Bad credit loans cater to consumers with lower credit scores — typically under 670. These loans make credit more accessible to credit-challenged borrowers who likely have trouble finding personal loans elsewhere. Still, bad credit loans come with higher borrowing costs since they are riskier to the lender and may not be ideal for your financial situation.  

Before applying for a bad credit loan, consider the benefits and drawbacks to decide if it’s a good fit or if you should consider an alternative funding option.  

Pros of bad credit loans  

A bad credit loan may seem attractive if you’re low on funds for a project or major cost and most traditional lenders have turned you away. Here’s a closer look at the advantages they offer borrowers. 

  • Flexible lending guidelines: Personal loans from traditional banks and credit unions require good or excellent credit. But as the name suggests, a bad credit loan is accessible to borrowers with fair or poor credit. Furthermore, the lender will likely consider other factors — like a consistent, verifiable source of income — to make a lending decision.  
  • Rapid funding: Online lenders offering bad credit loans are known for quick funding timelines. Many let you apply online, receive a same-day decision and, if approved, disperse the loan proceeds in just one to three business days.  
  • Credit building: If the lender reports account activity to the credit bureaus, your payment history will improve, assuming you make timely loan payments. Your credit score could also increase since payment history is the most significant component of the credit-scoring equation.  

Cons of bad credit loans 

Bad credit loans have their share of perks. However, there are downsides to consider when exploring your options:  

  • High interest rates: The best interest rates are generally reserved for borrowers with solid credit ratings. So, a lower credit score means you’ll usually get a much higher interest rate that makes your monthly loan payments unaffordable.  
  • Fees: Some lenders charge fees that could add to your already steep borrowing costs. These include origination fees, usually deducted from the loan amount, and early repayment penalties if you decide to pay the loan off early.  
  • Collateral requirements: If a secured loan is your only option, you’ll need collateral to get approved. Unfortunately, you could lose your assets if you fall behind on the loan payments.  

How to tell if a bad credit loan is right for you  

When deciding if a bad credit loan is right for you, consider its impact on your finances. A lower credit score means you’ll pay more in interest — and a higher monthly payment — and some lenders charge hidden fees that increase borrowing costs even more. And, depending on the repayment period you receive, you could spend a fortune on interest unless the lender doesn’t charge prepayment penalties and you’re able to pay the loan off early.  

Still, a bad credit loan could be ideal if you’ve done your homework to find a product with fair terms and an affordable monthly payment. Assuming you’ve exhausted all your other options, taking out a bad credit loan could also help you get your finances back on track. Plus, you can start rebuilding your credit health so you can qualify for better loan offers in the future should the need arise.  

Alternatives to a bad credit personal loan 

Bad credit loans are risky for lenders, but they can also be problematic for your financial situation. Luckily, there are other options available.  

  • Existing credit card: If you have a credit card with available credit, you can use it instead of taking out a bad credit personal loan. Be sure to pay the balance off as soon as you can to minimize interest charges.  
  • Borrow from a friend or relative: Ask a trusted friend or relative for a loan to get you over the hump. If they agree, come up with payment terms that work for both parties and create a written agreement. It’s equally important to uphold your end of the bargain to prevent discord and preserve the relationship. 
  • New credit card: Some unsecured credit cards are designed for borrowers with less-than-perfect credit. Most come with high interest rates and fees but can be more cost-efficient than a bad credit personal loan.  

The bottom line 

Personal loans are harder to get when you have bad credit. So, if you decide to use a bad credit loan to get fast cash, shop around and compare loan offers to find the best deal. Many lenders let you get prequalified online in minutes without affecting your credit score, making it easier to identify the best option for you.