A bad credit loan is a short-term financial fix for consumers who need to borrow money but have a bad credit score or poor credit history.
It’s not a perfect fix. Interest rates on bad credit loans are higher – in some cases considerably higher – and terms are short, one to five years. But consumers whose credit score is poor and have significant financial needs, may find this loan can help them get their feet back on the ground.
Look at it as a personal loan. Try not to focus on the interest rate. Instead look at the financial wherewithal it provides. But … do not take out any loan that does not fit your budget. Advice on budgeting and loans is available form a nonprofit credit counselor.
Bad credit loans are just another name for personal loans. Consumers borrow what they need and then make regular monthly payments. The good news is the loan can be used for just about anything — from consolidating credit card debt to paying medical bills to buying a car to making a major repair to the home. Swallowing the bad taste of the higher interest rate is simply part of the process.
Finding a bad credit loan can be a challenge. Stick to it. 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 with these options:
- Credit unions – Typically have more flexible lending standards than banks and may be willing to offer a small personal loan. Membership is easy to obtain, in most cases.
- Family or friends – It’s easier to qualify and hopefully has lower interest rates. Credit history also may not count as much.
- Find a co-signer – Use someone else’s high credit score to lower your interest rate.
- Borrow from the equity in your home – Credit score is not a factor. If you have equity in the house, this is an attractive debt relief option.
- Peer-to-Peer Loans – These are loans from an individual or group of individuals rather than a lending institution.
- Online Loans – This is a significant market of lenders, who can be flexible with terms.
- Negotiate an Agreement with Your Bank – Use a long-term relationship with your bank to obtain a short-term loan at reasonable rates.
- Cash advances – Not advised because this is an expensive option, but in an emergency, it’s available.
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.
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, which means 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 does vary from lender to lender. Some won’t touch anyone with a credit score under 650; some 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 under 620 – Extremely poor
How Bad Credit Scores Affect Borrowing
Consumers in the good-to-excellent credit score category (700 and above) receive the lowest interest rates and best loan terms. Consumers in the poor and extremely poor categories (anything under 620) are burdened with high rates and may not be approved for a loan at all. Folks in the middle (621-699) have to weigh the cost of a bad credit loan against the gain they hope to make using the money to pay the bills.
In other words, the higher your credit score, the more likely you’ll get a good deal on a loan. Low credit scores are risky business and borrowers are punished for it with high interest rates.
Many consumers get that message and that is why the average credit score for U.S. consumers has risen to an all-time high of 703 in 2020. That’s a 14-point jump over the last decade. However, the real numbers worth paying attention to are the combination of score and age, which say a lot about how our economy operates.
According to FICO, people ages 60-and-above have an average credit score of 743, while those in the 18-to-29 bracket average just 652. It’s one of the few places in life where being old pays off.
Still, that’s a 91-point difference, which is very costly when you are shopping for home and auto loans as the graphic below demonstrates. Check out the payment differences among credit scores for a 30-year, $200,000 home loan and a 6-year car loan in September of 2020.
|Score||Interest Rate||Monthly Payment||Total interest paid|
|Score||Interest Rate||Monthly Payment||Total interest paid|
How to Get a Loan with Bad Credit
If this is not an emergency, the first step would be to improve your credit score so you are able to afford the loan you need.
Pay bills on-time, especially on credit cards; reduce the balance on cards to less than 30% of the credit limit allowed. Finally, don’t apply for any new credit.
The combination of those three factors – on-time payment; low credit utilization; no new credit applications – account for 75% of your credit score. It’s not unrealistic to think that making an effort on those three fronts could raise your score by 100 points in as little as 3-to-6 months.
If, however, this is an emergency and your application for a loan has been turned down repeatedly due to poor credit or no credit, it might help to ask a bank or credit union loan officer for an in-person interview to convince them you are creditworthy.
If you get that interview, be sure you are prepared with documents that prove you’re a better risk than the credit score suggests. Lending institutions love stability. It definitely helps your case if you can show them that you’ve lived in the same house (or city) and worked the same job (preferably for the same employer) for several years.
Common things to bring that prove your credit worthiness include:
- Tax returns, W-2s and 1099 forms from at least the last two years
- Details of your job history, including salary and pay stubs
- List of assets such as home, car, property and where you stand on paying them off
- List of unsecured debts such as credit cards, student loans and medical bills
- Whether you pay or receive alimony or child support
- Bank statements for checking, savings and CDs
Not all of these documents are required, but if you have a poor credit history, anything you can produce that demonstrates you have become responsible with your money will be considered a plus. You should also expect the lender to ask questions about your credit history that may reflect negatively on you. Things like:
- Have you been involved in any lawsuits?
