Bankrate's guide to choosing the right bad credit loan
By: Mia Taylor
As of Wednesday, February 26, 2020
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If you have bad credit and are looking for a loan, shop around to make sure you’re comparing the best offers. While your credit score will keep you from getting a great APR, you can still find interest rates that are much lower than those you’d likely find on payday loans.
The loan lenders listed here are selected based on factors such as credit requirements, APR, loan amounts, fees and more.
Best bad credit loans of 2020
- Best loan for very bad credit scores: BadCreditLoans.com - APR range: 5.99% - 35.99%
- Runner-up for very bad credit scores: Upstart – APR range: 6.53% - 35.99%
- Best secured loan: OneMain Financial - APR range: 18% - 35.99%
- Runner-up for best secured loan: TD Personal Secured Loan - APR range: Variable, currently 7.17%
- Best secured loan: Avant - APR range: 9.95% - 35.99%
- Best for flexible repayment: LendingPoint - APR range: 9.99% - 35.99%
- Runner-up for flexible repayment: Upgrade - APR range: 6.98% - 35.89%
- Best for ease of qualification: Earnest - APR range: 5.99% - 17.24%
Best loan for very bad credit scores: BadCreditLoans.com, APR: 5.99% - 35.99%
Overview: A loan aggregator, BadCreditLoans.com refers applicants to reputable lenders that are willing to provide loans for those who have poor credit. The APR on personal loans from the BadCreditLoans network of lenders and financial service providers ranges from 5.99 percent to 35.99 percent. Loan amounts start at $500 and go no higher than $5,000. Repayment terms vary from three to 36 months. Applying for a loan is free. Applicants must be at least 18 years old.
Perks: BadCreditLoans.com does not charge you any fee for requesting a loan through its site. In addition, BadCreditLoans says it designs its application process to allow nearly anyone to qualify, even those who would not necessarily be approved elsewhere.
What to watch out for: BadCreditLoans is not a lender itself. It connects consumers to lenders and other financial service providers, meaning you will need to carefully read through the terms, fees and all other requirements offered by each lender, as details will vary.
Runner-up for very bad credit scores: Upstart, APR: 6.53% - 35.99%
Overview: Upstart has developed a reputation for offering fast and fair personal loans. While many loan applications are based primarily on a borrower’s credit score and years of credit, Upstart applications also factor in an individual’s education, job history and area of study. APRs for Upstart loans vary by state and range from 6.53 percent to 35.99 percent. However, the average three-year loan offered by lenders using the Upstart platform is 21 percent. Loan amounts range from $1,000 to $50,000. Loan repayment terms vary from three to five years.
Perks: Funds are provided quickly, as soon as the next day after approval. There’s no down payment required or prepayment penalties.
What to watch out for: Upstart charges a one-time origination fee, which can be as high as 8 percent of the approved loan amount. Upstart charges late payment fees and returned check fees.
Best secured loan: OneMain Financial, APR: 18.0% - 35.99%
Overview: OneMain Financial offers both unsecured loans and secured loans, which require providing collateral such as a motor vehicle. Loan amounts range from $1,500 to $20,000. APRs can be run anywhere from 18 percent to 35.99 percent. Term lengths are 24, 36, 48 or 60 months.
Perks: The application and funding process with OneMain is very quick. Typically, from the start of the application to receipt of funds takes about one day. The company also has nearly 1,600 branch offices, for those who like to deal with a brick and mortar business.
What to watch out for: OneMain Financial charges origination fees that vary based on the state you live in. In some cases, it’s a flat amount, ranging from $25 to $300, while in others it may be a percentage of the loan. Percentage-based fees range from 1 percent to as much as 10 percent. OneMain also charges late payment fees that vary based on the state where you opened the loan. Typically, the fees range from $5 to $30 per late payment.
Runner-up for best secured loan: TD Personal Secured Loan, APR: Variable, currently 7.17%
Overview: The TD Personal Secured Loan comes with a variable interest rate that’s the prime plus 2 percent. Its current APR is 7.17 percent. The origination fee for this loan is $50, which is collected at the closing and cannot be rolled into the loan. Borrowers can apply for loan amounts of $5,000 to $50,000. Loan terms range from 12 to 60 months.
Perks: This loan allows applicants to borrow against their savings, which TD Bank treats as collateral. There are no monthly fees, annual fees, prepayment fees, late fees or insufficient fund fees.
