Some lenders offer loans for bad credit (a FICO score below 580), which can help you get money even with a spotty credit history. But bad credit loans often have higher interest rates, less favorable terms, and some are downright predatory.
Learn what a bad credit loan is and how to spot the difference between ones that can help your financial situation and those that might make it worse.
How do bad credit loans work?
A bad credit loan is designed for borrowers who may not qualify for a traditional loan due to a low credit score. Many bad-credit loans, such as personal loans, are installment loans with monthly payment schedules.
Installment loans commonly have fixed interest rates, which keeps your installment payments the same. But they also tend to have much higher interest rates than loans for borrowers with good credit — often above 30%.
However, other bad credit loans, like payday loans and cash advance apps, may require lump-sum repayment on your next payday and charge fees that equate to much higher APRs.
Important
Important A FICO score of 580 or lower is considered poor credit and typically indicates the highest level of risk to a lender.
Types of bad credit loans
There are a few types of bad credit loans to consider, some being potentially riskier than others. Here's how they compare.
Personal loans
Best for longer repayment with quick funding
A personal loan for bad credit comes from a bank, credit union, or online lender. You receive a lump sum from a lender after submitting an application and getting approved. Then, you pay back the loan through monthly payments that include a portion of the loan's balance plus interest.
Lenders usually permit personal loans for several reasons, like making home repairs, covering medical expenses, or consolidating debt. Since these loans report to credit bureaus, they can be a great tool to improve your credit score.
Repayment terms are longer than most other bad credit loans — from two to seven years. Loan amounts may be much higher as well — into the thousands if you qualify. Most lenders conduct a hard credit pull when you apply, so make sure your credit score meets the lender's minimum requirement.
Related: What Credit Score Do You Need for a Personal Loan?
Compare Bad Credit Personal Loan Lenders
Home equity loans or HELOCs
Best for homeowners
Home equity loans and HELOCs (home equity lines of credit) let you borrow money against your home's equity, usually up to 80% or 85%, although this varies by lender. A home equity loan works like a personal loan in that it gives you a lump sum that you'll make payments on monthly. A HELOC is a revolving line of credit you can use like a credit card to borrow money as needed.
Since they're secured by the equity in your home, rates for borrowers with bad credit may be lower than other loan types. However, falling behind on payments can put your home in jeopardy of foreclosure. It may be difficult to get a home equity loan with bad credit, but if you have sufficient equity, a low debt-to-income ratio (DTI), and a strong income, you might qualify.
Home equity loan terms can last up to 30 years, and loan amounts are not capped but depend on your home equity, credit, and financial profile.
Cash advance apps and credit cards
Best for small emergency loans
Cash advance apps let you borrow small amounts of money to cover urgent expenses, typically up to $500 due by your next paycheck. These apps, such as Klover, Current, Dave, and Earnin, base your eligibility on your earnings rather than your credit score, so no credit check is required.
They're designed to provide short-term financial relief, making them an option for small cash needs rather than significant purchases. Some apps charge fees to send money instantly and may ask for optional tips.
Important
Fast-funding fees and tips can drive cash app APRs into the triple digits — making them little better than payday loans, in some cases.
Credit cards may also let you borrow money from your credit limit, known as a credit card cash advance. You can usually only borrow a percentage of your credit card limit, but if you've run up your balances, you may not be eligible. Once you get a cash advance, you'll pay it back like a credit card purchase. However, unlike regular purchases, interest starts accruing immediately. Cash advances may also have fees up to 5% of the amount advanced.
Before taking a cash advance from an app or credit card, review the terms and repayment conditions carefully. Borrow only what you need, and make sure you can repay it on time to avoid additional fees or complications.
Compare: Payday Loans vs. Cash Advances
Buy now, pay later loans
Best for small, no-credit-check loans
With a BNPL loan, you can split a purchase into multiple payments, often directly through an online store's checkout process. For example, you may have four equal interest-free installments with a payment due every two weeks. But larger purchases may carry an interest rate and a longer repayment term.
For example, Affirm charges 0% to 36% interest when you choose a monthly installment loan with a repayment term of up to 60 months, but its Pay-in-4 installment loans are interest-free. BNPL can be an appealing option if you have bad credit because short-term plans typically do not require a credit check.
Like other loans, BNPL loans could hurt your credit if you fail to pay. Even though BNPL lenders don't report to credit bureaus, debt collectors do. Signing up for automatic payments can ensure that you make each one on time.
Payday, pawn, and car title loans
Best avoided
Payday, pawn, and car title loans can be tempting if you're having trouble qualifying for other types of loans. They're not as strict with their borrowing requirements, catering to people with bad credit. However, they should be used with caution or avoided altogether due to extremely high interest rates and fees. Here's how they compare:
- Payday loans: A payday loan is a small, short-term loan option that you'll need to pay by your next paycheck. They have among the highest interest rates and fees of any bad credit loan, making them one of the most expensive borrowing options.
- Pawn loans: Pawn loans let you use an item of value as collateral to borrow money from a pawn shop. If you can't repay the loan on time, the pawn shop can keep your item. One benefit to pawnshop loans is that you're credit will not be damaged if you don't repay the loan. You will, however, lose your collateral.
