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A bad credit loan is a type of personal loan that caters to borrowers with lower credit scores. They can be used for a variety of purposes, such as covering financial emergencies, consolidating debt or paying for medical bills.
Bad credit personal loans work the same way as other personal loans — they generally come with a fixed interest rate and are payable in fixed monthly installments. But here’s the key difference: they often come with higher interest rates and fees.
Where can you get a bad credit loan?
You can get a bad credit personal loan from many places, such as:
- 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.
- Online lenders. Many online lenders offer bad credit loans. For example, Avant offers loans to consumers with credit scores as low as 580.
- Traditional banks. You may also get one from a bank, though they tend to have more stringent credit requirements. And if you have a relationship with the bank, you may be offered an interest rate discount.
Who may want to consider a bad credit loan?
A bad credit loan may be worth considering if you need fast cash and can’t get approved for a traditional loan. 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 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.
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.
How do you avoid predatory bad credit loans?
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 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 offer. If not, it may be a scam.
- What are the repayment terms? Steer clear of bad credit loans with extended payment periods. 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, look 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 lenders should be avoided at all costs.
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 strain your finances if you cannot pay. You may 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.
If you need money fast to tackle various expenses, taking out a bad credit personal loan is one potential solution. But before you do this, consider whether you can afford the higher borrowing costs and explore cheaper alternatives. For example, a friend or family member may be willing to loan you money at a much lower interest rate. Also, be mindful of potential scams — steer clear of lenders who guarantee approval or charge excessively high rates compared to other lenders.