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A bad credit loan is a personal loan that caters to credit-challenged consumers. It’s relatively easy to apply, and most lenders issue quick lending decisions and offer fast funding times. You could also qualify for a bad credit loan if you have little or no credit history, and most lenders generally don’t restrict how the funds can be used.
These loan products typically come with high interest rates because they are risky for the lender, so it’s important to shop around to find the best deal. 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.
Before applying for a bad credit loan, understand the loan types to identify which option is best and select a loan term that works for your financial situation. You should also get prequalified, calculate loan costs and evaluate lenders based on their reputation and incentives they offer.
What is a bad credit score?
A bad credit score depends on the credit scoring model a lender uses. For example, based on the most widely used FICO credit scoring model which ranges from 350 to 850, your credit score is considered bad if it falls between 300 and 669.
Lenders might also use the VantageScore 3.0 credit scoring model. Based on this model, which ranges from 300 to 850, your credit score is considered bad if it lands between 300 and 659.
Here are some actions you can take to find the best bad credit loan company.
1. Know what type of bad credit loan you need
There are four primary types of bad credit loans: secured, unsecured, payday and cash advance. Some require collateral, making them riskier for the borrower. Here’s what to know about each option:
- Cash advance: This costly option is available through some credit card issuers and involves 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.
- Secured loan: You’ll need collateral to get approved for a secured loan, and the lender can seize your asset and sell it to recoup their losses if you fall behind on payments. The upside is these loan products are easier to qualify for if you have bad credit. Plus, the rate will typically be lower than you’d get with an unsecured loan.
- Unsecured loan: You won’t need collateral to qualify and could be eligible for a sizable amount. The downside is your interest rate will be higher with a lower credit score.
- 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. Plus, they 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
Most bad credit loans come with repayment periods between two and five years (except payday loans, which are due on your next payday). It can be tempting to opt for a loan product with an extended term to get a more affordable payment. However, stretching the balance out means you’ll pay more in interest over time, making a shorter loan term ideal if you want to repay what you owe faster and save a bundle in interest.
Use a loan calculator to compute the difference in monthly payments and interest charges for various repayment periods. Doing so will give you a better idea of what to expect and help you pick the most suitable loan term for your financial situation.
3. Prequalify or try to determine what your offers would be
Get prequalified online with the lenders you’re considering to gauge your approval odds. The process is simple and can generally be done online in minutes without hurting your credit score since it only requires a soft credit inquiry. If there’s a match, you can view potential loan offers, including the loan amount, term, interest rate and monthly payment, before moving forward with a formal application.
4. Calculate the loan costs
Once you’re pre-qualified with a few lenders, compare the interest rates on offers for the same loan amount and repayment period to determine which are most competitive. Assess each lender’s fees before formally applying.
You could find that one lender charges a higher interest rate but far fewer fees than another option offering a much lower rate. And in this case, they could be the better choice to minimize overall borrowing costs.
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’s also vital that the application experience is seamless and that the lender allows you to manage your loan online.
Plus, you should look online to check out reviews to get a feel for the level of service they offer. It’s not abnormal to see a few negative reviews here and there, but most should indicate a satisfactory customer experience. Otherwise, you may want to look elsewhere to borrow the funds you need.
6. Identify useful perks
Beyond providing you with a seamless application experience and rapid funding, some bad credit lenders feature other perks to help improve your overall financial health. For example, you may have free access to your credit score directly from the online dashboard. Or there may 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. 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 secure website and physical address.
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.