Key takeaways

  • Bad credit lenders may approve borrowers with credit scores as low as 580 or lower.
  • Loans for bad credit usually come with high annual percentage rates (APRs) and high costs.
  • Beware of lenders that guarantee approval or require upfront fees — these are signs of a scam.

Getting approved for a loan with bad credit can be a challenging experience. Fortunately, there are a variety of personal loans for bad credit to choose from if you can afford the higher interest rates and payments.

Before applying, learn how they work and what to expect in terms of borrowing costs. Some bad credit lenders are predatory, and knowing how to spot them could keep you from being taken advantage of.

What is a bad credit loan?

A bad credit loan is a loan that caters to borrowers with FICO scores below 580 — though some lenders consider credit scores into the low-600s bad. They are designed to serve as a funding option if you need a loan but have past credit issues.

How does a bad credit loan work?

The main difference between a bad credit personal loan and any other personal loan is the APRs and fees are usually much higher with bad credit. Otherwise, they work the same — you receive all your funds at once, and pay a fixed rate in monthly installments for a term ranging between one and seven years.

Where can you get a bad credit loan?

A variety of lenders offer bad credit personal loans including community banks, credit unions and online lenders.

  • Online lenders. Many online lenders offer bad credit loans. Make sure you check their websites for minimum score requirements since they tend to vary from lender to lender.
  • Credit unions. Since credit unions are member-owned institutions, they may be willing to offer you a loan even if you have less-than-stellar credit.
  • Community banks. Banks usually have more stringent credit requirements, but you may still be able to get a personal loan with a community bank if you already have an account in good standing.

What to consider when getting a bad credit loan

Bad credit loans offer convenience for borrowers who may not be able to qualify for other options. However, there are a number of risks when you borrow a bad credit loan.

They will be more expensive because lenders will charge higher interest rates or — depending on the type of loan — more fees. You may also be limited in how much you can borrow and how long you have to repay your loan.

Bad credit loans cost more

Lenders charge higher interest rates to borrowers with bad credit because they’re viewed as more risky. The interest rate for a bad credit loan may be over 30 percent.

You may also be charged higher origination fees with bad credit which are usually deducted from the loan funds. Higher interest rates also mean higher monthly payments and more interest paid over the term of the loan.

You may not be able to borrow as much

Lenders may limit how much they’re willing to lend to a bad credit borrower compared to a good credit borrower. That’s because borrowers with a history of running into credit trouble are more likely to default, so lenders often cap the loan amounts to reduce their risk.

Your term will likely be shorter

You may not be eligible for a term of five or more years if you have a bad credit history. Bad credit loan lenders may prefer you pay your loan off faster to reduce the odds that you’ll default over a longer time period. Use a personal loan calculator to make sure the payment fits into your budget.

How do you avoid predatory bad credit loans?

People with poor credit are the most common targets for financial predators. Take extra precautions to avoid being a victim of predatory lending.

  • Did the lender reach out to you unsolicited? You should always be the one starting contact with a lender, not the other way around. If you suddenly start getting calls about bad credit loans, you may be dealing with a scam.
  • Is the lender asking for upfront fees? No legitimate personal loan lender will collect fees upfront. All of their fees should be collected when they fund your loan.
  • Is the lender reputable? The lender should be registered to do business in your state, have a physical address and a secure website. Check the Consumer Financial Protection Bureau’s complaint database for any actions against the lender.
  • Does the lender market “guaranteed approvals?” No lender can guarantee a loan approval without reviewing some of your financial information. If they do, they are probably not legit.
  • Does the lender charge prepayment penalties? Check the terms of any bad credit loan with prepayment penalties. You don’t want to be stuck in a loan you can’t refinance without paying a hefty fee if your credit improves in the future.
  • Do you feel pressured to accept the loan? Never, ever take a bad credit loan out because a salesperson pressures you to do so. Any reputable company should share the benefits of the loan and show you how it can improve your financial situation. Strong-arm sales tactics are a red flag that you’re dealing with a predatory lender.

Bottom line

A bad credit personal loan should be part of a bigger strategy to improve your credit and finances. Talk to a credit counselor if you’re not sure about the loan program, and  explore cheaper alternatives first. If you determine that it’s the best financing option for you, compare rates, terms and fees with as many lenders as possible to find the best deal.