Key takeaways

  • Use a loan calculator before applying so you know what to expect in terms of monthly payments and borrowing costs.
  • Select a loan with a shorter term to save a bundle on interest.
  • Get prequalified to gauge your approval odds without hurting your credit score.
  • Shop around for loans with at least three lenders before moving forward to find the best options available to you.

A bad credit loan is a personal loan that caters to people who have a less-than-stellar credit score or a limited credit history; especially those who have a FICO score under 580 or a VantageScore under 600.

Bad credit loans typically have high interest rates because they may pose a risk for the lender, so it’s important to shop around to find the most competitive rate offer. There are a few options available, so compare offers and get prequalified before settling on a lender.

1. Know what type of bad credit loan you need

There are four primary types of bad credit loans: cash advance loans, secured loans, unsecured loans and payday loans. Some require collateral, making them riskier — but less expensive — for the borrower.

Cash advance loans

Many credit card companies allow you to take out a cash advance against your credit limit. They come with hefty fees and are limited in the amount you can borrow. However, they don’t require credit checks and the amount you borrow will be rolled into the existing balance on your account.

Secured loans

Secured loans are generally less expensive than unsecured loans because the lender requires collateral. For borrowers with bad credit, this can be any asset with value, like a car or a savings account. However, the lender can seize your asset and sell it to recoup their losses if you fall behind on payments.

Unsecured loans

Unsecured loans are the most common option out there. You don’t need collateral to qualify, and many lenders offer loans between $1,000 to $50,000. But because there is no collateral, your interest rate will be higher with a lower credit score.

Payday loans

A payday loan can be used as a last resort if you can’t qualify for a personal loan or borrow from family or friends. They have a quick repayment term of less than a month — some are due on your next payday — and are often for $500 or less. Payday loans also have excessive interest rates, usually well over 300 percent, and can lead to a dangerous debt cycle if you’re forced to extend the loan term.

2. Pick what loan terms would be best for you

Almost every personal loan has a repayment term between two to five years. It can be tempting to opt for a loan with a long term to get a more affordable payment, especially when faced with high interest rates. But stick with the shortest term you can reasonably afford to cut down on the total interest you pay.

For example, consider a bad credit loan of $5,000 with an interest rate of 29 percent. A longer term means a lower monthly payment, but the interest you pay could be thousands more.

Loan term Monthly payment Total interest
2 years $277 $1,647.92
3 years $210 $2,543.03
4 years $177 $3,502.41
5 years $159 $4,522.56

Use a loan calculator to calculate the difference in monthly payments and interest to get a better idea of what to expect from your loan.

3. Prequalify with three or more lenders

Almost every lender allows you to prequalify online to preview your rates. The process is simple and generally only takes a few minutes.

Prequalifying won’t hurt your credit score since it only requires a soft credit check. And once you complete a few steps, you will be able to see what rates and loan terms you qualify for. Prequalify with at least three lenders to choose the best option that fits your needs and budget.

4. Calculate the loan costs

Once you prequalify with a few lenders, compare the interest rates for the same loan amount and repayment period to determine which are most competitive. You’ll generally need to provide your contact information, Social Security number, employer’s name and phone number and information about your income.

After entering this information and completing the lender’s questionnaire, you’ll receive loan quotes if there’s a match. Repeat this process with at least three lenders as suggested in the previous step. Then assess each lender’s fees before formally applying.

You might find that one lender charges a higher interest rate but far fewer fees than another option offering a much lower rate. In this case, they could be the better choice to minimize overall borrowing costs by cutting down on fees.

5. Look at customer experience and reviews

The lender should offer customer support by phone, online or both at times that work for your busy schedule. It is also vital that the application experience is seamless and that the lender allows you to manage your loan online.

You should also check out reviews to get a feel for the level of service each lender offers. It’s not abnormal to see a few negative reviews here and there, but most should indicate a satisfactory customer experience. Otherwise, consider applying with a different lender.

6. Identify useful perks

Beyond providing you with a seamless application experience and rapid funding, some bad credit lenders offer other perks to help improve your overall financial health.

For example, you may receive free access to your credit score directly from the online dashboard. There could be an assortment of financial tools, including calculators and educational articles, to provide the information needed to make sound financial decisions moving forward.

7. Watch out for predatory lenders and scams

Bad credit loans are readily available through several financial institutions, both brick-and-mortar and online. Not all lenders are the same, and some should be avoided altogether.

Steer clear of lenders that aren’t registered to do business in your state, offer guaranteed approvals without a credit check or require upfront payment to approve you for a loan. Always be on the lookout for common scams as well. Finally, check that your lender has a secure website and physical address.

Bottom line

There are several options for bad credit loans that could be a solid choice. Before you apply, research loan types and shop around with three or more lenders to get rate quotes. When narrowing down your options, evaluate lenders based on their reputation, loan costs, terms and customer service to find the best fit for you.