What to watch out for: Applicants must use a TD Bank savings, money market savings, or CD as collateral for these loans, which can be limiting for potential applicants.
Best secured loan: Avant, APR: 9.95 - 35.99%
Overview: Avant offers unsecured loans of between $2,000 and $35,000. There’s no minimum income or credit score for the loans. Avant’s loans, which can be used to consolidate debt, pay for emergencies or even home renovations, offer repayment terms of 24 to 60 months. APRs range from 9.95 percent to 35.99 percent.
Perks: For those who qualify, the loan funds will be made available as soon as the next day.
What to watch out for: Avant loans come with an administration fee of as much as 4.75 percent. There’s also a $25 late fee for if monthly payments are not made in full within 10 days after the due date. The insufficient funds fee for Avant loans is $15.
Best for flexible repayment options: LendingPoint, APR: 9.99% - 35.99%
Overview: LendingPoint operates in 49 states and the District of Columbia and offers loans for those with credit scores as low as 585. Loan amounts range from $2,000 to $25,000. APRs start at 9.99 percent and go as high as 35.99 percent. The repayment terms offered by LendingPoint vary from 24 to 48 months and monthly payments are designed to fit your budget.
Perks: LendingPoint provides application decisions in just a few seconds and once the loan is approved funds can be available as soon as the next day.
What to watch out for: You’ll pay an origination fee with LendingPoint of as much as 6 percent. The fee can be deducted from the loan proceeds. In addition, you must have a minimum annual income of $20,000 to qualify for a loan.
Runner-up flexible repayment options: Upgrade, APR: 6.98% - 35.89%
Overview: Offering personal loans for those with fair credit or better, Upgrade funds can be used for debt consolidation, refinancing credit cards, home improvements or major purchases. APRs available from Upgrade start at 6.98 percent and go as high as 35.89 percent. Loan amounts range from $1,000 to $50,000 and terms are 36 to 60 months.
Perks: Upgrade allows borrowers to choose a monthly payment that fits their budget as well as pick terms that fit their timeline. When applying for an Upgrade loan you’ll get a decision within just a few seconds and the funds can be available within just one day of going through the provider’s verification process.
What to watch out for: All personal loans include a 1.5 percent to 6 percent origination fee, which is deducted from the loan proceeds.
Best loan ease of qualification: Earnest, APR: 5.99% - 17.24%
Overview: Earnest is known for evaluating an applicant based on far more than just credit scores. Unlike many other lenders, Earnest considers such factors as the applicant’s savings habits, education, and even their earning potential in order to build an overall applicant profile and determine the best interest rate to offer. APRs start at 5.99 percent.
Perks: Earnest offers low-cost, zero-fee loans options. This includes no origination fees, early prepayment fees, or hidden fees.
What to watch out for: The Earnest decision-making process can take some time, anywhere from five to 10 days. That timeline can be impacted if additional information is required to evaluate an application.
Recap of best bad credit loan rates of 2020
Best loan for very bad credit scores
5.99% - 35.99%
Best runner-up for very bad credit scores
6.53% - 35.99%
Best secured loan
18.0% - 35.99%
|TD Personal Secured Loan
Best runner-up unsecured loan
Variable, currently 7.17%
Best unsecured loan
9.95% - 35.99%
Best for flexible repayment
9.99% - 35.99%
Runner-up for flexible repayment
6.98% - 35.89%
Best for ease of qualification
5.99% - 17.24%
What are bad credit loans?
Bad credit refers to bad credit scores or those who haven't had time to build a credit history. Things like late payments or maxed-out credit cards are financial missteps that can lower your credit score.
Bad credit loans are an option for people whose credit reflects some financial missteps or who haven’t had time to build a credit history. These loans are either secured (backed by collateral like a home or car) or unsecured. Interest rates, fees and terms for these types of loans vary by lender.
Various banks, credit unions and online lenders offer loans to those with weak credit, but the threshold for what’s considered a “creditworthy borrower” varies by institution. Some lenders have stricter requirements than others, which makes it important to shop around thoroughly when looking for a loan.
How do you know if you have bad credit? Check out these FICO score ranges to see where you land:
720 - 850
690 - 719
630 - 689
300 - 629
What are the types of personal loans for bad credit?
