Credible takeaways
- Try for a bad credit personal loan, a payday alternative loan (PAL), or a small bank loan before resorting to a payday loan.
- A low credit score often means paying a high interest rate.
- Payday loans and cash advance apps can be an easy way to get money but are often more costly than longer-term loans.
Some types of bad credit loans are better than others. Payday loans and title loans are easy to get but are short-term and high-cost, which can worsen your financial situation.
Bad credit personal loans, PALs, and small bank loans, however, can give you manageable monthly payments, more money, and improve your credit score. Learn which loan options to consider, which loans to avoid, and what to do if you already have a “bad” bad credit loan.
Where to get a bad credit loan
Cost and availability are two things to keep in mind if you’re trying to get a bad credit loan. The cost of a personal loan, for example, is usually expressed as an annual percentage rate (APR), which accounts for the interest rate and any upfront fees. In general, a lower credit score means paying a higher APR. That’s why it’s crucial to compare APRs between the loans you’re considering to see which is the most affordable.
Online lenders
Several online lenders offer personal loans for bad credit. A personal loan provides a lump sum of cash that you repay in fixed monthly payments over several months or years. Some lenders, like Upstart, consider applicants with poor credit or no credit history, but most require a hard credit check when you apply. Others, like 60MonthLoans, only require a soft credit pull. Some online lenders, such as Oportun, OneMain, Upgrade, BestEgg, and Reprise, also offer secured loans that may be easier to qualify for with bad credit.
Personal loans are generally much less costly and more manageable than no-credit-check options like payday loans. Plus, you can compare estimated rates from multiple lenders to find the best deal.
“The internet is a great equalizer in shopping and comparing loan terms and rates,” says Mark Williams, risk-management practitioner and master lecturer at Boston University’s Questrom School of Business. “With the proliferation of nonbank fintech lending companies, borrowers have many more options than payday loans to obtain competitive borrowing rates.”
Compare lenders for bad credit borrowers
Banks
While banks tend to have stricter eligibility criteria for loans than other financial institutions, some local banks may offer small loans to existing account holders without a credit check. These short-term loans have much lower APRs than payday loans.
For example, Bank of America offers a Balance Assist loan of up to $500 for a flat $5 fee (which translates to a maximum APR of 29.76%, depending on the amount you borrow). U.S. Bank offers its Simple Loan up to $1,000 with a low fixed rate for every $100 borrowed. Check your bank to see if a similar funding solution is available.
Explore: Best Banks for Personal Loans
Credit unions
Federal credit unions are member-owned, not-for-profit financial institutions that often serve bad credit borrowers. They tend to charge lower rates and fees and have less stringent income and credit requirements than banks. Plus, they can also be a resource for financial education.
A credit union may offer a few different loan options, including personal loans and payday alternative loans (PALs I and II). You can borrow up to $2,000 with a PAL II loan and repay it in 12 months or less. PALs I offer loans up to $1,000 with maximum six-month repayment terms, but you’ll need to be a member for at least one month to qualify. PALs don’t typically require a credit check, and interest rates are capped at 28%.
Cash advance apps
Cash advance apps offer a small advance on your earned wages that typically gets repaid out of your next paycheck, often with no credit check required. Cash advance apps can help you cover a one-time, unexpected expense, but many charge subscription fees and express transfer fees that could equate to triple-digit APRs comparable to payday loans.
But it’s also possible to get a few hundred dollars without paying the high fees associated with payday loans. For example, MoneyLion offers an advance of up to $500 with no credit check, no subscription fees, no interest, and no transfer fees for regular transfers. Tipping is optional. Before using a cash advance app, make sure you understand the fees and take note of the overdraft risk.
Compare: Payday Loans vs. Cash Advances
Important
Since cash advance apps deduct money from your next paycheck, that money won’t be there the next payday. Frequent use could increase the risk of overdrafts on your bank account, especially if you don’t have a steady income.
