Disruptive events rarely wait until it’s convenient, and that’s doubly true for consumers whose credit scores have gone south. Nonetheless, there are moments when those with rocky credit histories absolutely must have a fresh infusion of cash. And that often means trying to land a personal loan swiftly and, worse, under difficult conditions.
Take heart. Bad credit loans — an unfortunate term, but one with which we are stuck — are out there. Knowing how to navigate those choppy waters will help you score the best possible terms, rates and conditions, with a promise of better credit days ahead … if you stay true to your repayment schedule.
How to Get a Loan With Bad Credit
Finding a bad credit loan is a five-step process:
- Start by checking your credit score so you know whether you fit in the “bad credit” category and how much you must boost that score to improve your borrowing status.
- Fill out a loan application with banks, credit unions and online lenders.
- Provide necessary documents to lenders regarding your income and expenses to validate the interest rate you will pay.
- Review loan offers, comparing rates and terms of each option.
- If approved, receive funding and get to work paying off debt and improving your credit score.
Pay on time every month and you should see a nice bump up in your score in as little as six months.
What Is a Bad Credit Loan?
A bad credit loan is a short-term financial fix for consumers who need to borrow money but have a bad credit score and/or poor credit history.
Bad credit loans get their name because the borrower has a “bad” credit score, forcing them to deal with punishing interest rates when seeking a loan.
Used properly, a bad credit loan could be the starting point for a financial turnaround. It should improve your credit score and eventually make you a more attractive borrowing prospect.
Relevant warning here: Bad credit loans are not a perfect solution to the problem. Interest rates on bad credit loans are higher, generally significantly higher than conventional loans. Also, terms are short, usually 1-5 years, which means you must be committed to finishing what you start.
Other debt-relief options, including debt management or nonprofit debt settlement, may prove to be more cost-effective ways to improve your credit score. It would be wise to seek advice from a nonprofit credit counselor about creating an affordable, sustainable budget and deciding whether a debt consolidation loan with bad credit solves a problem, or merely adds to your troubles.
What Is Considered a Bad Credit Score?
Credit scores range from 300-850 and though there is no official start to the “bad credit score” category, it’s safe to say if you’re under 650, you are considered a high risk. This means, among other unpleasantries, you will pay the highest interest rates. People in this category are prime candidates for bad credit loans.
The definition of a “good” and “bad” credit score varies from lender to lender. Some won’t touch anyone with a credit score under 650; others actually market to consumers with a sub-650 score.
So, it’s hard to say what makes you “good” or “bad” on the credit scoreboard, but the accepted range looks something like this:
- 760-850 – Excellent
- 700-759 – Very good
- 660-699 – Fair
- 620-659 – Poor
- Scores below 620 – Extremely poor
Your credit score might be the most important factor in being approved for a loan. It is made up of five parts, each carrying a different weight. Those parts are:
- Payment history (35%): Do you make on-time payments every month or carry over a balance from month-to-month? Miss even one payment, and it dings your credit score.
- Amounts owed (30%): How much of available credit do you use every month? Use more than 30% of your credit limit, and your score slips.
- Length of credit history (15%): How long have you been using credit? Closing accounts is harmful, especially if there is an unpaid balance.
- New credit (10%): Applying frequently for a card is a negative. It makes you look desperate. Don’t apply for a credit card unless you truly need one.
- Mix of credit (10%): What other forms of credit do you have? Credit cards, mortgages, car loans and student loans, if managed successfully, help your credit score. Not making payments on even one of them bruises your score.
How Bad Credit Scores Affect Borrowing
Because low credit scores represent risky business for lenders, low-score borrowers are punished with comparatively high interest rates and generally unfavorable repayment terms.
Many people have gotten that message over the last decade and that is why the average credit score for U.S. consumers has risen to an all-time high of 714. That’s a whopping 25-point jump — from fair to very good — over the last 10 years.
