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Key learning points
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You can find loans for borrowers with bad credit through community banks, credit unions and online lenders.
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Predatory or deceptive lending is often disguised as bad credit loans. If the rate is higher than 35.99 percent, you’ll want to find a lower interest rate option.
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Bad credit loans can come with challenges such as higher interest rates and fees.
It is not uncommon for people with less than excellent credit to have difficulty getting approved for a loan, as many lenders view poor credit as a potential risk factor. Fortunately, there are specific online lenders, community banks and credit unions that work with borrowers across the credit spectrum. Bad credit loans are personal loans that can be used to finance almost any legal expense. However, they often have some of the highest rates on the market and offer unfavorable terms compared to fair or good credit loans.
Where can you get a bad credit loan?
Not every financial institution offers bad credit loans, but chances are you can find one through an online lender, a community bank or a local credit union. As you begin your research process, take a look at the following institutions to avoid predatory lending (such as payday lending) or deceptive lending practices.
Online lenders
Several online lenders offer personal loans for applicants with lower credit. They typically host a fast, streamlined application process on their website and offer credit decisions within minutes of submission. If the loan is approved, some will disburse the money the same day, while other lenders may take a few days for the direct deposit to reach your bank account.
Since there are a seemingly endless number of lenders, it can be easy to become overwhelmed by the number of options. This is where an online credit network could help. They are online marketplaces that contain the details of different lenders by category, making it easier to search and compare bad lenders.
Using an online network also simplifies the research process because you can view and compare offers from multiple lenders with a single application. Most lenders also allow you to see your eligibility and predicted interest rates through prequalification without affecting your credit.
Before you apply for the first loan that looks good, keep in mind that lenders charge higher rates for people with low credit levels. Additionally, fees are often higher for bad credit loans, so review each lender’s fee structure and integrate the fees into your total monthly payment estimate before applying.
Learn more: How to Choose the Best Bad Credit Loan Company
Who Should Consider an Online Lender?
Those who prefer to get a loan without visiting a physical location.
Banks or credit unions
Some smaller or local community banks will consider lending to people with bad credit. Still, it can be difficult to get approved because most lending decisions are based solely on your credit and income. If you get into your local bank, you may have better luck with your local credit union if you meet all the membership requirements.
Credit unions tend to be more lenient than community banks because they are member-oriented. Each credit union serves a different population, with some operating at a local level and others expanding their membership nationally.
Regardless of which type of credit union you choose, you must qualify for membership to be approved. Most have fairly simple membership requirements based on profession, association or area of residence. Federal credit unions work with customers who must qualify for membership before being approved.
Some federal credit unions offer alternative payday loans (PALs), aimed at borrowers with bad credit. They have rates as high as 18 percent, compared to payday loans, which can have rates as high as 400 percent.
Who Should Consider a Bank or Credit Union?
Those who want to bank locally, qualify for credit union membership or take out a PAL.
Pay in advance apps
Pay advance apps are designed to give you access to your paycheck earlier than the expected deposit date. Due to the nature of this method, you will need a steady source of income. Regardless of your credit score, the more predictable your paycheck is, the more likely you are to qualify for a cash advance.
An advance on a salary is not a loan and no interest is charged. Most apps charge fees or require additional tips. The fees may seem small, but remember that a $15 fee for a $500 cash advance equates to an APR of almost 36 percent.
Another factor to keep in mind: you’re tapping into your future income. This means a lower amount on your actual payday, which can make future bills more difficult to pay.
Who should consider a cash advance app?
People with fixed salaries who need a quick boost to their bank account.
Bad credit loans to avoid
Some bad credit loans can be predatory with unreasonably high interest rates or ask for collateral such as your car. These options should only be used as a last resort.
Payday lenders
Payday lenders can offer small short-term loans, up to $500. It’s easy to get approved for these products even if you have bad credit, but there are significant downsides: You pay a high interest rate, sometimes up to 400 percent, and only has a short period to pay back what you owe.
One challenge that borrowers may face with a payday loan is repaying the loan by the due date, usually the next payday. Unfortunately, this leads to even more costs and a perpetual high-interest debt cycle that is very difficult to end. Despite their convenience, these loans should only be used as a last resort.
Title Lenders
Title lenders also target borrowers with poor credit scores. Car title loans are installment loans that are relatively easy to qualify for. In most cases, you will make equal monthly payments over a period of time, up to six months. You can also get a slightly lower interest rate than with a personal loan.
Still, these loans are risky because they use your vehicle as collateral. If you fall behind on your payments, your lender could seize your car.
How to get a bad credit loan
Getting a loan with a low credit score can be challenging, but there are options available. It can be difficult to qualify for traditional personal loans, so make sure you are familiar with the lender’s requirements before applying. Here are some steps to increase your chances of getting approved for a low credit loan.
- Check your credit score: Check your credit score before applying for anything. The lower your score, the more difficult it may be to qualify for a loan.
- To apply with a cosigner or secured loan: If you have someone with excellent credit standing with you for a loan, you may qualify, but your repayment behavior will affect their credit score and yours.
- Investigate secured loans: These loans use an asset such as a home or car as collateral, which can result in more favorable rates compared to unsecured loans. However, they pose a greater risk to the borrower: if you cannot pay off the loan, you risk losing your collateral.
- Prequalify first: Loan applications require a hard credit check, which temporarily lowers your score by about 10 points. Prequalification does not guarantee approval, but it does allow you to see your predicted rates without affecting your credit score.
- Know the risks: Lenders that make loans to individuals with bad credit may charge higher fees and interest rates to compensate for the risk. It is important to fully understand the costs associated with the loan and ensure you can make payments on time.
In short
Bad credit loans can help you get out of a financial situation. They are often more expensive than personal loans, so borrow carefully.
Familiarize yourself with each option and its pros and cons, and request quotes from at least three lenders to find the most competitive loan offer. Depending on the loan terms, you may be better off saving on the costs of releasing funds, applying for a credit card or seeking other alternatives.
Frequently asked questions about bad credit loans
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Common types of bad credit loans include traditional personal loans, loans with a cosigner or secured loans, payday advances, and car loans.
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Whether you qualify for a bad credit loan depends on the lender and the type of loan you apply for. Generally, you will need a steady source of income and may need to provide collateral or a co-signer. It’s also important to check your credit score before applying.
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Yes, there are risks associated with bad credit loans. Borrowers typically have to pay higher fees and interest rates, and some loans may require collateral. It is important to be aware of the costs associated with the loan and have a plan for making on-time payments.
