5 types of bad credit loans and their uses

If you’ve been turned down for a loan due to bad credit, you’re not completely out of luck. Traditional personal loan lenders may have said no, but bad credit loans exist for borrowers with low credit scores who can’t get approved for funding elsewhere.

Most are convenient as they come with fast funding timelines and may not require a credit check. Still, bad credit loans come with their fair share of drawbacks, including possibly facing higher costs to borrow or needing to use your assets as security.

Cash advances

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 on regular credit card purchases, but there are ways to limit the total cost.

If possible, only use cash advances for emergencies. Although they offer a rapid solution if you’re experiencing financial hardship, they can be costly and can keep you in credit card debt for an extended period.

Pros

• Funds available instantly.
• Less predatory than payday or no-credit-check loans.

Cons

• High interest rates, though lower than other bad credit options.
• Must have a credit card with an available balance.

Payday loans

Payday loans are an expensive, short-term solution for borrowers who can’t qualify for other forms of funding. These loans should only be used when all other options have been exhausted and only for critical needs like food or shelter, as they’re often predatory and can keep you stuck in a debt cycle if you cannot repay the balance in full, plus fees, when it’s due.

Many borrowers go for these loans because lenders don’t complete a credit check and most offer loans up to $500. They also have quick funding turnarounds — typically same or next day.

The cost of these loans is steep, with most payday loans carrying annual percentage rates (APRs) of well over 300 percent. Plus, the repayment timeline is often much shorter than other types of funding. You’ll often have to repay the entire balance by your next payday or else you’ll incur hefty fees and may have to roll what’s due into another payday loan.

Pros

• Same- or next-day turnaround.
• No credit check required.

Cons

• Extremely short repayment period.
• High APRs — often 300 percent or more.

Bank agreements

Some banks offer short-term loans for smaller amounts to account holders with positive banking history. The qualification criteria differs between banks, so reach out to your bank to determine if this is a viable option.

Credit unions also offer short-term loans with interest rates capped at 18 percent. You will need to be a member of the credit union to qualify, but they often have less strict criteria than banks and other lenders.

Pros

• Lower interest rates than other bad credit options.
• Funds available quickly.

Cons

• Much more difficult to qualify for.
• Must have an open checking account.

Car title loans

Car title loans let you borrow between 25 and 50 percent of your vehicle’s value. But there’s a catch — you must own your car outright and hand over the title until the loan is paid in full. Most car title loans come with short repayment periods between 15 and 30 days, and loan amounts generally start at $100.

They are quick, but the ease of access comes at a price. Interest rates are very high, and if you are unable to pay back your loan within the short repayment term, your car can be repossessed.

Pros

• May not require a credit check.
• Rapid approvals and funding timelines.

Cons

• Exorbitant interest rates.
• Risk of repossession if you default on the loan.

HELOCs or home equity loans

Home equity lines of credit (HELOCs) and home equity loans are another popular secured loan option for borrowers with less-than-perfect credit. These loans are second mortgages and allow you to convert a percentage of the equity you’ve built up in your home to cash. Even better, there are very few limits on how you can use your funds.

The downside is they’re secured by your home. You risk foreclosure if you default on the loan. Still, they could work if you haven’t found better options elsewhere and don’t foresee any issues paying on time.

Before you apply, research potential lenders to determine if you meet the minimum eligibility criteria. It can be challenging to find a suitable lender if your credit score isn’t at least in the mid-600s. However, some lenders may be willing to do business with you if you have an acceptable debt-to-income (DTI) ratio and meet other guidelines.

Pros

• Potential to qualify for a higher loan amount.
• More competitive terms than bad credit personal loans.

Cons

• Risk of foreclosure.
• Funding may take longer, usually 30 to 45 days.

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. If you’re facing a financial hardship or unexpected expense, there may be some viable alternatives outside of bad credit or emergency loans.

• Consider a charity. Local charities organizations, churches and nonprofits frequently offer help to members of their communities. You can join forums like Reddit and find local Facebook groups to see what options may be available to you.
• 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.
• Take out a 401(k) loan. It provides easy access to funds without a credit check (if available), but should only be used as a last resort.
• Inquire about a hardship loan. Some employers offer hardship loans to provide financial support to employees facing unexpected expenses or other financial challenges.

Most importantly, work towards building your emergency fund and improving your credit. This way, you can potentially qualify for loan options with better terms, higher amounts and more competitive interest rates in the future.

Frequently asked questions

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  How do I improve my credit score?

  Improving your score won’t happen overnight, but there are some ways you can grow your credit faster. For example, practicing responsible credit usage and debt repayment is a sure-fire way to see your score go up. You can also check your credit report for free to see if there are any discrepancies you need to correct that are lowering your score.
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  What is the easiest type of loan to get with bad credit?

  Bad credit personal loans are among the easiest loans to get with bad credit, as the lenders cater to borrow across the credit spectrum. However, they often come with much higher interest rates and less favorable terms than loans for good credit borrowers.
  
  Depending on the lender, borrowers with less-than-ideal credit may be able to use a co-signer or joint applicant to secure a loan and get a better rate.
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  Where can I get a loan with bad credit?

  Online lenders and some community banks and credit unions may lend to borrowers with low credit. Just make sure to do your research before applying — there are predatory lenders who may try to take advantage of your situation.