If you have bad credit and need fast cash, you may not realize you may still have loans you qualify for. A bad credit loan could be an option if you’ve been turned down by your bank or credit union and borrowing from relatives or friends isn’t an option.
There are several types of bad credit loans to choose from. They often come with steep interest rates that could cost you several hundred or thousands of dollars more over the life of the loan. So, it’s worthwhile to exhaust all your options and explore other alternatives before applying for a bad credit loan. However, if you are in a pinch, a bad credit loan could be what you need.
What is a bad credit loan?
Bad credit loans are designed for consumers with low credit scores that can’t get approved for funding elsewhere. You can expect higher interest rates and fees with these loans as the risk of default is higher.
The FICO scoring model, which 90 percent of lenders and creditors use to make a lending decision, ranges from 300 to 850. Lenders who offer bad credit loans generally target consumers within these FICO score ranges:
- Poor credit: 300 to 579
- Fair credit: 580 to 669
While these loans are costly for borrowers, the upside is you can get the cash you need when dealing with an unexpected expense or financial emergency. Furthermore, some lenders offer a streamlined application process and same or next-day funding.
Secured loans cater to consumers with less than perfect credit but require some form of collateral to get approved. Title loans and home equity loans are popular secured loan options, but you risk losing your car or home if you default on the loan payments.
Still, they could work if you haven’t found better options elsewhere and don’t foresee any issue repaying the loan on time.
Before you apply for a secured loan, research several lenders who offer title and home equity loans to determine if you meet their eligibility criteria. You’ll likely have better luck with a title loan if your credit score is in the trenches, but you could qualify for a home equity loan with certain lenders.
As the name implies, these loan products do not require a credit check to get approved. They are enticing to borrowers with very low credit scores who’ve been turned down for other loan products but come with steep interest rates to offset the risks they pose to the lender. Consequently, you could get a monthly payment that doesn’t quite work for your budget and find yourself in even more financial trouble over time.
Some lenders will stretch out the loan term on these loan products to give you a lower, more appealing monthly payment. However, this just means you’ll pay more in interest over the life of the loan as the lender will have more time to collect interest from you.
Common no-credit-check loans include payday loans, installment loans, auto title loans and cosigner loans.
Payday loans provide a short-term solution to credit-challenged borrowers. These loans typically come with exorbitant interest rates, sometimes well into three figures, and cap at around $500.
Most payday lenders won’t check your credit to qualify you for a loan, and you could get the loan proceeds within hours. Still, payday loans should only be used as a last resort because the cost of borrowing is steep. Plus, you’ll typically have to repay what you borrow by the next payday or face hefty fees if you extend the loan term. This could lead to a vicious cycle that’s challenging to escape.
A cash advance lets you pull funds from your credit card’s available balance up to the preset limit set by your credit card issuer. The amount you borrow is rolled into the outstanding balance on your credit card. You’ll likely pay a higher interest rate than you would on regular credit card purchases.
Cash advances are usually made by withdrawing cash from an ATM. You can also request a cash advance from a teller at the credit card issuer’s physical branch location (if applicable).
If possible, only use cash advances in financial emergencies. Although they offer a rapid solution if you’re experiencing financial hardship, they can be costly and keep you in credit card debt for an extended period.
Some banks offer short-term loans for smaller amounts to account holders with positive banking history. The qualification criteria differ by the financial institution, though, so you want to reach out to your bank or credit union to determine if this is a viable option for you.
Alternatives to bad credit loans
Although bad credit loans are designed to help consumers who have trouble accessing funding, they can be costly and predatory in some cases. If you’re facing a financial emergency or unexpected expense, here are some viable alternatives:
- Ask a relative or friend for money. Be sure to draft up a repayment plan that works for both parties to avoid problems later on.
- Use a credit card. If you have available credit on a credit card, the cost of swiping it is probably much lower than you’ll pay if you take out a bad credit loan. However, you want to repay what you spend sooner than later to avoid spending a fortune in interest.
- Look for local help. Some communities have religious and nonprofit organizations that offer financial assistance to those experiencing a financial crisis.
Most importantly, work towards building your emergency fund and improving your credit. That way, you may not have to borrow money the next time life happens. Furthermore, you’ll potentially qualify for loan options with better terms and more competitive interest rates if you don’t have enough saved to cover a financial emergency if it arises.