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 debts or paying medical bills.
Personal loans for bad credit work in the same way as other personal loans – they usually have a fixed interest rate and are payable in fixed monthly installments. But here’s the main difference: they often come with higher interest rates and fees.
Where can you get a loan for bad credit?
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 loans for bad credit. For example, Avant offers loans to consumers with credit scores as low as 580.
- Traditional banks. You can also get one from a bank, although they tend to have stricter credit requirements. And if you have a relationship with the bank, you may be offered an interest rate reduction.
Who might want to consider a loan for bad credit?
A bad credit loan may be worth considering if you need money fast 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 much lower than what payday lenders charge, and some lenders offer same-day or next-day financing.
A secured loan is a good choice for borrowers who are confident they can make loan payments on time. These are ideal for people who have something to use as collateral and could benefit from lower rates.
An unsecured loan could be ideal if you prefer not to put an asset as 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% when you take out a bad credit loan.
A lower credit score means you’ll usually get a higher interest rate because there’s a higher risk of default. But if you opt for a secured loan, the lender might give you a slight reduction in interest because they will assume a little less risk.
How to avoid predatory bad loans?
Not all bad credit loans are the same. When weighing your options, consider these factors to assess whether the loan you’re considering is a safe and viable choice:
- Is the lender trustworthy? The lender must be registered to do business in your state and have a physical address and a secure website.
- Does the lender impose prepayment penalties? You may want to avoid bad loans with prepayment penalties. Otherwise, you will be charged a fee if you get back on track sooner rather than later and repay the loan sooner.
- Is the interest rate excessive? Bad loans come with high interest rates. The quote from your preferred lender should be comparable to what other lenders offer. Otherwise, it may be a scam.
- What are the refund conditions? Avoid bad loans with extended payment terms. The lender may extend the loan to make your monthly payment more affordable, but you’ll also pay a fortune in interest because they’ll have more time to cash you in.
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 the alternatives to a loan for bad credit?
If you can’t get approved for a bad credit loan or would rather explore other options, here are some alternatives to consider:
- Credit card: Some credit card companies offer products for consumers with past credit issues. Only consider options that don’t charge high 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 usually due within two weeks and can strain your finances if you can’t pay. You may incur additional interest and charges due to the rollover of the loan.
- Family or friends: You can also ask a relative or friend to lend you money. Put an agreement in writing to avoid confusion, and only commit to a repayment schedule that you can comfortably afford and that suits your budget.
As you get back on track financially, consider improving your credit health and building an emergency fund. This way, you won’t have to resort to a bad credit loan if you run into financial difficulties in the future.
At the end of the line
If you need money quickly to meet various expenses, taking out a bad credit personal loan is a potential solution. But before you do that, ask yourself if you can afford higher borrowing costs and explore cheaper alternatives. For example, a friend or family member may be willing to lend you money at a much lower interest rate. Also be aware of potential scams – avoid lenders who guarantee approval or charge excessively high rates compared to other lenders.