- Car title loans: You'll need to use your vehicle as collateral for a car title loan, placing it at risk if you can't pay back your loan. You might qualify for higher borrowing amounts compared to payday or pawn loans, depending on your vehicle's value. However, some lenders won't give you a loan if you still owe money on your car.
Learn More: Types of Bad Credit Loans
Current rates on bad credit loans
The APR on bad credit loans is usually higher than traditional loans because of the added borrowing risk to a lender. But some types of bad credit loans can have much higher rates than others.
If you go the personal loan route, you may see APRs of 30% to 36% for a bad credit loan. It's common for credit card companies to also charge similar rates for cash advances. While these rates can be high relative to personal loans for fair credit and good credit, they're much lower than rates on other bad credit loans.
For example, title loans may charge finance fees of 25%, resulting in APRs around 300%. Payday loans typically have APRs around 400%, but in some cases, rates can exceed 600%, depending on state laws and lender practices.
Related: Current Personal Loan Interest Rates
What you should know about bad credit loans
Borrowing money is a commitment, whether you have bad credit or excellent credit. While a bad credit loan can give you the money you need right away, you'll be responsible for it until you pay it off.
Here's what to know about bad credit loans before you borrow.
More expensive
Lenders usually charge more for a bad credit loan than they would for a good credit loan to offset their lending risk. As a borrower, you'll see these additional costs in the form of high interest rates and fees, both of which can significantly increase the loan's APR and what you'll pay to borrow money.
Specifically, watch for origination fees, which some lenders charge as a cost of processing a loan. Personal loan lenders may charge anywhere from 0% to 12% of your loan's cost, which could equate to a $120 fee on a $1,000 personal loan. Payday loans typically have fees instead of interest, but a $15 fee per $100 borrowed over a two-week period, equates to an APR of almost 400%.
Before borrowing, calculate the total repayment amount, including interest and fees to help you decide whether a loan is a good financial move.
Check Out: Personal Loan Calculator
Lower maximum loan amounts
A lender may reduce the maximum amount you can borrow if you have bad credit because it wants to feel confident you can afford payments.
Loan amounts depend on your income, debt-to-income ratio, and other factors. But higher interest rates mean higher monthly payments, which means you might only qualify for a small loan amount.
Good to know
Once you build a strong history of on-time payments and improve your credit score, you could qualify for higher loan limits in the future.
Related: How To Build Credit
Shorter repayment terms
The less time you have to pay back a loan, the lower the risk to a lender. That's why payday loans and cash advance apps require that you repay the loan when you receive your next paycheck, and some car title loans only offer 30-day repayment periods.
With a personal loan for bad credit, you can usually repay over at least one or two years. This can lead to lower monthly payments, but you'll likely pay more interest. For example, a $5,000 loan with a 35% interest rate paid over two years would cost you $2,022 in interest for a total repayment cost of $7,022.
Check Out: 3 Short-Term Loan Options
Tips on avoiding predatory lending
Predatory lenders use fraudulent practices to encourage people to apply for loans with excessive interest rates and fees. They target people they see as vulnerable, like consumers with bad credit.
Some common signs of predatory lending include:
- Aggressive sales tactics: You should never feel pressured to apply for a loan, but predatory lenders may try to push you into a loan through frequent calls or emails.
- Approval guarantees: A predatory lender may promise you a loan even before you apply.
- Pre-application fees: You shouldn't have to pay anything before being approved for a loan. However, predatory lenders might ask you to pay an application fee or other fees just to apply.
- Little to no online presence: Do not take a loan from an individual or company you aren't familiar with and can't find information about online. Trustworthy lenders are transparent with their contact information and credentials.
If you believe you've encountered predatory lending practices, submit a complaint to the Consumer Financial Protection Bureau.
To avoid falling into a predatory lending trap, consider asking a trusted family member for help with a loan. If that's not an option or one you're uncomfortable with, consult with a credit counselor to see if you might find another solution.
Check Out: 8 Signs of Personal Loan Scams
How to apply for a bad credit loan
Follow these steps when you're ready to apply for a loan:
- Review your finances: Think about whether you can reasonably afford a loan. Ask yourself, "What is a bad credit loan going to offer me?" If you feel confident in your ability to repay the loan without harming your budget, it could be a good move to help you rebuild credit. On the other hand, if there's a chance you'll default or repaying it might require you to take on additional debt, it may not be the best solution.
- Check your credit score: See where your credit stands so you can find lenders and loan options available to you. Many banks and credit card companies offer free monthly credit score updates for account holders.
- Compare loans and lenders: Decide which type of bad credit loan you want to apply for and research lenders offering those loans. Compare fees, APRs, repayment terms, funding times, and application processes. Most importantly, find lender minimum credit score requirements to see if you're eligible.
- Prequalify: If applying for a personal loan, prequalify with several lenders before applying. Prequalification shows you the rates and terms you may be eligible for without affecting your credit score. If you decide to apply for a loan, most lenders will conduct a hard credit check, which can drop your score by a few points temporarily.
- Apply: You'll usually need to prove your identity, income, and employment — your lender will let you know what documents to provide — along with submitting the lender's application.
- Review and sign: If approved, you'll get a loan agreement to review that details your payments, total costs, and repayment period. Look over this document closely and sign only if you agree to all terms.
Learn More: How To Apply for a Personal Loan
FAQ
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