- Do you have any court judgments against you or items in collection?
- Have you declared bankruptcy or had a foreclosure judgment against you?
- What is your ethnic background?
The last question would seem to violate anti-discrimination laws, but it is required by the government so that it can keep data on lending to minorities and make sure they aren’t routinely turned down or charged excessive fees.
The purpose of an in-person interview is to convince the lender that if you receive a loan, you can comfortably make payments. Any evidence you have that can support that fact – especially proof that you paid off loans on assets like a car, motorcycle or boat in the past – are going to work in your favor.
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. Predatory lenders are all too happy to take your money and make your life miserable.
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.
Pros for a Bad Credit Loan:
Loans for Bad Credit Are Fast: Most loan applications are available online and only take a few hours to get a response. At some places, you can have the money in your account within a day.
Lower Interest Rate on Credit Cards: If you are able to get a bad credit loan, it likely would come at 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, and make lenders compete for your business, you might find a loan with an interest rate that you can afford.
Repayment Term Length: Depending on who the lender is, repayment terms could stretch anywhere from 1-to-5 years.
Improve Your Credit Score: If you commit to making on-time payments, your credit score will improve and make you a more desirable candidate next time you need a loan.
Cons for Bad Credit Loans:
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 making 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 that house or car.
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 you start paying for their service.
Can Increase Debt: It’s vital to budget and ensure you can afford what you borrow. Predatory lenders are all too happy to take your money. Decisions should have long-term benefits. If you’re unsure, meet with a credit counselor to discuss options.
Assess Multiple Offers before Making a Final Decision: The competition gives you a chance to compare and research the company you eventually choose.
Where to Get a Loan with Bad Credit
Some lenders market bad credit loans, but it definitely will take shopping to find interest rates and repayment terms you can afford.
The big national and regional banks stick tightly to credit score ratings so don’t bother with that unless you have taken time to clean up your credit report and raise your score.
If you don’t have time to improve your score, look into the sources listed below.
Credit Union Loans for Bad Credit
A credit union – especially one affiliated with your employer or one that is community-based – may be willing to look beyond a poor credit history and make a judgment based on your character and your promise to repay. Think of credit unions the way you would a small community bank from years ago.
The most promising aspect of a credit union loan is the interest rate ceiling of 18%, which applies to anyone, regardless of their credit score. A similar loan from a bank could run you as much as 36% interest.
A veteran of the armed forces might want to approach 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.
Borrow from Family or Friends
This is dangerous from a relationship standpoint; nobody needs Uncle Bob banging on the door for his money. But this kind of borrowing makes a lot of sense from a financial and loan-anxiety standpoint. It should be easier.
Family and friends aren’t likely to put you through a grueling qualifying process and probably would cut you some slack on the interest rate, if they charge one at all.
However, if you’re thinking about borrowing from family members or friends, do so with eyes open. Not repaying a loan to a relative or close associate can poison relationships and cost a lot more than a present under the tree at Christmas. This fallout goes far beyond a bad credit report.
Treat any loan from someone you know as if it were an important business transaction between you and a stranger. That means it should be formalized with clear documentation and legally recorded. To avoid future problems, 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
If borrowing from a friend or relative is not possible, you can still approach someone you know with good credit about co-signing for a bad credit loan.
With a qualified co-signer, the lender will set the loan terms based on the credit score of the person with good credit, who will then be equally responsible for repayment. All payment information will be recorded on both your credit report and your co-signer’s, so if you default on the loan, or you’re late with payments, you both suffer – and you’ve hurt the co-signer (usually a close relative or friend). If you make timely payments, your own score will improve, making it easier to obtain future loans without a co-signer.
Home Equity Loan with Bad Credit
If you have equity in your home, you can apply for a home equity loan or home equity line of credit (HELOC). Your home is used as collateral, and 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. Also, the interest you pay on a home equity loan is usually tax-deductible.
It is important to remember that tapping your home equity puts your property in jeopardy if you don’t repay the debt. But if you are disciplined and have a reliable income, it is an inexpensive way to borrow from a reputable lender when you have bad credit.
Peer-to-peer lending, also known as P2P lending, has been around since 2005. It’s 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.
Your credit score is still a factor, but since an individual investor has much greater leeway in how factors are weighted, these loans are often more readily available for people with bad credit. Lending standards are significantly more lenient and interest rates are usually lower than those offered by traditional lenders. In addition, peer-to-peer websites help evaluate risk for the lender, while verifying the lender’s credentials for the borrower.
