Personal Loans for Bad Credit

Emergency expenses rarely come up at convenient times. But unexpected costs are even more inconvenient when your credit is bad. If your credit scores are low but you need cash right away, you may have no choice but to apply for a personal loan.

Take heart. Personal loans for bad credit, also known as bad credit loans, are available. These loans aren’t ideal, but knowing how to find the best possible loan can help you improve your credit scores in the future.

What Is a Bad Credit Loan?

A bad credit loan is a loan available to people with low credit scores or with very little credit history. These loans get their name because the borrower has “bad” credit and can’t qualify for traditional loans. As a result, the borrower must resort to bad credit loans that have higher interest rates.

When used carefully, a bad credit loan can be the starting point for a financial turnaround. Making your loan payments on time can improve your credit scores and eventually help you qualify for better options.

But be sure to heed this warning: Bad credit loans are not a perfect solution to the problem. Interest rates on these loans are usually significantly higher than traditional loans. Also, terms are short (usually 1-5 years) which means you must be able to pay the loan back fairly quickly.

Other debt-relief options, such as debt management and nonprofit debt settlement, can be more cost-effective ways to improve your credit scores. It’s also a good idea to consult with a nonprofit credit counselor about whether a debt consolidation loan for bad credit will help solve the problem, or merely add to your troubles.

What Is Considered a Bad Credit Score?

Credit scores traditionally range from 300 to 850, and though there is no official “bad” credit score, the term usually applies to scores below 650. So if your scores are below 650, you’ll likely have to pay the highest interest rates offered by lenders.

Here’s how the credit score ranges are typically defined:

• 800-850: Excellent
• 700-759: Very good
• 660-699: Fair
• 620-659: Poor
• 619-300: Extremely poor

Just keep in mind that the definition of “good” and “bad” credit scores varies from lender to lender. Some won’t work with anyone who has scores under 650 while others actually market to consumers with lower scores.

Factors That Contribute to Your Credit Scores

Your credit scores are often the most important factor in being approved for a loan. But how are your scores calculated?

Many people don’t realize that each score is calculated based on five categories of information, and each category carries a different weight. Here’s what goes into your credit scores:

• Payment history (35%): Do you make on-time debt payments every month? Miss even one payment, and your scores can take a major hit.
• Amounts owed (30%): How much of your available credit do you use every month? The higher the percentage you’re using, the lower your scores will be.
• Length of credit history (15%): How long have you been using credit? The longer the better. Closing accounts can prevent you from gaining points, and you can lose even more points if you close an account with an unpaid balance.
• New credit (10%): How often do you apply for new loans and credit cards? Applying frequently is a red flag for financial problems and each application can cost you a few points.
• Mix of credit (10%): What forms of credit do you have? If you can responsibly manage a mix of credit cards and loans, you’ll help your credit scores grow.

How Bad Credit Scores Affect Borrowing

Low credit scores can be a sign that you’ve had trouble managing debt. So when your scores are low, some lenders will be hesitant to work with you. The loans you do qualify for will typically have higher-than-average interest rates and other unfavorable repayment terms.

As you can see below, personal loans with bad credit can have astronomical rates. Based on the interest rates shown in the table, someone who takes out a three-year loan for $10,000 and has credit scores between 670 and 580 would pay $3,427 more in interest than a person with the same loan who has scores above 800.

How Credit Scores Affect Interest Rates

Score	Interest Rate
800-850	11.66%
740-799	14.35%
670-739	22.83%
580-669	30.22%
579-300	32.09%

Top Personal Loans for Bad Credit

The process of getting approved for bad credit loans can be challenging, but research and comparing lenders can lead to finding the most affordable option. The good news? Plenty of lenders want your business.

