8 Types of Bad-Credit Loans and Common Uses

If you have bad credit, you may find it difficult to get a loan. Approval for most loans hinges on two things — your credit and income. If either is lower than average, it can result in denials or high annual percentage rates (APRs). However, a variety of loan types are designed for people who have bad credit. Understanding how they compare (like which types could improve your credit) can help you make a smart decision when you need a loan.

Unsecured personal loans

An unsecured personal loan is a type of installment loan that provides a lump sum of money upfront. You could be approved and get money the same day you apply, but in most cases, it takes one to three business days. You make monthly payments, and repayment terms often last between two and seven years. Loan amounts are available from around $1,000 to $50,000 or more, and APRs typically top out at 36%.

Some lenders offer personal loans for bad credit, but expect to pay an APR over 30% if approved. That's still much lower than other loans for bad credit, like payday loans, pawnshop loans, title loans, and cash advance apps.

You don't need to be stuck with a high APR. You might be able to refinance later if you improve your credit, says Jim Hunsanger, Chief Risk Officer at MSU Federal Credit Union. However, he says, "generally, it would take at least six months for a consumer's credit score to improve."

Secured personal loans

Bad credit loans are usually unsecured, but some lenders offer secured loans, which require collateral — an asset that can become the property of your lender if you stop making payments.

According to Hunsanger, a car is the most common asset for a secured loan because lenders can determine value relatively quickly with digital valuation tools. "Other assets — RVs, ATVs, boats — can also be used," says Hunsanger. "However, those come with more variability in value and are less common for lenders to review, so they may take longer." Generally, you should expect an application for a secured loan to take longer than an unsecured loan so the lender has time to estimate the value of your collateral.

With collateral to secure your loan, you may qualify for lower interest rates and better repayment terms compared to an unsecured loan. Your lender might also let you borrow more if your asset's value can support the amount you request. Carefully assess your ability to make payments before taking out a secured loan to avoid putting your asset at risk.

Home equity loans or HELOCs

If you own a home with equity, you could potentially tap that equity through a home equity loan or a home equity line of credit (HELOC). Both are types of secured loans that use your home as collateral.

With a home equity loan, you get an upfront payment and repay it in monthly installments — repayment terms can last from five to 30 years. These loans usually have fixed interest rates, similar to personal loans, keeping your payments the same throughout your repayment term.

HELOCs, on the other hand, give you an open line of credit to borrow from as needed. They commonly have variable interest rates, so the rate could change after you open a HELOC.

How it works

Your home's loan-to-value ratio (LTV) is the amount you owe on your home compared to its market value. If your home's LTV is higher than 80% or 85%, you may not be eligible. In other words, you need at least 15% to 20% equity in your home to get a home equity loan or HELOC.

Because your home serves as collateral, you might have an easier time qualifying or getting a better rate than you would on an unsecured loan. But you'll still need the income to support repayment, and some lenders may not approve you with bad credit.

Before applying, consider the potential consequences. If you fall behind on payments, you risk foreclosure. Plus, "if home values decline," says Brandon Galici, CFP and founder of Galici Financial, "you could end up owing more than your home is worth." This negative equity can be a problem if you want to sell your home — the sale might not cover the amount you owe.

Learn More: Here's What You Need to Get a Home Equity Loan or HELOC

Cash advances

If you have bad credit, you can request a cash advance from an app like Dave or Klover. Cash advances deposit money into your bank account with no credit check, but you'll usually need to repay the cash advance in full from your next paycheck. Apps don't typically charge interest, but they may charge for instant deposits, subscriptions, and optional tips, which can significantly increase your overall borrowing cost.

Amounts may be available up to $500 or $1,000, depending on the app and what you qualify for.

Some credit cards let you borrow money from your available credit line, which can be convenient for getting money quickly and without needing to apply for a loan. But your advance starts accruing interest from the moment you withdraw the money and many charge cash advance fees, such as 5% of the borrowed amount.

Credit card cash advances are usually available up to a percentage of your limit. So if you've used most of your available credit, you may not qualify. You can find your available cash advance amount listed on your credit card statement.