However, the real numbers worth paying attention to are the combination of score and age, which say a lot about how our economy operates. Credit scores are one of the few places in life where being old pays off.
Silent Generation (77 and older) members have an average score of 760. Baby Boomers (58-76) are at 742; Generation X (42-57) at 706; Millennials (26-41) at 687. At 679, Generation Z (18-25) is at rock bottom.
That’s an 81-point difference — the gap between just barely fair and excellent — between the bottom and top, which is costly when shopping for bad credit mortgages and personal loans, as the graphic below demonstrates. Check out the payment differences among credit scores for a 30-year, $200,000 home loan and a 5-year, $25,000 personal loan in February 2023.
|Score||Interest Rate||Monthly Payment||Total interest paid|
|Score||Interest Rate||Monthly Payment||Total interest paid|
|500 and lower||13.42%||$574||$9,453|
Top Bad Credit Loan Companies
The approval process for bad credit loans can be challenging, but patience and diligent research can pay off with an affordable loan. The good news? Plenty of lenders want your business.
How to Compare Lenders
Shopping for a bad credit loan is like shopping for anything else. The prime consideration: What’s it going to cost?
With loans, what it’s going to cost is determined by the interest you pay and the length of time they give you to pay it back. You should know up front that neither one is going to look good when you have a bad credit score, so be prepared to evaluate much more than cost before accepting a loan.
Here are a few things that must be factored into the equation:
- Will I qualify? Eligibility requirements usually include a minimum-allowable credit score, what your debt-to-income ratio should be, and the minimum income level you must have.
- What are the repayment terms? Typically, bad credit loans open a 3-5 year repayment window, but may allow some wiggle room so you can get the monthly payment down to the right number. Ask before you sign.
- Am I comfortable with the lender? You can get a bad credit loan in a lot of places. You need to know if a face-to-face relationship at a bank or credit union matters more than the speed and limited communication you have with an online lender. If something unexpected happens during the repayment period, this could become an issue.
- Interest rates. Yes, it’s last because you probably already compared rates and should be ready to narrow the field to two or three lenders. Compare their interest rates and repayment terms, then decide what’s best for you.
Types of Bad Credit Loans
Finding an affordable bad credit loan can be a challenge, but there are plenty of options. Diligence will be rewarded. The loan could come from your regular bank, but more affordable interest rates and flexible qualifying requirements probably can be found at these options:
- Credit unions
- Family or friends
- Find a co-signer
- Borrow from the equity in your home
- Peer-to-Peer Loans
- Online Loans
- Secured vs unsecured loans
- Negotiate an agreement with your bank
- Cash advances
- Payday loans
Other options like borrowing from a retirement fund (must be paid back or face a penalty); borrowing against life insurance (more penalties); and payday loans (exorbitant interest charges) exist but are risky. A better alternative would be to consolidate debt.
The most alluring aspect of a credit union loan is the ceiling rate of 18%, which applies to anyone, regardless of credit score. Additionally, a credit union may be willing to look beyond a poor credit history and make a judgment based on your character and your promise to repay. A veteran of the armed forces should consider the Navy Federal Credit Union or PenFed Credit Union. A teacher or government worker might check into the State Employees Credit Union or Schoolsfirst Credit Union.
Friends and Family
This is a great place to find low interest, easy repayment terms, but also is dangerous from a relationship standpoint. On the other hand, family and friends aren’t likely to put you through a grueling qualifying process and may cut you some slack on the interest rate, if they charge one at all. Treat any loan from someone you know as an important business transaction between you and a stranger. Create a written contract that includes the loan terms and interest rate, and what will happen if you cannot repay the debt.
Get a Co-Signer
Know someone with good credit? Someone you trust who also trusts you? Respectfully ask her/him about cosigning for a bad credit loan. Because the co-signer is equally responsible for repayment, the lender sets the loan terms based on the borrower with better credit. Stick to the agreement: All payment information will be recorded on both your credit report and your cosigner’s, so if you default on the loan, or you’re late with payments, you both suffer. Make timely payments and your credit score will rise, improving your prospects for getting future loans, with better terms, on your own.
