If you have bad credit then you know how hard it is to get approved for a loan.
Any type of loan, whether it’s a personal loan, mortgage, or auto loan.
Lenders use your credit score to determine your loan eligibility and interest rates.
In this article, we’re going to dive into the different types of bad credit loans available, where to find them, and how to get the lowest rates. We’ll also talk about which types of loans you should, and shouldn’t get.
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Bad Credit Personal Loans
You can get a bad credit personal loan to get extra cash for just about anything you need it for. Personal loans are unsecured loans that range from $1,000-$35,000 and usually have a repayment term of 12-24 months. These are also known as installment loans because they have a set monthly payment for a set number of months.
However, if you have a bad credit score your options for a personal loan get smaller. Most bad credit personal loans will let you borrow from $250-$5,000 and will have fairly high-interest rates between 18%-29%.
Even though the interest rate is high it doesn’t mean you shouldn’t get a personal loan. These loans are good for times when you’re in a difficult situation and really need the cash as a last resort.
If you’ve been laid off or don’t have the money to pay your mortgage then a personal loan, at any rate, will definitely help you short-term. But it’s important to not rely on personal loans to get you by financially.
Good Reasons to Get a Personal Loan
- Pay your mortgage, rent, or car payment
- Keep current on utilities
- Replace/repair necessities in your home
- To stay current on your credit cards
Bad Reasons to Get a Personal Loan
- Debt consolidation
- Take a vacation
- Buy a car
- Entertainment or other unnecessary expenses
- Home improvements/renovations
What to Watch For
When getting a personal loan with a poor credit score you need to keep in mind that your interest rate will be high. Borrowing money to take a vacation or other large purchase is not worth it, you will end up paying much more than you would with cash. It’s better to start a savings fund for vacations and other major purchases.
Debt consolidation loans only make sense if you’re paying more interest on your credit cards than your rate will be with a personal loan. If you have a bad rate then it defeats the whole purpose of a debt consolidation loan.
If you’re struggling with collection accounts you should either dispute the native items with the three major Credit Bureaus, or work out a “pay for delete“. This is an agreement between you and the creditor that they will remove the collection from your credit report once you pay the balance.
If you have an account in collections you’re trying to pay off you need to know that paying off collections will not improve your credit score.
Pros of Personal Loans
- Get money when you need it
- Help stay current on bills if you’ve been laid off
- Pay your mortgage/rent/auto loan on time
- Re-pay the loan in low monthly installments over a couple of years.
Cons of Personal Loans
- High interest rates
- Will put you in a worse financial position long-term
- Large percentage of monthly payment goes towards interest
Best Bad Credit Personal Loan Lender
A payday loan is a short-term loan typically for $1,000 or less that is due on your next pay day. Interest rates and fees on payday loans are often extremely high, up to a 30% fee and rates of 400%. They are loans available with no credit check. Payday loans typically don’t have to be completely repaid by your next pay period.
They work as an expensive paycheck advance. Lenders will often allow more time to repay the loan, mainly because the rates are so high that it benefits them greatly if you take your time repaying the loan.
The reasons to get a payday loan are very similar to getting a personal loan. Although the urgency is usually much greater. If your car were to break down, an auto loan is delinquent, your rent or mortgage is past due or other unexpected emergencies.
A payday loan gives you access to cash right away. While it can take a few days to get cash in hand with a personal loan.
Good Reasons to Get a Payday Loan
- Catch up on your mortgage, rent, or car payment to avoid repossession or eviction
- Repair broke down vehicle
- Keep utilities from getting disconnected
- Replace/repair home appliances
- Keep an account out of collections
- Quick and easy loan application
Bad Reasons to Get a Payday Loan
- Debt consolidation
- Vacations or other unnecessary purchases
- Home improvements
What to Watch For…
To say interest rates on a personal loan when you have bad credit are high is an under-statement. The interest rate on a payday loan is ridiculous, up to 400% or even higher. But payday loans make sense in some situations when you need cash within 24 hours and you’re expecting to repay it on your next pay day.
Many financial experts agree that payday loans, in general, are predatory and strongly advise against them. A $300 loan can quickly turn into a $600-$800 debt after just a couple months.
If you do decide to get one of these loans to make sure you pay it back within 2 weeks. You will keep the amount of interest paid at a minimum and get an advance on your pay.
An alternative to consider is getting a credit card or personal loan. The terms are much more appealing and you’ll save a ton in interest.
Pros of Payday Loans
- Get cash the same day
- No credit check with some lenders
- Cash advance on your paycheck to pay for unexpected immediate expenses
- Considered predatory loans
Cons of Payday Loans
- Interest rates as high as 400%
- High fees between 15-30%
- Must be repaid in full within a short time period to avoid extreme penalties
Auto Loans with Bad Credit
Bad credit auto loans do come with high rates as do most bad credit loans. A car is a daily necessity that most people today can’t go without. If you have a bad credit score you may qualify but the terms of the loan will be less than favorable.
