Key Takeaways
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Bad lenders may approve borrowers with credit scores in the upper 500s or lower.
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Loans for bad credit usually come with high annual percentage rates (APRs) and high fees.
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Beware of lenders that guarantee approval or charge upfront fees: these are signs of a scam.
Getting approved for a loan with bad credit can be a challenge. Fortunately, you can get bad credit loans from many lenders if you can afford the higher interest rates and payments.
Before you sign up, you should know how personal loans with bad credit work and what loan costs you can expect. Some bad lenders are predatory, and knowing how to spot them can help you avoid being exploited.
What is a bad credit loan?
A bad credit personal loan is a loan for borrowers with a FICO score of less than 580 – although some lenders consider credit scores below 600 to be bad. They can provide you with money if you need a loan but have had credit problems in the past.
How does a bad credit loan work?
The main difference between a bad credit personal loan and any other personal loan is that the APRs and fees are usually much higher with bad credit. Otherwise they work the same. You receive all your money at once and pay back the balance plus a fixed interest rate monthly over the course of one to seven years.
What to look for when getting a bad credit loan
Personal loans with bad credit come with some risks.
They are more expensive because lenders charge higher interest rates or more fees. You may also be limited in how much you can borrow and how long you have to repay the loan.
Bad credit loans cost more
A low credit score tells lenders that you may have had problems with missing payments or defaulting on loans in the past. They see a low credit score as a sign of higher risk for them. So they charge higher interest rates to ensure they make money. Personal loan rates for bad credit can be as high as 35.99 percent. They can be even higher for other types of bad credit loans.
Higher interest rates also mean higher monthly payments and more interest over the life of the loan. You may also be charged higher origination fees, which are usually deducted from the loan fund. You will receive less money to use, but you will still be charged interest on the full amount.
You may not be able to borrow that much
Lenders may limit how much they lend to a borrower with bad credit. That’s because borrowers with a history of credit problems are more likely to default. Lenders often limit loan amounts to reduce the amount of money they could lose.
Your term will likely be shorter
If you have a poor credit history, you may not qualify for a lender’s maximum loan term. Bad credit lenders may prefer that you pay off your loan more quickly to reduce the chance that you will default over a longer period of time. Use a personal loan calculator to make sure the payment fits your budget.
How do you avoid predatory bad credit lending?
People with bad credit are often targeted by financial predators. Not all bad credit loans are legitimate, so take extra precautions to avoid falling victim to predatory lending practices.
- Has the lender contacted you unsolicited? You should always be the one to contact a lender, not the other way around. If you suddenly receive calls about bad credit loans, you may be dealing with a scam.
- Does the lender charge upfront fees? No legitimate personal loan lender will collect fees up front. All their fees must be collected when they fund your loan.
- Is the lender reliable? The lender must be registered to do business in your country and have a physical address and a secure website. Check the Consumer Financial Protection Bureau’s (CFPB) complaint database for any action against the lender.
- Does the Lender Market Offer “Guaranteed Approvals?” No lender can guarantee loan approval without verifying some of your financial information. If they do, they’re probably not legitimate.
- Does the lender charge prepayment penalties? Check the terms of any bad credit loan with prepayment penalties. While this isn’t a red flag for a scam, you don’t want to be stuck with a loan. You’ll have to pay a hefty fee to refinance if your credit improves in the future.
- Do you feel pressured to accept the loan? Never take out a bad credit loan because a salesperson pressures you to do so. Any reputable company should share the benefits of the loan and show you how it can improve your financial situation. Strong sales techniques are a signal that you are dealing with a predatory lender.
Bad credit loans are a quick source of liquidity of last resort. Unfortunately, this market is filled with unscrupulous players looking to take advantage of consumers. Stay away from lenders who are not registered with your state… or who have been censured or sanctioned by the CFPB for regulatory violations.
—Thomas Brock, CFA, CPA
The bottom line
Bad credit personal loans come with high APRs and fees. Discover cheaper alternatives first. If you’re having trouble getting approved for other types of loans and need cash, a bad credit loan may be worth considering. But it should be part of a larger strategy to improve your credit and finances in the long term.
If you are unsure about the loan program, contact a credit counselor before making a decision. If you determine that this is the best financing option for you, compare personal loan rates, terms, and fees to find the best deal.