There are two main options when it comes to getting a personal loan if you have bad credit: secured and unsecured.
Secured loans require the loan amount to be backed by collateral, like a home or car, says Adam West, finance editor for BadCredit.org. This is often a good option for borrowers who have equity in their home and can’t qualify for an unsecured loan. Secured loans generally offer more favorable rates, higher loan limits and better terms, as banks view these loans as less risky due to the collateral put up by borrowers. But there’s a caveat: If you default on the loan, you could risk losing your home, car or other collateral.
“If it’s a situation where you feel very confident that you’re going to be able to repay and not put your collateral at risk, this option can be OK. But it can be risky,” says West. “Putting your car or home against a loan is a big risk. If you can’t repay that loan, all of sudden they can take your house.”
Unsecured loans, however, don’t require any collateral. The rate you receive is based on your creditworthiness. Since it’s not secured by an asset, this type of loan typically comes with a higher interest rate and lower loan limits. “For those who have bad credit, the terms of an unsecured loan might not be the most advantageous, but sometimes people don’t have a choice,” West says.
Fortunately, whatever your needs, there’s likely a lender that’s a good fit.
How do online bad credit loans work?
Personal loans for bad credit can be used for a wide range of purposes, from debt consolidation to financing major purchases.
But it’s important to note that borrowers with low credit scores are seen as riskier in the eyes of lenders. In exchange for taking on additional risk, lenders generally charge you more in the form of higher interest rates, fees and other charges, West says. “The finance charges can be pretty sizable,” West says. “Sometimes as high as $20 per $100 loaned. It’s not always that high, but for someone with bad credit it can definitely be that high.”
Some bad credit loans may also include early termination fees. “It’s really important to do your homework and look at all of the associated fees so that you have a sense of how much you will ultimately be paying,” West says.
Applying for a bad credit loan online is similar to a regular loan. Legitimate lenders will typically check your credit history, financial situation, ability to repay and other information before extending a loan offer.
Is there risk in bad credit loans?
As a borrower, you take on some risk whenever getting a personal loan. If you default on a secured personal loan, for instance, the lender could take your collateral, and your credit score could take an even bigger hit. You also chance racking up even more debt if you don’t pay bills on time.
The lender may also sue you, says Adam Marlowe, principal experience officer for Georgia’s Own Credit Union. “If you don’t pay the loan back, the lender has an opportunity then to sue you for breach of contract,” Marlowe says. “Most lenders, depending on the amount you borrow, wouldn’t do that, but they could. So, it’s another risk.”
Additional types of loans for people with bad credit
These loans are for a specific sum of money upfront that you repay with interest in equal monthly installmentover the life of the loan, Marlowe says.
Payday lenders charge exorbitant interest rates but don’t look at your credit when deciding if you’re eligible for a loan. These are typically short-term loans that are for low amounts, often $500 or less. Payday loans also carry extremely high fees.
In fact, the Consumer Financial Protection Bureau has found that the fees for a typical two-week payday loan can equate to an APR of almost 400 percent. Payday loans are banned in some states, while other states set limits on payday loan sizes and fees.
Similar to payday loans, cash advance lenders most likely won’t check your credit, but these are most useful if you have a credit card or steady income, says West of BadCredit.org.
“If you have an unsecured credit card, you can contact the issuer for cash advances,” explained West. “The interest rate might be more favorable then some other options and they won’t be doing a hard inquiry on your credit because they already have all of your information.”
Per your bank’s policy, they may approve you for a short-term loan or minimal overdraft agreement. This is, of course, dependent on your banking history and ability to keep your account open.
Choosing a bad credit lender
Despite the obstacles, having a low credit score doesn’t mean getting a loan is impossible. You can be approved through a short-term lender, online lender, bank or credit union. But you’ll want to be careful and do your homework before taking on such a loan, says Leslie Tayne, a debt resolution attorney.
“I can’t stress enough the importance of educating yourself as a consumer and shopping around for the right financial product to assist you with your goals,” Tayne says. “A low credit score does mean you have limited options, but it doesn’t mean you don’t have any options. There are products that assist borrowers with low or bad credit.”
When shopping for a bad credit loan online, it’s a good idea to start by contacting your local bank or credit union and explaining your needs, Tayne says. You can also shop online, she added, but be careful to study the language and terms of online lending loans.