Expect an interest rate in the 15-20% range with a down payment of 10-20%. Buy a cheap car, nothing fancy. The good news about a bad credit auto loan is that it helps your credit score.
After several months of timely car payments, your credit score should be looking up. You can then trade on up to a nicer car, or refinance your car loan to get a lower rate.
Best Bad Credit Auto Loan Lenders
Car Title Loans
A car title loan is a secured loan that uses the title as collateral. These short-term loans are for people who own their car outright. Borrowers are charged a fee for receiving the loan plus repay the loan interest only until it’s paid off. The loan is usually given a 30 day period before it needs to be repaid.
The terms of these loans are not good at all, interest rates are extremely high, up to 400%. Auto title loans are legal in only 23 states, to view the list of states where car title loans are still legal at Investopedia. Like payday loans, these loans are considered by most as predatory in nature. Because of this, we do not recommend working with any auto title companies. This option should be avoided at all costs.
Credit Cards for Bad Credit
If you need access to money in a hurry, a credit card can provide you the extra cash you need. While it’s not as quick as a payday loan, you can apply for a credit card, request express shipping, and do a cash transfer within 48 hours in some cases. If you have a bad credit history your selection of cards will be limited.
Initially, you won’t get a high credit limit. Maybe just a few hundred dollars, but the limit may increase as long as you make your payments on time for 12 months.
Not only will it help you build credit, but if you can pay your balance off in full you won’t have to pay any interest. This is one of the huge benefits of having a credit card for emergencies and not have to rely on short term loans.
Pros of Credit Cards
- Revolving line of credit
- Helps build credit
- No interest if paid in full each month
Cons of Credit Cards
- Rates can be as high as 29.99%
- Can sometimes lead to more spending
- Low monthly payments can leave you in debt
Best Credit Cards for Bad Credit
Credit One Bank® Unsecured Platinum Visa®
An easy and convenient way to start rebuilding your credit. The Credit One Bank® Unsecured Platinum Visa®. There is an annual fee of up to $99.
Lot’s of great features such as cash back rewards, free credit score updates, and text notifications of payments.
First PREMIER® Bank Credit Card
The First Premier card for bad credit borrowers offers a chance for you to rebuild your credit history with this insecure revolving credit card.
Payments are reported to all three major credit bureaus each month to help you build positive credit history.
Bad Credit Home Loans
Home loans for borrowers with bad credit are not as easy to get approved for as they were before the 2008 housing market crash. After the crash subprime loans were no longer being offered by most lenders.
Because many borrowers with credit issues were defaulting on their mortgages, minimum credit requirements have increased. However, in the last couple of years, sub-prime loans have made a comeback.
The Federal Housing Administration insures FHA home loans in the event a borrower defaults on the loan. The FHA will pay off the loan balance to the mortgage lender and take possession of the home.
Lenders are able to reduce their credit requirements because FHA loans have a lot less of a risk than conventional mortgages do.
If you have a 500 credit score you may qualify for an FHA home loan with a 10% down payment. If you have at least a 580 credit score you may qualify with just a 3.5% down payment. The low credit requirements make FHA the best bad credit loan for homebuyers.
Pros of FHA Loans
- Low 3.5% downpayment required with a 580 FICO score
- Higher Debt-to-income ratios accepted
- Gift funds may be used for the down payment
- The seller can pay up to 6% of closing costs
- Low mortgage rates
Cons of FHA Loans
- Require mortgage insurance
- Have a loan limit
- Requires more paperwork
Home Equity Loans
If you have a bad credit score and need access to cash. You can use the equity in your home as collateral to get a second mortgage on your home. Home equity loans have much lower rates than personal and payday loans. You can get up to 80% of the loan-to-value ratio of your mortgage loan.
As an example: If the market value of your home is $100,000 and your loan balance is $50,000, you can borrow up to $30,000, which is 80% of the homes $100,000 value.
When you get a home equity loan the new lender will be the second lean holder on your home. Because of this, it’s difficult to qualify for a second mortgage with bad credit. You will have a second payment each month to the new lender.
These loans will have rates much lower than other types of loans, usually between 5%-8%. And the repayment term is longer you will have about 60 months to repay the money you borrow.
A HELOC stands for home equity line of credit and it works much like a credit card. You still use the equity in your home to get cash out but the funds go into an account you have access to anytime you need it. You borrow money from it and make monthly payments. You’re only charged interest on the amount you borrow.
After you repay what you borrow you’re eligible to take the money back out. If you can qualify for one of these loans, it’s something you should strongly consider.
Pros of Home-Equity Loans
- Turn your home equity into cash
- Low-interest rates
- Only pay interest on the money you borrow
Cons of Home-Equity Loans
- The money you get is secured by your home
- If you’re unable to make the payments you can lose your home
- Difficult to qualify for with bad credit
- High closing costs
Cash-Out Refinance with Bad Credit
Cash-Out Refinance loans also use the equity in your home to provide a loan. However, instead of having two separate lenders and loans, you’ll just have a single loan from one lender.
