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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.
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 poor credit, your options for personal loans are limited. Most personal loans for people with poor credit will let you borrow from $250-$5,000 and have fairly high-interest rates between 18%-29%.
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 not to 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 purchases is not worth it; you will pay 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 your credit report’s collection 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 and Cons 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.
- High-interest rates
- It will put you in a worse financial position long-term.
- A large percentage of the monthly payment goes towards interest.
Payday Loans with Bad Credit
A payday loan is a short-term loan, typically for $1,000 or less due on your next payday. 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 they greatly benefit them if you take your time repaying the loan.
The reasons to get a payday loan are very similar to getting a personal loan. However, 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. In comparison, 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 understatement. 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 payday.
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 of months.
If you 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 and Cons of Payday Loans
- Get cash the same day
- No credit check with some lenders
- A cash advance on your paycheck to pay for unexpected immediate expenses
- Considered predatory 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
Bad Credit Auto Loans
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 loan terms 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 repaying 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 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 and Cons of Credit Cards
- Revolving line of credit
- Helps build credit
- No interest if paid in full each month
- 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 Unsecured Platinum card. There is an annual fee of up to $99.
Lots of great features such as cashback rewards, free credit score updates, and text notifications of payments.
First PREMIER® Bank Credit Card
The First Premier card for bad credit borrowers offers you a chance 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 a 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.
If you have a 500 credit score, you may qualify for an FHA home loan with a 10% down payment. If you have 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.
Veterans may be eligible for a VA home loan which offers 100% financing with no mortgage insurance required. Technically, there is no minimum credit score requirement for VA loans, lenders set their own credit requirements. Most lenders want applicants to have at least a 620 credit score, however, some lenders can approve VA loans for borrowers with credit scores as low as 580.
Refinance Programs for Borrowers with Poor Credit
Home Equity Loans
Suppose 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 home’s $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.
Home Equity Line of Credit
A home equity line of credit, or HELOC, works 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 need it anytime. 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.
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 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 can 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.
Cash-out Refinance Pros and Cons
• Get cash at a lower rate than other types of loans
• Closing costs are as much as a regular mortgage
• Pay off student loans or other types of debts
• Reduces the amount of equity your have in your home
• Pay off high-interest credit cards
• Home at risk of foreclosure if you can't make the monthly payments
• Renovate and make home repairs
• May increase your mortgage payments
• Payments are tax-deductible
• Spend cash as you please
• One mortgage payment
• Take advantage of lower interest rates that occur in the housing market
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.
What is Considered Poor Credit?
Bad credit is usually considered anything below 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
- 700-749 = Great
- 660-699 = Good
- 620-659 = Fair
- 580-619 = Poor
- 579 or lower = Bad
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.
Several websites 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
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
When compared to the credit limit, the balance on your credit cards 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 you’re 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 that’s allowed to access the account. When someone is added as an authorized user, the entire account history will be listed on their credit report, positively impacting your scores.
If you have a friend or family member with a credit card in good standing, ask them to add you to their account to 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 successfully contacted their creditors and simply asked them to remove late payments from their credit reports. 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. 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.