How to Get a Loan With Bad Credit

Finding a bad credit loan is a five-step process:

1. Check your credit info: Review your credit scores so you know if you fit in the “bad credit” categoryPull your free credit reports from AnnualCreditReport.com and look for errors or areas you can improve.
2. Shop around: Search for lenders who work with bad credit and compare their rates and terms.
3. Apply: Fill out loan applications with the banks, credit unions and online lenders who have the best loan options for you. Provide the necessary documents showing your income and expenses.
4. Review offers: Review the loan offers you receive. Don’t just look at the payments but compare the rates and terms of each loan.
5. Accept an offer: Sign the paperwork and receive the funds. Make sure you note the monthly due date and set up a calendar reminder to pay on time.

As long as you maintain your loan payments, you can usually expect to see a nice bump up in your score in as little as six months.

How to Compare Lenders for Bad Credit Loans

Shopping for a bad credit loan is like shopping for anything else. The main consideration: What’s it going to cost?

With loans, the cost is determined by a combination of the interest rate and the length of time you take to pay it back. The higher the interest rate and the longer you take to pay it back, the more it will cost you to borrow money. You can plug that information into an online loan calculator to see your total cost to borrow.

Here are a few things that must be factored into your loan comparisons:

• Will I qualify? Eligibility requirements usually include minimum-allowable credit scores, maximum debt-to-income ratio and a minimum income level.
• What are the repayment terms? Typically, bad credit loans have 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.
• Can I trust the lender? You can get bad credit loans in a lot of places. The best lenders are well-established and reputable, and easy to contact if you have any issues you need to resolve.
• Am I comfortable with the interest rate? Make sure you look at the rates and narrow the field to two or three lenders who have the most affordable offers.

Types of Bad Credit Loans

Finding an affordable loan for bad credit can be a challenge, but there are some options available. Your loan could come from your regular bank, but more affordable interest rates and flexible qualifying requirements are usually found elsewhere, including:

• Credit unions
• Borrowing from family or friends
• Find a co-signer
• Borrow from the equity in your home
• Peer-to-peer loans
• Online loans
• Secured loans
• Negotiate an agreement with your bank
• Cash advances
• Payday loans

Other high-risk options exist, but are not recommended. That includes borrowing from a retirement fund (penalties are high); borrowing against life insurance (more penalties); and payday loans (exorbitant interest charges).

Credit Unions

One of the best things about borrowing from a credit union loan is that they have a maximum rate of 18%, regardless of credit scores.

Additionally, a credit union may be willing to look beyond a poor credit history and make a judgment based on other aspects of your finances or your professional affiliations.

If you’re a veteran of the armed forces, you should consider military-focused institutions such as 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

Borrowing from a loved one is a great way to get a loan with flexible repayment terms. However, it also is dangerous from a relationship standpoint.

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. Just be sure to 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 states what will happen if you can’t repay the debt.

Get a Co-Signer

Know someone with good credit? Someone you trust who also trusts you? Respectfully ask them if they’ll cosign for your loan.

Having a co-signer can help you qualify for a loan because the co-signer agrees to be equally responsible for repayment. When approving you, the lender sets the loan terms based on the borrower with better credit.

Just keep in mind that all of the payment information will be recorded on both of your credit reports, so if you default on the loan or you’re late with payments, you both suffer.

Make timely payments and both of your credit scores will rise, improving your prospects for getting future loans with better terms, on your own.

Home Equity Loan

Homeowners who owe less on a mortgage than their house 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 easier to get with bad credit scores. The interest rates are usually low, because the loan is secured by the home.

Remember, tapping your equity puts your property in jeopardy. But if you’re disciplined and have a reliable income, it is a relatively inexpensive way to borrow money.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending has been around since 2005. This type of lending allows you to get a loan online, directly from another individual or group of individuals, rather than from an institution.

Potential borrowers can post a loan listing on various peer-to-peer websites, indicating the amount needed, their credit scores, and what the loan is for. Investors review the loan listings and choose which borrowers they wish to fund.

Online Personal Loans

Online lenders are essentially banks that don’t have physical branches. They do their work online and offer bad credit loans for things like debt consolidation 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. Check with each lender for current interest rates.