“Note that payday loans are illegal in some states but others do allow lending under certain circumstances,” Tayne says. “You may have to dig a little to find your options, but you may be surprised that there are options available to you.”
In addition, read Google and Yelp reviews about a potential lender to see what other consumers are saying about their experiences. “Real consumers will tell you on Google or Yelp if a company is good or not,” Marlowe says. “And some companies, like SoFi, are so transparent they put their reviews on their own website.”
You can also look at ratings from companies like the Better Business Bureau in order to get a fuller picture.
How to look out for bad credit loan scams
Scams targeting borrowers who have poor credit are also a concern. Fortunately, fraudulent lenders throw up some red flags that are easy to recognize. Here are some of the signs you might be walking into a scam:
- Guarantees without approval: Reputable lenders generally want to see your credit report, income and other information before extending an offer. If you come across a lender who isn’t interested in your payment history, you might be getting lured into a bad situation. “It’s a big red flag if a lender isn’t asking to see your credit report or other information,” says Becky House, director of education for American Financial Solutions, a nonprofit credit counseling agency. “There has to be something to base the loan on.”
- No registration in your state: The Federal Trade Commission requires that lenders be registered in the state where they do business. “Look and make sure it’s a business that is licensed to do business in your state,” House says.
- Poor advertising methods: Phone calls and door-to-door solicitation are not considered legitimate advertising practices for trustworthy lenders. “If you’ve never heard of the company before I would be cautious,” House says. “And if someone is coming to your door to offer a loan I would not trust (them).”
How to fix credit in order to get a better loan
If you want more loan options with better terms, work on improving your credit. Having responsible financial habits can go a long way toward boosting your credit health. Remember, however, that process can take time. Here are several things you can do to get started on the path to a higher credit score:
Pay your bills on time
This doesn’t just apply to your credit card bills, but also to any other debts, including auto loans, mortgages and student loans. What lenders care about, above all else, is the likelihood that you’ll pay back your debts.
Pay down your debt
Your credit utilization ratio compares the amount of debt you owe to the amount of credit you have at your disposal. Keeping an eye on your balances relative to your total credit limit is crucial for improving credit. The less of your credit limit you use the better.
According to Experian, lenders typically like to see a credit utilization ratio of 30 percent or less.
Use credit score-boosting programs
Experian Boost and UltraFICO connect to your bank account to grab utility and other financial information. This is especially beneficial for those with a thin or no credit profile.
Leave unused credit cards open
As long as there is no annual fee associated with an unused card, leaving it open can be beneficial. Not tapping your available credit on the unused card will help lower your credit utilization ratio.
Don’t open too many credit cards at the same time
Be careful not to open too many credit cards within a short time period. When you apply for a credit card or loan, it generates a hard inquiry. A hard inquiry is a credit check done in order to determine your creditworthiness. A hard inquiry stays on your credit report for about two years and can also cause your credit score to decrease. The hard inquiry impacts your credit score only for about one year, however.
Fix errors on your credit report. By law, you’re entitled to one free credit report from each of the three major credit bureaus per year. Correcting any blemishes on your report can help you improve your credit standing overall.
Protecting your credit score after laying fresh ground
Building credit and boosting your credit score are not always synonymous, but they’re related.
Once you’ve regained some financial footing via a bad credit loan (and you will), you can then continue to practice good habits and set up protections around your credit score.
3 quick financial wellness tips:
- Make automated payments: Start by setting up automatic payments for your bills through your bank. This will relieve you of the burden of having to remember due dates and avoid late payments. And it will get you into a consistent rhythm of repayment, which is music to a creditor’s ears.
- Cash in, cash out: Be strategic with your credit cards and pay for more purchases using cash. Your budget shouldn’t allow you to spend beyond what you earn. Using cash will help you keep track.
- Keep an eye on your accounts: Even when you’re not overly active, continue to check your FICO score and credit card accounts regularly. This will help you maintain an ownership mentality, monitor spending and keep annual fees from sneaking up on you.
The bottom line
Starting over financially most likely means starting over personally in some areas as well, and that’s nothing to be ashamed of.
A lack of knowledge, adequate resources, or access to funds to pay off debt can have a swift impact on your credit score. But remember, bad credit isn’t irreversible. You still have options toward building a functional financial life; and a bad credit loan could be a viable one.