Here are some examples of peer-to-peer lending institutions:
|Lender Name||Borrowing Levels||Loan Terms||Minimum Credit Score||Interest Ranges||Origination Fee||Time to Receive Funds|
|Lending Club||$1,000 to $40,000||3 years or 5 years||600||5.98% to 35.89%||1% to 6% of loan amount||One week|
|Peerform||$4,000 to $25,000||3 years or 5 years||600||5.99% to 29.99%||1% to 6% of loan amount||Up to two weeks|
|Prosper Marketplace||$2,000 to $35,000||3 years or 5 years||640||7.95% to 35.99%||1% to 5% of loan amount||One to three business days|
|SoFi||$5,000 to $100,000||2 years to 7 years||660||5.99% to 18.28%||None||One week|
|Upstart||$1,000 to $50,000||3 years to 5 years||620||7.98% to 29.99%||1% to 8% of loan amount||One day|
Online Personal Loans
Technology and a wide gap in the marketplace have opened the door for Personal Loan Lenders, a new industry that has created an option for people with low credit scores.
These lenders are essentially banks that don’t have offices. They do their work online and offer bad credit loans for things like debt consolidation and home repairs. Their primary appeal is they work fast. They can make decisions in minutes and deposit funds in an account in a few hours or days. Many have no application fee or pre-payment penalty.
Online personal loan applications are simple and easy to fill out. Credit scores are only a part of the decision-making process so this could be an appealing option if you have bad credit or no credit. In fact, some personal loan lenders have their own credit-score model and don’t use FICO scores. Other factors considered include whether you have a college degree, the school your degree came from and your employment history.
|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% to 35.99%||Varies by state||Same day|
Secured vs. Unsecured Bad Credit Loans
If your credit score draws red flags, the best chance to get money you need could be through a secured loan.
A secured loan is one in which you borrow against an asset you own, such as a home, car, boat, property, savings or even stocks. The lender will hold the asset as collateral against you defaulting on the loan. If you don’t repay the loan, you lose the asset. Secured loans offer lower interest rates, better terms and access to larger amounts of money than unsecured loans.
An unsecured loan has nothing more than a promise that you will repay behind it and could be very difficult to get from most banks. Banks are willing to make unsecured loans to their best customers – people who have the income and credit history to prove they will repay the loan – but are very cautious about lending money otherwise.
An unsecured loan is no risk for the borrower, but high risk for the bank so you can expect considerably higher interest rate charges and little flexibility on qualifying or terms of the loans.
Some banks will make secured loans based on the amount you have in a savings account or the value of any stocks you own. The value of getting a secured loan against savings or stocks is that you will not need to liquidate the asset so when you have paid off the loan, you still own the savings or stocks.
However, if you plan to use savings or stocks as collateral, most financial advisors suggest you sell them and use the money to pay the debt. Why borrow at a high interest rate if the funds are there to avoid borrowing?
The good news for everyone involved is that paying off the loan, whether it’s secured or unsecured, will improve your credit score.
Negotiate an Agreement with Your Bank
If you happen to be a long-time customer at your bank and have a good record until some recent mishaps, it’s possible you could talk them into an agreement that would provide you a bad credit loan on a short-term basis.
The loan limit probably won’t be very high and it would really be a good-faith gesture on the part of your bank; there likely is no policy regarding this.
But the bottom line is that it’s only possible if you ask. It doesn’t cost anything to try, and the worst that can happen is the bank says no.
Get a Cash Advance
A cash advance is a loan using your credit card line. This is a really risky solution for a financial problem. A cash advance carries heavy interest charges, higher than those on purchases and there usually is a fee (3%-5%) charged for receiving one.
If you’re in a hole, this just digs you deeper, so it’s not advisable. But it’s there, if it’s the only one to get a loan. It’s also one of the fastest ways to get money if borrowers face an urgent situation.
What Is the Best Bad Credit Loan Company for Me?
Like every business, some companies get a reputation as the place to go for a specific product, and that is the case with bad loans.
Credit unions (because they are nonprofit) and owner-operated institutions have earned a reputation as a good place to find bad credit loans. Since you’re already a member, the feeling is they’ll push a little harder to help one of their own.
Online lenders like Upstart, Prosper, Lending Club, OneMain and Peerform are good examples of companies that have stretched the boundaries to allow someone with bad credit to get a personal loan.
Some online lenders who can help include:
- Lending Club
- Bad Credit Loans
- Lending Point
In each case, be prepared for some level of sticker shock when it comes to interest rate charges.
If you have a credit score under 670 or no credit history, you likely will be paying 18% or more to get a bad credit loan. If your credit score is under 620, the rate is going to jump to 22% and if you are under 600, the best you can hope for is 27%-30%.
It’s costly to have a bad credit score. Spend time improving it before borrowing any more money.
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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