Pros and cons of cash advances

Buy now, pay later loans

BNPL loans are one of the most common types of bad credit loans for small purchases. A host of online retailers partner with BNPL loan providers, like Affirm and Afterpay, to offer BNPL loans at checkout. Some BNPL loan providers conduct a soft credit check when you apply, which doesn't affect your score, but hard credit checks for short-term BNPL loans are rare.

Short-term BNPL options usually don't charge interest, but you may have interest charges on monthly BNPL loans. For example, Afterpay charges 6.99% to 35.99% for its monthly installment plans.

Find out if your BNPL provider reports to credit bureaus and what types of plans it reports. Even if it doesn't, failure to pay could send your account to a debt collector, which could damage your credit further. Non-reporting also won't help you get a credit boost if you pay on time.

Payday loans

If you need cash before your next payday, you could get a payday loan from a payday loan lender, but it's not advised. These loans usually need to be paid back in full by your next paycheck and often carry expensive fees, such as $15 charged for every $100 you borrow. As a result, APRs are much higher than traditional loans — the average APR for payday loans in some states is over 600%. Paying off your payday loan leaves you with less money on payday, which might make you need to borrow again.

Pawn and car title loans

Pawn and car title loans are designed for people with bad credit. Like payday loans, they can be predatory.

Your vehicle is used as collateral for a car title loan. To qualify, your vehicle needs to be completely paid off with no other lienholders attached to the title. Car title loans can have many fees. The most expensive is the finance charge, which is the amount you pay to borrow money. This fee can reach 25% or higher, equating to APRs of 300% or more — or about $126 on a $500 loan. Other fees include late fees, title verification fees, and document processing fees.

You could get a pawnshop loan if you have a valuable item to use as collateral, like jewelry or a trading card collection. Their rates can also be high, but these vary significantly by state. For example, Texas has allowed pawnshops to charge APRs up to 240%, but Massachusetts' highest allowable pawn loan APR is 36%.

Failure to repay either loan as agreed could result in losing your collateral. However, non-payment on a pawnshop loan will not impact your credit.

Family loans

If you can't qualify or prefer to avoid high interest rates, consider borrowing money from a family member. You could get better terms and a much lower interest rate from family than you would with a commercial lender. Plus, they could benefit from interest payments

But it's important to tread carefully when borrowing from family. Family loans can strain relationships if payment issues arise. Make sure you can fully commit to borrowing responsibly if going this route.

"To maintain professionalism and reduce emotional complications, consider using a third-party service to manage the loan," Galici suggests. For example, ZimpleMoney lets you create a payment plan and make online payments.

Using a lawyer or an online legal document service are other options. Whatever you choose, draw up a formal agreement that outlines repayment terms, fees, interest, due dates, and delinquency consequences. This offers a layer of protection and trust for the person lending to you.

Read More: Should You Borrow Money From a Family Member?

Alternatives to bad credit loans

You may have a few other options aside from getting a bad credit loan:

401(k) loan

Some 401(k) plans let you take out a loan against your retirement savings. No credit check is required, but you're limited to borrowing the lesser of $50,000 or 50% of your vested amount. Some plans let you borrow up to $10,000 if 50% of your vested balance is less than $10,000. This type of loan comes with some risks. "You potentially miss out on growth opportunities on money that otherwise would have been invested," says Galici. He adds that you could also face expensive tax consequences if you can't repay your loan or if you switch jobs before you've paid it off.

Share-secured loan

A share-secured loan uses money in your savings account as collateral. It may not require a credit check, and you may be able to borrow 100% of your saved money. That cash stays in your account to grow while you pay off the loan, and your bank or credit union will report your payments, which can help you build credit.

Borrow-and-save loan

Some credit unions offer borrow-and-save loans for members, similar to credit builder loans. Amounts may be available up to $2,500. These are best if you don't need the full amount immediately — you may be able to get a portion of the cash upfront, but you'll make payments on the loan before receiving the remaining funds.

Interest rates vary by credit union, but we saw APRs around 18% for 12- or 18-month loans.