If you don’t have good credit. you may still qualify for a bad credit personal loan. However, these debt products can be costly. Before you take out a loan, make sure that it is the best option to support your long-term financial success.
What is a bad credit loan?
A bad credit loan is a type of personal loan that caters to borrowers with lower credit scores. Many banks, credit unions and online lenders offer these loan products. They generally come with a fixed interest rate and are payable in equal monthly installments.
There are no restrictions on how the funds can be used. Some borrowers take out bad credit loans to cover a financial emergency, pay medical bills or consolidate debt. Others use the loan proceeds to cover larger purchases or make home improvements.
Bad credit loans are either unsecured or secured. The latter is backed by collateral, like a car or home, that your lender can seize if you fall behind on payments.
Who may want to consider a bad credit loan?
If you need fast cash and can’t get approved for a traditional loan, a bad credit loan may be worth considering. You could pay several hundred or thousands of dollars more in interest. Still, the rate is usually far less than payday lenders charge, and some lenders offer same or next-day funding.
A secured loan is a good fit for borrowers who are confident that they can make the loan payments on time. These are ideal for people who have something to use for collateral and could benefit from the lower rates.
An unsecured loan could be more ideal if you’d prefer not to put an asset up for collateral and don’t mind paying a higher cost to borrow the funds you need.
Are some types of bad credit loans safer than others?
Not all bad credit loans are the same. When evaluating your options, consider these factors to gauge if the loan you’re considering is a safe and viable choice:
- Is the lender reputable? The lender should be registered to do business in your state, and have a physical address and secured website.
- Does the lender charge prepayment penalties? You may want to steer clear of bad credit loans that come with prepayment penalties. Otherwise, you’ll be assessed a fee if you get back on track sooner than later and pay the loan off early.
- Is the interest rate excessive? Bad credit loans come with steep interest rates. The rate quote for your preferred lender should be comparable to what other lenders are offering. If not, it may be a scam.
- What are the repayment terms? Steer clear of bad credit loans with extended payment periods as they can mean bad news for your finances. The lender may stretch the loan out to make your monthly payment more affordable, but you’ll also pay a fortune in interest as they’ll have more time to collect from you.
Also, be on the lookout for lenders who guarantee approval before you apply or require an upfront payment to secure a loan. Both are signs of a scam, and these types of lenders should be avoided at all costs.
How much does a personal loan cost when you have bad credit?
It depends on the lender and your credit rating. You can expect an APR of up to 36 percent when you take out a bad credit loan.
A lower credit score means you’ll typically get a higher interest rate as the risk of you defaulting on the loan is higher. But if you opt for a secured loan, the lender could give you a slight break on the interest as they’ll assume a little less risk.
What are alternatives to a bad credit loan?
If you can’t get approved for a bad credit loan or would prefer to explore other options, here are some alternatives to consider:
- Credit cards: Some credit card companies feature products for consumers with past credit challenges. Only consider options that do not charge steep annual fees or monthly maintenance fees if possible.
- Payday loans: These loans should only be used as a last resort as they often come with three-digit interest rates. Plus, they’re typically due within two weeks and can put a strain on your finances if you’re unable to pay and incur additional interest and fees from having to roll the loan over.
- Family or friends: You can also ask a relative or close confidant to loan you the money. Put an agreement in writing to avoid any confusion, and only commit to a repayment schedule that you can comfortably afford and that works for your budget.
As you get back on track financially, consider improving your credit health and building an emergency fund. That way, you won’t have to resort to a bad credit loan if you experience financial hardship in the future.