Online Personal Loan Lender Examples

Lender Name	Borrowing Levels	Loan Terms (Years)	Minimum Credit Score	Origination Fee	Time to Receive Funds
Avant	$2,000 to $35,000	2-5	580	4.75% of loan amount	Two days
Best Egg	$2,000 to $35,000	3-5	640	0.99% to 5.99% of loan amount	Next day
Earnest	$1,000 to $100,000	2-7	720	None	One week
One Main	$1,500 to $20,000	2-5	None	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, savings or even stocks. If you fail to make payments, the lender can take your asset.

Because something tangible backs a secured loan, terms and interest rates are more favorable than with a personal unsecured loan for bad credit.

Negotiate an Agreement with Your Bank

If you’re a longtime customer with a solid record, who only recently suffered financial setbacks, you may be able to negotiate an agreement with your bank for a short-term, bad credit loan.

The loan limit probably won’t be very high, and it would be a good-faith gesture on the part of your bank. Bottom line: It can’t hurt to ask.

Get a Cash Advance

A credit card cash advance is a loan taken out against your credit card. The amount you borrow will be added to your credit card balance.

But this is a really high-risk solution that can make your financial problem worse. A cash advance carries ultra-high interest charges and fees, usually 30% APR plus a flat fee of 5%. Still, in genuine emergencies where you have no other options, a cash advance is among the fastest ways to get money.

Payday Loans

Payday loans are last on this list because that’s where they belong. Also known as “predatory loans,” they come with rates in the range of 399% and a two-week payback period. That’s $15 for every $100 you borrow. And you’re expected to have the money ready to repay by the time your next paycheck arrives.

Pros and Cons of Using Loans for Bad Credit

If you have bad credit, don’t make it worse by being irresponsible when you choose a loan. Predatory lenders are all too happy to lend you money and make your life miserable if you fall behind.

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.
• Has bad customer reviews.

Those are red-flag warnings that you might have encountered a loan scam and should look for funds elsewhere.

Advantages of Loans for Bad Credit

• Speed of Funding: 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 Rates than Credit Cards: Generally, bad credit loans pack a lower interest rate than you pay on credit card debt.
• Many Lender Options: There are dozens of reputable online lenders to choose from. 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.
• Opportunity to Improve Your Scores: Making on-time loan payments can improve your credit, 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 also 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 your property.
• 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. If you’re unsure, call a nonprofit credit counseling agency and discuss options.

Avoid Bad-Credit Loan Scams and No-Credit-Check Loans

It can get frustrating to find 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 address.
• The lender says you can get a lower interest rate if you pay 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 debt while simultaneously improving your credit scores. You can accomplish both when you create a budget that allows you to make punctual payments.

The easiest way to ensure your payments are on time is to set up autopay 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.

Whatever you do, don’t dig your hole deeper by not making payments.

Alternatives to Loans for Bad Credit

If you find yourself in a financial emergency, take a breath. In most cases, there are alternatives to bad credit loans that can help you improve your credit and avoid digging yourself into deeper trouble.

A Debt Management Program

If your main struggle is credit card debt, consider a debt management program (DMP) from a nonprofit credit counseling agency.

Enrolling in a DMP could reduce the interest rates on your credit card debt to 8% or lower, and possibly reduce your payments.

This helps you pay down, and eventually zero out your credit card debt, which is often the hardest debt to eliminate.

Nonprofit Debt Settlement”

Nonprofit debt settlement is offered by a small group of nonprofit credit counseling agencies. This option lets you settle certain debt for 50% to 60% of the balance if you enroll and stick to a 36-month payment plan. The downside: Your credit scores will suffer because you’re paying less than what is owed.

Need Help? Talk to a Financial Professional

If you’re in financial distress, the place to start is to call a nonprofit credit counseling service for a free, no-obligation evaluation.

Nonprofit credit counselors are trained and certified in helping consumers create budgets and recommending the best steps to eliminate debt.

After reviewing your income and expenses, your counselor will discuss all of your options for covering expenses or paying off debt, and they’ll point you to the choice that 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!