A bad credit loan could be a viable option if you can’t get approved for a loan from a bank, credit union, or borrow money from friends and family.
It is relatively easy to apply and most lenders issue quick loan decisions. Interest rates can reach up to 36% on unsecured and secured personal loans for bad credit or triple digits for payday loans and cash advances.
However, not all loan options are the same. Before applying, consider how to choose the best bad credit lender.
What is a bad credit loan
A bad credit loan is a personal loan for consumers with credit difficulties. You may also qualify for a bad credit loan if you have little or no credit history.
Loans for bad credit generally have no restrictions on how the funds can be used. Some borrowers cover financial emergencies, medical bills, or make expensive home repairs. Others use the money to consolidate their debts or as they see fit.
These loan products usually come with high interest rates because they are risky for the lender. But the interest rate on most bad credit loans is fixed, so the monthly payment amount won’t change. Loan proceeds are allocated in a lump sum and payable in equal monthly installments over a specified period.
Payday loans and cash advances are alternatives to bad credit personal loans. However, interest rates and fees tend to make these loans very risky options.
Types of loans for bad credit
There are four main types of bad credit loans.
You will need collateral to get approved for a secured loan. However, the rate will generally be lower than what you would get with an unsecured loan. Your lender can seize your property and sell it to recover their losses if you fail to repay the loan.
These loan products are also easier to obtain if you have bad credit. However, they should only be used if you can comfortably afford the loan repayments.
This type of loan is preferred if you need a bad credit loan. You won’t need collateral to qualify and you could be eligible for a hefty amount. The downside is that your interest rate will be higher with a lower credit score.
Consider targeting online lenders. They tend to offer more flexible personal loan options for borrowers with bad credit than traditional banks and credit unions.
A payday loan can be used as a last resort if you cannot qualify for a personal loan or borrow from family or friends. It is a short term loan of $500 or less. It comes with an excessive interest rate, usually in the triple digits, and is payable on the day of your next payday.
These loans are extremely risky and can trap you in a dangerous cycle of debt if you are unable to pay and are forced to extend the term of the loan. You could rack up several hundred dollars in interest and fees each time you carry over the balance.
Like payday loans, cash advances are another expensive way to borrow money. They are available from some credit card issuers and involve withdrawing funds from your credit card’s available balance.
The amount you borrow will be added to your existing account balance, but you can expect to pay a higher interest rate than that charged for purchases made with the card.
How to Choose a Loan Company for Bad Credit
Beyond funding timelines, there are other factors to consider when evaluating bad credit lenders.
The cost of borrowing varies by lender and loan product. Get options from multiple lenders and compare them to see which offers the most competitive interest rate and doesn’t charge a fortune in fees.
Reputation of the lender
Loans for bad credit are readily available from several financial institutions, both physical and online. Not all lenders are the same and some should be avoided. Some lenders may even be scammers.
Avoid lenders that aren’t registered to do business in your state, offer guaranteed approvals without a credit check, or require an upfront payment to approve you for a loan. It is equally important that they have a secure website and a physical address.
An extended repayment term means that your monthly payment will be lower, but you will pay more interest over the life of the loan. So, a shorter loan term might be more ideal if you want to pay off what you owe faster and save a lot of interest.
The lender should offer customer support by phone, online, or both at times that suit your busy schedule. It’s also essential that the application experience is seamless, and the lender gives you the ability to manage your loan online through a mobile app once it’s approved and you start making payments.
At the end of the line
Several loan options for bad credit could be suitable. But before applying for a loan, research loan types and shop around for quotes. When narrowing down your options, you also want to evaluate lenders based on their reputation, loan costs, terms, and customer service to find the best one for you.