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Key takeaways
- You can find loans for borrowers with bad credit through community banks, credit unions and online lenders.
- Predatory or misleading loans can be disguised as bad credit loans.
- If the rate is above 35.99 percent, you’ll want to find a lower-interest option.
- Bad credit loans can come with challenges like higher interest rates and fees.
It’s not uncommon for those with less-than-stellar credit to have difficulty getting approved for a loan. This is in part because many lenders see low credit as a potential risk factor. Fortunately, there are online lenders, community banks and credit unions that offer bad credit loans and work with borrowers across the credit spectrum.
Where to get a bad credit loan
Not every financial institution offers bad credit loans, but you’re most likely to find one through an online lender, a community bank or a local credit union. When starting your research process, look into the following institutions to avoid predatory loans — like payday loans — or misleading lending practices.
Online lenders
Several online lenders offer personal loans for applicants with lower credit. These lenders typically feature a quick, streamlined application process on their websites and offer lending decisions within minutes of applying. If approved for the loan, some lenders will disburse the funds as soon as the same day. Others may take a few days, but it’s rare for an online lender to take more than a week.
Given that there are a seemingly endless number of lenders, it can be easy to get overwhelmed. An online lending network can help reduce the noise.
These networks are online marketplaces that list reputable lenders and can often help you prequalify based on your needs. They also highlight the most important details, like the APR range and loan terms. Prequalifying allows you to see your eligibility odds and predicted APR without impacting your credit.
Who should consider an online lender?
Those who prefer to get a loan without visiting a brick-and-mortar location.
Banks or credit unions
Some 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 creditworthiness and income. If you strike out at your local bank, you may have more luck with your local credit union — provided you meet all the membership requirements.
Credit unions tend to be more lenient than community banks because they are member-focused. Each credit union serves a different people group, with some operating on a local level, and others extending membership on a national level. Most have fairly simple membership requirements based on occupation, association or area of residence.
Some federal credit unions offer payday alternative loans (PALs) geared toward borrowers with bad credit. These PALs carry annual percentage rates (APRs) that cap out at 18 percent, compared to payday loans, which can have APRs as high as 400 percent.
Who should consider a bank or credit union?
Those who wish to bank locally, qualify for a credit union membership or want to take out a PAL.
Pay advance apps
Pay advance apps are designed to help you access your paycheck earlier than your expected deposit date. Due to the nature of this method, you’ll need to have a steady source of income. Regardless of your credit score, the more predictable your paycheck is, the more likely you will qualify for an advance.
A paycheck advance isn’t a loan, and there’s no interest charged. Apps may charge subscription fees, express funding fees or request optional tips. The fees may seem small, but remember that a fee of $15 for a $500 cash advance is equivalent to an APR of nearly 36 percent.
On top of any potential fees, keep in mind that you’ll be drawing from your future income when you use a pay advance app. This means you’ll receive a smaller paycheck on your next payday.
Who should consider a pay advance app?
People with steady paychecks 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 and extremely tight payment timelines. These options should only be used as a last resort.
Payday lenders
Payday lenders offer small short-term loans, typically up to $500. It’s easy to get approved for these products even if you have bad credit, but there are significant drawbacks: You’ll pay a hefty APR, sometimes over 400 percent, and only have a short window to repay what you owe.
One challenge borrowers may face with a payday loan is paying back the loan by the due date, typically the next payday. Unfortunately, this often leads to even more fees and a perpetual high-interest debt cycle that’s very challenging to end. Despite their convenience, these loans should only be used if you’re sure you can pay off the entire balance by the due date.
Title lenders
Title lenders also cater to borrowers with bad credit scores. Car title loans are installment loans that are relatively easy to qualify for because they use your car as collateral. You must own your car in full to qualify for one of these loans.
In most cases, you’ll make equal monthly payments over a set period — usually up to six months. You could also get a slightly lower APR than with a payday loan.
Still, this type of loan is risky since it uses your vehicle to secure it. If you fall behind on your payments, your lender could repossess your car.
Bad credit loan application tips
Getting a loan with a low credit score can be challenging, but options are available. Traditional personal loans may be hard to qualify for, so make sure you’re well aware of the lender requirements before applying. Here are some steps to increase your chances of approval for a loan with low credit:
- Check your credit score: Before you apply for anything, check your credit score. The lower your score, the more challenging it may be to qualify for a loan.
- Apply with a co-signer or co-borrower: Having someone with excellent credit sign for a loan with you can help you qualify, but it will negatively affect their credit if you mismanage the loan.
- Look into secured loans: These loans use an asset like a home or car as collateral, which can result in more favorable rates compared to unsecured loans. The drawback is if you default on the loan, you risk losing your collateral.
- Prequalify first: Loan applications require a hard credit check, temporarily knocking your score down about 10 points. Prequalification doesn’t guarantee approval but lets you see your predicted rates without impacting your credit.
- Know the risks: Lenders who provide loans to individuals with bad credit may charge higher fees and interest rates. It’s important to fully understand the costs associated with the loan and ensure you can make timely payments.
The bottom line
Bad credit loans can help you get out of a financial bind. They are often more costly than personal loans, so borrow with caution.
Familiarize yourself with each option and its benefits and drawbacks, and get quotes from at least three lenders to find the most competitive loan offer. Depending on the loan terms, you could be better off cutting expenses to free up funds, applying for a credit card or finding other bad credit loan 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 co-signer or secured loans, payday advances and car title loans.
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Qualifying for a bad credit loan depends on the lender and the type of loan you are applying for. Generally, you will need to have 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 are usually charged higher fees and interest rates, and some loans may require collateral. It’s important to be aware of the costs associated with the loan and have a plan to make timely payments.
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