Family loan or salary advance
The least expensive way to borrow money when you have bad credit may be to ask your family or employer for help. Many employers offer payroll advances and may have an official policy for requesting and repaying an advance. Interest rates are typically low, just to cover administrative costs, since employers generally aren’t allowed to earn money from offering loans to workers.
Likewise, someone in your family could offer you a low-interest or interest-free loan and provide some flexibility with repayment. Keep in mind that a family loan could have tax implications for the lender depending on the size of the loan, in addition to emotional implications for everyone involved.
Crowdfunding is an option to collect small amounts from people in your social network. You can also use a loan platform like Pigeon to facilitate a loan from a friend or family member.
Bad credit loans to avoid
Payday loans
Payday loans are short-term, small-dollar loans that you repay out of your next paycheck. You can get a payday loan from a storefront or online payday lender with no credit check. But the fees could equate to over 400% APR depending on the laws in your state. In some states, payday loans are banned or payday lenders don’t operate due to interest rate caps. “Payday loans are predatory and come with high interest rates, add-on fees, and unfriendly terms,” says Williams. “Such loans should be avoided at all costs.”
Compare: Payday Loans vs. Personal Loans
Credit card cash advances
Many credit card issuers allow short-term loans against your credit line, known as cash advances. You can get a cash advance from an ATM without needing to apply, so your credit score won’t be an obstacle. But cash advances often come with higher APRs than regular purchases, there is often no grace period before interest begins accruing, and you typically need to pay fees. It’s best to avoid credit card cash advances if you have other options.
Title loans
An auto title loan is a lump sum loan secured by the title to your vehicle. You can continue to drive your car while you pay off the loan, but if you fail to repay by the due date, the lender can seize your car.
Title loans vary significantly from state to state due to variations in state laws. But title loans often come with high fees and require repayment within 30 days. For example, auto title lenders in Alabama may charge up to 300% APR. Many borrowers find repayment difficult because of the short repayment terms, and title lenders commonly offer the option to renew your loan, which can lead to even more fees.
Pawnshop loans
Pawnshop loans are short-term loans secured by a valuable item like gold jewelry or a television. The pawnbroker holds the item until you repay the loan and can sell the item if you fail to repay. The average pawnshop loan amount is $150 with a repayment window of about 30 days.
While interest rates vary by state, pawnshop loans can be costly. For example, pawnbrokers in Illinois can charge up to 20% per month, which equates to 243% APR.
One potential benefit of a pawnshop loan is that the lender generally can’t pursue you for collection if you fail to repay it. However, you’d lose the asset you put up as collateral.
Learn More: 8 Signs of Personal Loan Scams
How to qualify for a loan with bad credit
- Research bad credit lenders: Look for online lenders that offer bad credit personal loans and prequalify to compare potential APRs, repayment terms, and loan amounts to your other options. Prequalification estimates rates and terms but doesn’t represent an actual offer of credit.
- Apply with a cosigner or co-borrower: If you have a friend or family member with good credit willing to guarantee repayment of the loan, applying with them as a cosigner or co-applicant can improve your chances of qualifying for a loan. Unlike a cosigner, a co-applicant has access to the loan funds.
- Apply for a secured loan: It may be easier to qualify if you offer to secure the loan with an asset, such as your home or vehicle. You might also qualify for a lower interest rate, but the lender can take it if you default.
Related: What Are the Requirements for a Personal Loan?
How you can improve your credit
Here are some proactive steps you can take to improve your credit and help your chances of qualifying for a loan:
- Make timely payments: With payment history accounting for 35% of your FICO score, staying current on payments is essential to your credit. Late payments to non-credit accounts like utilities might still negatively impact your score if sent to collections.
- Pay down credit card debt: Reducing revolving debt like credit card balances can improve your credit utilization ratio, which is a significant factor in your credit score.
- Become an authorized user: Being added to a trusted person’s credit card as an authorized user can increase your credit limit and decrease your credit utilization ratio.
- Check your credit report for errors: Correct any errors on your credit report to improve your credit profile. Small corrections can increase your chances of qualifying for better loans.
FAQ
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