What Is A Bad Credit Personal Loan? Here’s What To Know

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If you have a bad credit score — or a score between 300 and 580 — getting approved for a loan with bad credit can be challenging. Fortunately, some legitimate lenders specialize in loans for bad credit, but you can expect to pay higher interest rates and fees.

Before applying, learn about how bad credit personal loans work and the borrowing costs you can expect. Some bad credit lenders are predatory, and knowing how to spot them could keep you from being exploited.

What are bad credit loans?

The biggest difference between a bad credit personal loan and any other personal loan are the APRs and fees, which are usually much higher when a borrower has bad credit. Otherwise, bad credit loans work the same. You receive all your funds at once and pay back the balance, plus a fixed interest rate, on a monthly basis over the course of one to seven years.

A longer repayment term can help spread out the cost and result in lower monthly payments, but it’s more expensive in the long run. Since interest has more time to accrue over a long term, you’ll pay more for the loan in the end. Generally, you should select the shortest repayment term you can realistically afford.

How do bad credit loans work?

Let’s say Frank needs to borrow $5,000 to cover some emergency repairs to his home, but his credit score is 570. While Frank’s choice of lenders will be more limited than someone with good credit, he still has options.

After shopping around, Frank receives the following loan offers for a $5,000 loan:

The best loan for Frank depends on his goals. If he needs the lowest monthly payment possible, Loan 3 is a viable option — but the high rate coupled with a long loan term means that he’ll pay nearly as much in interest as he initially borrowed, doubling his out-of-pocket costs. Loan 1 is best for keeping interest costs to a minimum, assuming Frank can afford the higher monthly payment.

Pros and cons of bad credit loans

Bad credit loans may be your only option if you need cash for an emergency expense, home improvement or big purchase and have been turned down by traditional lenders. It’s important to consider the advantages and disadvantages of this type of loan before moving forward.

Pros

• More flexible approval guidelines: Bad credit lenders have lower credit score requirements and may consider alternative criteria when making a lending decision, including income and education.
• Could help improve your credit score: If you make on-time payments, you could boost your score over time.
• Less risky than credit cards or payday loans: Credit cards and payday loans can get you into a cycle of debt since they allow for minimum payments (credit cards) or have to be repaid every two weeks (payday loans). Plus, payday loan rates can be as high as 400 percent APR.

Cons

• High fees and interest rates: APRs can be as high as 35.99 percent, while rates for borrowers with excellent credit could be as low as 6 percent. You may pay origination fees of up to 12 percent of your loan amount, and these fees reduce the amount you receive when your loan funds.
• Collateral requirements: Some bad credit loans require collateral to approve you for the funds. Secured loans offer more affordable rates than traditional unsecured personal loans since the risk to the lender is reduced. But if you default on your loan, the lender could seize your asset and sell it to repay your debt.
• Increased predatory potential: It’s common for predatory products like payday loans to be advertised as bad credit loans. The primary difference between a legitimate and a predatory product is the interest rate — up to 36 percent versus 400 percent or more, respectively.

How to apply for a bad credit loan

Before you get a bad credit loan, prepare your budget to ensure you can afford the extra payments. Then, check your credit score and compare it against different lenders’ requirements.

Compare different bad credit loans to find the best rate and terms for your needs. Be sure to prequalify with at least three lenders to check your rates without a hard credit inquiry.

You can use a marketplace site like Bankrate to review several lenders and apply. After you’ve chosen your lender, fill out an application. Double-check all the information you put in — any mistakes could result in a rejection.

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How do you avoid predatory bad credit loans?

Not all bad credit loans are legitimate or affordable, so take extra precautions to avoid being a victim of predatory lending.

• Does the lender want upfront money? No legitimate bad credit lender should charge an upfront fee. It’s standard practice for the fees to be deducted from your loan funds before the remainder of the money is deposited into your account.
• Did the lender reach out to you unsolicited? You should always be the one to initiate contact with a lender. If you suddenly start getting calls about bad credit loans, you may be dealing with a scam.
• Is the lender reputable? The lender should be registered to do business in your state and have a physical address and a secure website. Check the Consumer Financial Protection Bureau’s (CFPB) complaint database for any actions against the lender.
• Does the lender market “guaranteed approvals?” No lender can guarantee a loan approval without reviewing some of your financial information. If they do, they are probably not legit.
• Do you feel pressured to accept the loan? Never, ever take a bad credit loan out 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-arm sales tactics are a red flag that you’re dealing with a predatory lender.

Bottom line

Although bad credit personal loans come with high APRs and fees, they can be a worthwhile financial cleanup tool. The fixed monthly payment is a good alternative to variable credit card payments.

If you use one to consolidate multiple debts, you could avoid an accidental missed payment since you’ll only have one new personal loan payment. Explore cheaper alternatives for bad credit if the rates are payments are too steep for your budget.

If you’re not sure about the loan program, talk to a credit counselor before making a decision. If you determine that it’s the best financing option for you, compare personal loan rates, terms and fees to find the best deal.

Frequently asked questions

• Are there personal loans for bad credit with guaranteed approval?
  

  A guaranteed approval personal loan is a tell-tale sign of a scam. Reputable lenders review your financial information when you apply for funding. So, if a lender guarantees you’ll receive approval, you should look elsewhere to borrow the cash you need.

• How do you borrow money with a really bad credit score?
  

  Do your research to find lenders that cater to credit-challenged borrowers. Get prequalified with at least three to gauge your eligibility for funding. Have your income documents ready, and consider a co-signer if the lender allows them.

• Are there alternatives to bad credit loans?
  

  If you can’t get approved for a bad credit loan or prefer to look elsewhere, there are still ways to get the cash you need. Bad credit loan alternatives to consider include early payday apps; buy now, pay later loans; and 401(k) loans. You can also use a credit card if one is available, or consider a cash-out refinance if you have a sizable amount of home equity.