When you do a cash-out refi you refinance your entire mortgage with a new lender who also adds cash up to 80% LTV. The terms of these refinance loans are very favorable. You will have a single mortgage payment and the money you receive will be at a very low rate, the same as your mortgage loan.
Because the new lender is the only lean holder on your home the loan is less risky. Because of this lenders are able to offer a cash-out refinance to borrowers with less than perfect credit.
If you’re seeking a home loan using the equity in your home and you have bad credit, then a cash-out refinance will be a great option.
Pros of Cash-Out Refinancing
- Use home equity to get cash
- Low-interest rates
- Long repayment term so payments are low
Cons of Cash-Out Refinancing
- Lose equity in your home
- Money is secured by your home
A credit union focuses more on relationships and their community than any big bank or online lender does. If you’ve been a member for a long time with a credit union you may be able to get a short term personal loan with bad credit at a reasonable rate.
Since you have a more personal relationship with your credit union they may be more willing to lend money to you with good terms than other bad credit lenders.
Another benefit of credit unions is that they offer all types of loans, personal, auto loans, mortgages, and student loans. You can take advantage of having a one stop shop for all of your loan needs with a credit union.
How People End up with Bad Credit
If you have poor credit it’s a result of one of two things. You either went through a financial hardship, such as a loss of a job, reduction in income, or a medical condition. If your poor credit history is a result of financial hardship it’s usually fairly easy to tell by looking at your report.
If you can see where the financial struggles happened by showing late payments and collections that started at the same time then this is in your favor.
As long as you have since recovered from the economic event that caused the bad credit and have re-established positive credit in the months since the hardship, a lender is more likely to take a risk on you as a borrower.
The other reason for poor credit is just bad judgment and irresponsible debt and bill payments. If you take out more debt than you can afford to pay back it shows you’re impulsive and don’t make sound financial decisions.
A lender who is looking at a credit report with a consistent history of late payments, missed payments, and collections you’re a much bigger risk and loan companies are less likely to take a risk on you.
What is Considered Poor Credit?
Bad credit is usually considered anything below a 620. However, there are different degrees of bad. A 450 FICO score is certainly worse than a 580 score. You can potentially qualify for a mortgage or personal loan with a 580 credit score.
- 750+ = Excellent Credit
- 700-749 = Great Credit
- 660-699 = Good Credit
- 620-659 = Fair Credit
- 580-619 = Poor Credit
- 579 or lower = Bad Credit
Get Your Free Credit Report and Scores
If you have bad credit and are searching for a loan, the first thing you need to do is pull a copy of your credit report and scores to see where you stand. You can get a free copy of your credit report from the Government sponsored website www.annualcreditreport.com
Scan through your report to see if there are any inaccurate items or accounts. If your name is misspelled, the current or previous address is incorrect, or you see any accounts that you don’t recognize you should dispute them with the Credit Bureaus immediately.
There are several websites that will give you free credit reports and scores but most only offer a free trial, then charge monthly afterward. On these websites, you can get your credit scores absolutely free, forever.
Just remember these are consumer credit scores which are an estimate of your FICO scores. The score lenders see when they pull your credit profile will be different from what you see online.
Increase Your Credit Score Before Applying for Bad Credit Loans
Believe it, or not, there are several things you can do to improve your credit score within 30-45 days. Before applying for a bad credit loan you should make sure you’re maximizing your FICO score. This will give you the best chances of qualifying.
Pay down the balances on your credit cards
The balance on your credit cards, when compared to the credit limit, is your credit utilization ratio. Your credit utilization ratio makes up a whopping 30% of your overall credit score. Only your credit history (35%) has a larger impact on your credit scores.
The lower your balances, the higher your score will be. So if your carrying a lot of debt make sure you pay it off several weeks before starting a loan application if possible.
Get added as an authorized user
You can add an authorized user to any credit card account. This is a second user thats allowed to access the account. When someone is added as an authorized user, the entire account history will be listed on their credit report, having a positive impact on your scores.
If you have a friend or family member with a credit card in good standing ask them to add you onto their account to help improve your score.
Remove late payments
If you have any late payments on your credit profile, your credit score is suffering because of it. Many people have had success in contacting their creditors and simply asking them to remove late payments from their report. Some companies will do this as an act of goodwill for long-standing customers.
The Bottom Line…
Bad credit loans come with their fair share of disadvantages. But, if you repay the loans quickly, use the money responsibly, and make sound financial decisions you can rebuild your credit and take advantage of low rates in the future.
Be cautious of predatory lenders who add high fees and unreasonable interest rates. If possible try to get approved for a credit card instead of a payday loan. If you’re able to repay the balance in full each month you can pay no interest at all.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.