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How to choose the best bad credit loan company

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A bad credit loan could be a viable option if you can’t get approved for a loan through a bank, credit union or borrow the money from friends and family.

It’s relatively easy to apply, and most lenders issue quick lending decisions. The interest rates can reach up to 36 percent on both unsecured and secured bad credit personal loans or well into three-digits for payday loans and cash advances.

Not all loan options are the same, though. Before you apply, look into how to choose the best bad credit lender.

What is a bad credit loan

A bad credit loan is a personal loan that caters to credit-challenged consumers. You could also qualify for a bad credit loan if you have little or no credit history.

Bad credit loans generally do not have restrictions on how the funds can be used. Some borrowers cover financial emergencies, medical expenses or make costly home repairs. Others use the money to consolidate debt or however else they see fit.

These loan products typically come with high interest rates because they are risky for the lender. But the interest rate on most bad credit loans is fixed, so the monthly payment amount won’t change. Loan proceeds are dispersed in a lump sum and payable in equal monthly installments over a set period.

Payday loans and cash advances are alternatives to bad credit personal loans. However, the interest rates and fees tend to make these loans very risky options.

Types of bad credit loans

There are four primary types of bad credit loans.

Secured loan

You’ll need collateral to get approved for a secured loan. However, the rate will typically be lower than what you’d get with an unsecured loan. Your lender can seize your asset and sell it to recoup their losses if you default on the loan.

These loan products are also easier to qualify for if you have bad credit. Still, they should only be used if you can comfortably afford the loan payments.

Unsecured loan

This loan type is preferred if you need a bad credit loan. You won’t need collateral to qualify, and you could be eligible for a sizable amount. The downside is your interest rate will be higher with a lower credit score.

Consider scoping out online lenders. They tend to have more flexible personal loan options for borrowers with bad credit than traditional banks and credit unions.

Payday loan

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. It’s a short-term loan for $500 or less. It comes with an excessive interest rate, usually three-figures, and is payable on your next payday.

These loans are extremely risky and can trap you in a dangerous debt cycle if you’re unable to pay and are forced to extend the loan term. You could rack up several hundred dollars in interest and fees each time you roll the balance over.

Cash advance

Like payday loans, cash advances are another costly way to borrow money. They’re available through some credit card issuers and involve withdrawing funds from your credit card’s available balance.

The amount you borrow will be rolled into the existing balance on your account, but you can expect to pay a higher interest rate than you’re assessed for purchases made on the card.

How to choose a bad credit loan company

Beyond funding times, there are other factors to consider when evaluating bad credit loan companies.

Loan costs

The cost of borrowing varies by lender and loan product. Get options from several lenders and compare them to determine which offers the most competitive interest rate and doesn’t charge a fortune in fees.

Lender reputation

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. Some lenders may even be scammers.

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. It’s equally important that they have a secured website and physical address.

Loan terms

An extended repayment term means your monthly payment will be lower, but you’ll pay more in interest over the loan term. So, a shorter loan term could be more ideal if you want to repay what you owe faster and save a bundle in interest.

Customer experience

The lender should offer customer support by phone, online or both at times that work for your busy schedule. It’s also vital that the application experience is seamless, and the lender gives you the ability to manage your loan online through a mobile app once it’s approved and you start making payments.

Bottom line

Several bad credit loan options could be a good fit. But before you apply for a loan, research loan types and shop around with lenders to get rate quotes. When narrowing down your options, you also want to evaluate lenders based on their reputation, loan costs, terms and customer service to find the best fit for you.

Written by
Allison Martin
Allison Martin's work began over 10 years ago as a digital content strategist, and she’s since been published in several leading financial outlets, including The Wall Street Journal, MSN Money, MoneyTalksNews, Investopedia, Experian and Credit.com.
Edited by
Loans Editor