Five types of bad credit personal loans out there and what you should know before applying.
Not sure how bad credit personal loans work? Want to learn more about what to look for in a lender? Look through our guide to find the top online loans for bad credit borrowers.
Online loans to apply for with bad credit
How do bad credit personal loans work?
You first have to look for lenders that provide loans to people with poor or bad credit scores. These lenders may look at your credit history, but they also take your existing financial condition and ability to repay into account. Depending on the lender you choose, you can apply in-store or online, but remember that you’ll have to meet some basic eligibility criteria.
If you apply in-store, you can get your hands on the approved cash almost immediately. With online loans for bad credit, the money transfers into your nominated bank account. While some lenders may give you access to funds on the same day, others may require you to wait one to three business days, or longer.
Compare features of top online loans for bad credit borrowers
Where can I get a loan with bad credit?
While you might not be able to walk into a multinational bank to get a bad credit loan, you still have several options.
You might be able to qualify for an online personal loan with bad credit if other aspects of your personal finances are satisfactory. You’ll likely get your funds faster than you would with a bank or credit union, though your rates might be slightly higher. Just be sure you meet your lender’s credit requirements before submitting an application — many allow you to prequalify without it affecting your credit score.
Credit unions and local banks aren’t going to cut it if you need cash fast. That’s where short-term lenders can help, both online and in-person. In emergency situations, you can apply for a payday loan, installment loan, auto title loan or a cash advance and get funds in as little as a few days.
With these types of loans, you’ll typically get higher interest rates than other lenders. They also come with the risk of ruining your personal finances if you’re unable to make your payment on time.
These nonprofit financial institutions often offer financing to borrowers of all credit types with much lower interest rates than you’d get at other institutions. Many even provide credit builder loans, or small short-term loans designed to improve your credit score before you apply for larger amounts of financing.
Credit unions are typically a better option for those who aren’t in a rush: You’ll have to become a member to qualify and it can take some time to get your money.
Your local bank
See if there’s a bank in your area that’s classified as a Community Development Finance Institution, like Spring Bank in New York City. These are typically small local banks that aim to help members of underserved communities develop their credit.
They have many of the same options as credit unions — including credit builder loans — but you won’t have to join to become a member. It’ll still take some time, however, to get the money in your account.
What types of bad credit personal loans are there?
In your search for bad credit personal loans, you have the following options:
- Payday loans. Payday loans are short-term loans that you typically have to repay by your next payday. You don’t have to provide any collateral to secure these loans, but you can expect to pay a higher than usual APR. These loans are not legal in all US states.
- Installment loans. An installment loan requires you to make equal periodical repayments over a predetermined loan term. These loans don’t require any collateral and normally charge lower APRs than payday loans — though they’re still higher than most personal loans.
- Auto title loans. If you have a car or motorcycle, you can use its title as security and get an auto title loan. Since you’re providing security, you can expect to pay a lower APR when compared to payday or installment loans. You’ll have to repay this type of loan in installments over a predetermined time period. If you don’t make the payments, the lender can take possession of your vehicle.
- Cash advances. Cash loans for bad credit are essentially the same as payday loans. If you have a credit card, you may be able to use its cash advance facility to withdraw money from an ATM. If you have a steady job, you might consider getting a cash advance from your employer.
- Credit builder loans. Got some time on your hands? Consider improving your credit score by taking out a credit builder loan from your local bank or credit union. You can typically borrow a small amount of funds — sometimes as low as $100 — with relatively low interest rates and pay it off over around six months.
5 benefits of bad credit personal loans
Here’s how you can expect to benefit from a bad credit personal loan that you borrow online.
- It’s unsecured. These loans are typically unsecured, so you don’t have to provide any kind of collateral.
- It’s fast. You can apply for most such loans in minutes, and you can expect to find out about your application’s status soon after. If you need access to money quickly, you can look for lenders that provide access to approved funds on the same day or by the following business day.
- Your rates don’t change. Bad credit personal loans usually have fixed interest rates, so you don’t have to worry about your repayments changing over time.
- You can use it for most purposes. If you have debt on a high interest credit card, you can consider taking a personal loan to consolidate your existing debt. This can help you save on interest charges and simplify your repayments. You can use proceeds from such a loan to buy a used car, repair your car, make home renovations, take a vacation or for any other worthwhile purpose.
- You can prepay without a penalty. Some lenders let you repay your loan ahead of time without charging any additional fees. Doing this can reduce how much you end up paying in interest.
How can I tell if I have bad credit?Most Americans don’t know exactly what their credit score is. As a US citizen, however, you’re entitled to get a free copy of your credit report from any of the three main credit bureaus: TransUnion, Equifax and Experian. You can also get an estimate of your credit score from companies that do a soft credit pull that doesn’t affect your rating.
Typically, people with bad credit have struggled paying off debt in the past or simply don’t have a long-enough credit history to get a good credit score.
What to avoid when borrowing with bad credit
If you already have poor or bad credit, make sure you have a repayment plan in place before you apply for any further loans. Failure to repay the loan in a timely manner can have a further adverse effect on your credit rating. Avoid applying for multiple loans at or around the same time, as prospective lenders don’t view this favorably.
The APR you pay can have a significant effect on how much your loan ends up costing, so make sure you compare the rates of different lenders carefully. Fees can also vary widely depending on the lender. Be sure you understand what fees your lender could charge you before you accept a loan offer.
How to improve your credit score
While improving your credit score can be a slow process, it’s a good thing to do so that later on down the road, you have an easier time getting financing with more favorable interest rates and loan terms. Here are a few things you can do now to begin to improve your credit score:
- Order a copy of your credit report. To get the most accurate picture of your current financial health, request a free credit report from one of the major bureaus. Take a look at your personal information, employment data, open accounts and balances and any other financial details listed and make sure that all of the information is accurate. If you see any discrepancies, dispute them with the three credit bureaus and the provider that reported them.
- Pay down your credit card accounts. One of the five variables that determines your credit score is your credit utilization ratio, which is calculated by dividing your balance on existing credit cards by your available credit limits. Most lenders want to see a utilization ratio of 30% or less. This means that if you have a credit card with a $1,000 limit, you only want to keep a balance of $300 or less, which is 30% of your limit.
- Don’t try to open up new accounts or take out new loans. Every time you apply for a credit card or personal loan, the lender does a hard credit check, which knocks your credit score down 5 points.
- Don’t close accounts just because you’re not using them. One of the five variables that determines your credit score is your credit history. Lenders want to see a long history of credit in your report, so closing that bank account or credit card that you might not be using any more could cause more harm than good.