make future financial processes smoother and may help improve your chances for approvals and lower interest rates.