If you don’t have good credit. you may still qualify for a bad credit personal loan. However, these debt products can be expensive. Before taking out a loan, make sure it’s the best option to support your long-term financial success.
What is a bad credit loan?
A bad credit loan is a type of personal loan that caters to borrowers with lower credit scores. Many banks, credit unions, and online lenders offer these loan products. They usually have a fixed interest rate and are payable in equal monthly installments.
There are no restrictions on how the funds can be used. Some borrowers take out bad credit loans to cover a financial emergency, pay medical bills, or consolidate debt. Others use the loan proceeds to cover larger purchases or make improvements to their homes.
Loans for bad credit are either unsecured or secured. The latter is backed by guarantees, such as a car or a house, that your lender can seize if you are late in payment.
Who might want to consider a loan for bad credit?
If you need money fast and can’t get approved for a traditional loan, a bad credit loan may be worth considering. You could pay several hundred or thousands of dollars more in interest. Still, the rate is usually much lower than what payday lenders charge, and some lenders offer same-day or next-day financing.
A secured loan is a good choice for borrowers who are confident they can make loan payments on time. These are ideal for people who have something to use as collateral and could benefit from lower rates.
An unsecured loan might be more ideal if you’d rather not put an asset as collateral and don’t mind paying a higher cost to borrow the funds you need.
Are some types of bad credit loans safer than others?
Not all bad credit loans are the same. When weighing your options, consider these factors to assess whether the loan you’re considering is a safe and viable choice:
- Is the lender trustworthy? The lender must be registered to do business in your state and have a physical address and a secure website.
- Does the lender impose prepayment penalties? You may want to avoid bad loans with prepayment penalties. Otherwise, you will be charged a fee if you get back on track sooner rather than later and repay the loan sooner.
- Is the interest rate excessive? Bad loans come with high interest rates. The quote from your preferred lender should be comparable to what other lenders offer. Otherwise, it may be a scam.
- What are the refund conditions? Avoid bad loans with extended payment periods, as they can mean bad news for your finances. The lender may extend the loan to make your monthly payment more affordable, but you’ll also be paying a fortune in interest because they’ll have more time to collect from you.
Also, be on the lookout for lenders who guarantee approval before you apply or require an upfront payment to secure a loan. Both are signs of a scam, and these types of lenders should be avoided at all costs.
How much does a personal loan cost when you have bad credit?
It depends on the lender and your credit rating. You can expect an APR of up to 36% when you take out a bad credit loan.
A lower credit score means you’ll usually get a higher interest rate because there’s a higher risk of default. But if you opt for a secured loan, the lender might give you a slight reduction in interest because they will assume a little less risk.
What are the alternatives to a loan for bad credit?
If you can’t get approved for a bad credit loan or prefer to explore other options, here are some alternatives to consider:
- Credit card: Some credit card companies offer products for consumers with past credit problems. Only consider options that don’t charge high annual fees or monthly maintenance fees if possible.
- Payday loans: These loans should only be used as a last resort as they often come with three-digit interest rates. Plus, they’re usually due within two weeks and can put a strain on your finances if you’re unable to pay and incur additional interest and fees due to loan renewals.
- Family or friends: You can also ask a relative or close friend to lend you money. Put an agreement in writing to avoid confusion and only commit to a repayment schedule that you can comfortably afford and that suits your budget.
As you get back on track financially, consider improving your credit health and building an emergency fund. This way, you won’t have to resort to a bad credit loan if you run into financial difficulties in the future.