Home Equity Loan
Homeowners who owe less than their dwelling is worth can apply for a home equity loan or home equity line of credit (HELOC). With your home as collateral, home equity loans can be obtained regardless of your credit score. The interest rate is usually low, because the loan is secured by the home. Remember, tapping your equity puts your property in jeopardy. But if you are disciplined and have a reliable income, it is an inexpensive way to borrow from a reputable lender.
Peer-to-peer lending has been around since 2005. P2P lending is an online platform that allows you to get a bad credit loan directly from another individual or group of individuals rather than from an institution. Potential borrowers post a loan listing on various peer-to-peer websites, indicating the amount needed and what it’s for. Investors review the loan listings and choose borrowers they wish to fund.
Online Personal Loans
Online lenders are essentially banks that don’t have offices. They do their work online and offer bad credit loans for things like debt consolidation loans and home repairs. Online lenders tend to be speedy, making decisions in minutes and depositing funds in the borrower’s account in a few hours or days. Many have no application fee or prepayment penalty.
|Lender Name||Borrowing Levels||Loan Terms||Minimum Credit Score||Interest Ranges||Origination Fee||Time to Receive Funds|
|Avant||$2,000 to $35,000||2 years to 5 years||580||9.95% to 35.99%||4.75% of loan amount||Two days|
|Best Egg||$2,000 to $35,000||3 years or 5 years||640||5.99% to 29.99%||0.99% to 5.99% of loan amount||Next day|
|Earnest||$1,000 to $100,000||2 years to 7 years||720||4.99% to 19.99%||None||One week|
|One Main||$1,500 to $20,000||2 years to 5 years||None||18.99% to 35.99%||Varies by state||Same day|
Secured vs. Unsecured Bad Credit Loans
With a secured loan, you borrow against an asset you own, such as a home, car, boat, property, savings or even stocks. Because something tangible backs a secured loan, terms and interest rates are more favorable than with an unsecured loan, which hinges on your promise to repay.
Negotiate an Agreement with Your Bank
Longtime customers with solid records who only recently suffered financial setbacks may be able to negotiate an agreement with their banks for a short-term, bad credit loan. The loan limit probably won’t be very high and it would really be a good-faith gesture on the part of your bank. Bottom line: It can’t hurt to ask.
Get a Cash Advance
A cash advance is a loan using your credit card line. This is a really high-risk solution for a financial problem. A cash advance carries heavy interest charges, higher than those on credit card purchases, and you’ll probably incur a fee (3%-5%), all of which violate the First Rule of Holes. Still, in genuine emergencies, a cash advance is among the fastest ways to get money.
Payday Loans are last on this list because that’s where they belong. Also known as “predatory loans,” payday lenders typically charge a 399% interest rate with a two-week payback period. That’s $15 for every $100 you borrow. And you’re expected to have the $115 or $230 or $345 or $460 ready to repay by the time your next paycheck arrives. Good luck with that.
Pros and Cons of Bad Credit Loans
It makes sense to use caution when taking on any loan, but if you have bad credit, don’t make it worse by being irresponsible. Predatory lenders are all too happy to take your money and make your life miserable if you get sloppy.
It’s time to look elsewhere if the lender:
- Doesn’t require a credit check.
- Doesn’t check your income.
- Guarantees you’ll be approved.
- Can’t be found for customer reviews or a Better Business Bureau ranking.
Those are red-flag warnings that you might have encountered a loan scam. Closely examine the pros and cons of the situation before making a final decision.
Advantages of Loans for Bad Credit
- Loans for Bad Credit Are Fast: Most bad credit loan applications are available online, requiring only a few hours to get a response. At some places, you’ll have the money in your account within a day.
- Lower Interest Rate than Credit Cards: Generally, bad credit loans pack a lower interest rate than you pay on credit card debt.
