Reducing borrowing costs: Alternatives to loans for bad credit

Loans for bad credit are designed specifically for borrowers with credit scores under 670. These loans can be tempting if you’re in a tight financial spot and need fast cash, as they’re fairly easy to qualify for and offer quick funding. However, there is a tradeoff: because lenders are taking on more risk to lend you money, these loans typically come with higher interest rates and fees than good or excellent credit loans.

Before applying to these loans, make sure you explore and exhaust all the options available to you. You’ll want to avoid getting into a tricky situation that could lead to long-term financial consequences if you aren’t able to make payments.

8 alternatives to bad credit loans that can save you money

Bad credit loans can serve as a lifeline if you need to borrow money quickly and have less-than-stellar credit. But because they come with high borrowing costs, it’s always best to explore other options before signing on the dotted line.

1. Raise your credit score

Start by improving your credit score. This, in turn, will open the doors to a variety of personal loan lenders that can offer you better terms and interest rates than the ones you would if you choose a bad credit lender. However, this option is often easier said than done.

Raising your credit score requires some time for your actions to reflect in your credit score. If you have the ability, these are the best ways to raise your credit score quickly:

• Get a secured credit card: If you have some cash available, consider using it to get a secured credit card. They operate like traditional cards and can be used online and at most retail locations. Payments are reported to credit bureaus, which can improve your credit score. But if you don’t make payments, the cardholder will close the card and use your security deposit to pay off the balance.
• Pay credit balances: This might seem counterintuitive for someone who needs cash, but paying down your balances to lower your debt utilization has a big impact on your credit score. Pay off your balances strategically by getting your credit utilization below 30 percent to have the best chance at a higher credit score.
• Request higher credit limits: Another way to improve your debt utilization is by upping your available limit. Contact your credit card issuer and ask if they will raise your credit limit. Be sure you ask if they will require a hard inquiry since that will temporarily lower your score.
• Dispute credit history errors: It is quite common for a credit report to have incorrect information that hurts your score. Request a free credit report, look for errors and file disputes with the credit bureaus if needed. An accurate credit history can improve your credit and increase your chances of being approved for loans in the future.
• Get credit for monthly expenses: Some services like Experian Boost consider alternative credit data, or payments made to service providers when calculating your credit score. That includes rent, utilities and cable bills. Making consistent payments on time can help boost your score with these services.

2. Consider a nontraditional lender

Some financial institutions look beyond your credit score when making decisions on who to lend money to. These include the following:

• Credit unions: Credit unions often offer more friendly terms than payday loans and sometimes consider factors outside of credit score and history when considering a borrower. However, you’ll have to become a member in order to apply for a loan with one.
• Online lenders: Some online lenders tend to be even more lenient with their credit requirements than credit unions. They may look at other factors, such as your employment history and educational background to approve your loan. That said, most online lenders cap their interest rates at 36 percent — which is quite steep, and may add an origination fee of up to 10 percent. While both of these things can make your loan more expensive, it will still be a more affordable option than a payday loan or a car title loan.

3. Use a home equity loan or HELOC

If you have a home or property that you have made payments on, you can take out a loan or a line of credit that allows you to turn your equity into cash. In the case of a home equity loan and a home equity line of credit (HELOC), both act as a second mortgage and use your home as collateral.

A home equity loan will be paid out in a lump sum, whereas HELOC operates more like a credit card, giving you money on an as-needed basis. You will have to pay closing costs from refinancing, but it is an option that does not require perfect credit for competitive rates. Still, this option is best suited if you need a considerable amount of money, otherwise, it’s not worth going through the whole process.

4. Consider using a buy now, pay later (BNPL) loan

You can also avoid taking on more debt by splitting up big purchases into more affordable installments through a BNPL loan. These loans typically allow you to pay off your balance — interest-free — in four monthly installments.

BNPLs can be a great solution if you don’t need cash but rather to pay for materials for an emergency repair or if you need to replace an appliance or finance any other big purchase, as most retailers are now offering BNPLs as part of their payment options.

5. Use a credit card

While it’s not an ideal solution, you might be able to pay some of your imminent bills with a credit card. There are a number of credit cards for bad credit, so you should be able to find a company that can work with you.

Credit cards will have higher interest rates than most personal loans — but your rates may still be significantly better than those made available by lenders that offer bad credit loan options. And if you’re able to pay off all or most of your balance each month, interest won’t accrue.

6. Request a payment plan

Instead of relying on credit, you may be able to use a payment plan in some cases. Some areas where you may be able to get a low- or no-interest payment plan include:

• Utilities.
• Medical.
• Dental.
• Taxes.

In addition to making your monthly costs more manageable, you may be able to save thousands on interest.

7. Borrow from friends or family

The prospect of asking loved ones for money can be scary, but it can also be the best option for you financially. There is pressure to repay the loan based on maintaining your relationship with the person or persons who lend to you, but the terms are likely to be more friendly than a bad credit loan.

Know that you aren’t alone in this, too. Financial struggles affect many people, and your friends and family will likely understand your challenges the most. Even if they can’t help directly, they may be able to support you in another way once they understand your struggle.

8. Increase your income

If possible, adding a secondary source of income may help you avoid high-cost loans. There are a variety of options, but you may be limited based on your time, skills or energy.

In most cases, a side hustle requires both time and effort. However, there are opportunities available through the gig economy that could allow you to generate additional income.

Try selling products, furniture, appliances or clothes you no longer need through ecommerce sites like Ebay or Facebook Marketplace. If you have a car, consider driving for a company like Uber or Lyft. If you are crafty, consider launching an Etsy store. If you have property, you can try to rent it to turn it into additional income.

All of these solutions will require time to start producing returns, so know that you may have to wait to see results.

Bottom line

Bad credit loans can offer short-term financial support but they tend to come attached to higher borrowing costs, which could send you down an endless cycle of debt, if not handled properly.

There are ways to secure money that is not reliant on your credit score and likely will not carry the same onerous terms as the average bad credit loan. However, if a bad credit loan is the only viable option, make sure to get one from a reputable lender that is able to offer you affordable loans with comfortable repayment terms — even if rates aren’t the lowest in the market.