- Many Lender Options: The number of peer-to-peer lending businesses seems to double every year. If you’re patient enough to make lenders compete for your business, you’re more likely to score a lower interest rate.
- Repayment Term Length: Repayment terms could stretch anywhere from 1-5 years.
- Improve Your Credit Score: By delivering timely payments, your credit score will rise, making you a more desirable candidate next time you need a loan.
Disadvantages of Loans for Bad Credit
- High Interest Rates: You’re a risk, so the lender wants a reward — sometimes a huge reward.
- Fees and Penalties: Read the fine print. Is there a loan origination fee? What is the late fee? Prepayment penalty? Check carefully; some lenders charge a fee for accepting payments by check.
- Collateral Sometimes Required: You may have to put a house or car at risk to get the loan. If you miss payments, you could lose whatever is backing the loan.
- Might Not Be Licensed: Not every online lender is licensed in every state. Be sure the company you choose is certified in your state before paying for their service.
- Can Increase Debt: It’s vital to budget and ensure you can afford what you borrow. Predatory lenders are delighted to take your money. If you’re unsure, call a nonprofit credit counseling agency and discuss options.
- Assess Multiple Offers before Making a Final Decision: Competition provides the chance to compare and research the company you eventually choose.
Avoid Bad-Credit Loan Scams and No-Credit-Check Loans
It can get frustrating to score a loan with bad credit, and that frustration can lead to carelessness in recognizing loan scams.
Be wary. Not all loan opportunities are good ones. Loan scammers target the elderly, people in debt over their head, and those with little experience making financial decisions.
Among the warning signs that you’re dealing with a scammer:
- The lender doesn’t pull your credit report or do a credit check.
- The lender doesn’t ask for proof of employment or income statements.
- The lender isn’t registered in your state.
- The lender conducts all business over the phone and has no physical company address.
- The lender says you can get a lower interest rate if you put money up front.
- The proposal you receive is not transparent about fees, terms, or interest rates.
- The lender asks for a prepaid debit card or a gift card as “insurance” or “collateral” for the loan.
Don’t disclose personal information, such as Social Security or bank account number, before verifying that the lender you’re dealing with is legitimate. Don’t let a lender pressure you into making a quick decision. If it sounds too good to be true, it probably is.
Repaying Bad Credit Loans
The purpose for many bad credit loans is to pay off debts while simultaneously improving your credit score. You accomplish both when you create a budget that allows you to make punctual payments.
The easiest way to do that is to set up automatic payments through your bank account. You might even get a small discount for doing so.
If something unexpected happens, such as reduced hours at work or loss of a job, alert your lending institution. They typically have hardship programs to help borrowers in crisis.
Don’t dig your hole deeper by not making payments.
Bad Credit Loan Alternatives
If you find yourself in a financial emergency, take a breath. Finding an alternative to bad credit loans can help you take steps toward becoming a more attractive candidate for borrowing.
Alternative No. 1: A debt management program from a nonprofit credit counseling agency. A debt management program could reduce the interest rate on your credit card debt to 8%, sometimes lower.
That would help you pay down, and eventually zero out, credit card debt, often the single largest negative impact on a consumer’s credit score.
Alternative No. 2: Nonprofit debt settlement, offered by a small group of nonprofit credit counseling agencies, enables qualified applicants to settle their credit card debt for 50%-60% of their balance over a 36-month time frame. The downside: Your credit score will suffer because you’re paying less than what is owed.
Need Help? Talk to a Financial Professional
Calling a nonprofit credit counseling service for a free, no-obligation evaluation is the first step someone in financial distress should take.
Counselors are trained and certified in helping consumers create rational, affordable budgets and recommending the best steps to eliminate debt.
With several debt-relief options to choose from, and after reviewing your income and expenses, your counselor will discuss each option’s pros and cons and tell you which choice would best solve your problem.
If your goal is to get your financial house in order, call or go online to a nonprofit credit counseling agency and get started today.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
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