A bad credit loan is a personal loan for consumers with credit difficulties. It is relatively easy to apply and most lenders make quick loan decisions and offer quick funding turnarounds. You may also qualify for a bad credit loan if you have little or no credit history, and most lenders generally don’t limit how funds can be used.
These loan products usually come with high interest rates because they are risky for the lender. It is therefore important to shop around to find the best deal. But the interest rate on most bad credit loans is fixed, so the monthly payment amount won’t change. Loan proceeds are allocated in a lump sum and payable in equal monthly installments over a specified period.
Before applying for a loan for bad credit, understand the loan types to identify the best option and select a loan term that suits your financial situation. You also need to be prequalified, calculate loan costs, and evaluate lenders based on their reputation and the incentives they offer.
1. Know what type of bad credit loan you need
There are four main types of bad credit loans: secured, unsecured, payday and cash advance. Some require collateral, which makes them riskier for the borrower. Here’s what to know about each option:
- Cash advance: This expensive option is available from some credit card issuers and involves withdrawing funds from your credit card’s available balance. The amount you borrow will be added to your existing account balance, but you can expect to pay a higher interest rate than that charged for purchases made with the card.
- Secured loan: You will need collateral to get approved for a secured loan, and the lender may seize your property and sell it to recoup their losses if you are late on payment. The advantage is that these loan products are easier to obtain if you have bad credit. Also, the rate will usually be lower than what you would get with an unsecured loan.
- Unsecured loan: You won’t need collateral to qualify and could qualify for a hefty amount. The downside is that your interest rate will be higher with a lower credit score.
- Payday loan: A payday loan can be used as a last resort if you cannot qualify for a personal loan or borrow from family or friends. It is a short term loan of $500 or less. It comes with an excessive interest rate, usually in the triple digits, and is payable on the day of your next payday. Moreover, they can lead to a dangerous cycle of debt if you are forced to extend the term of the loan.
2. Choose the loan terms that suit you best
Most bad credit loans have repayment periods of between two and five years (with the exception of payday loans, which are due on your next payday). It can be tempting to opt for an extended term loan product to get a more affordable payment. However, making the balance longer means you’ll pay more interest over time, making a shorter loan term ideal if you want to pay off what you owe faster and save a lot of interest.
Use a loan calculator to calculate the difference between monthly payments and interest charges for various repayment periods. This will give you a better idea of what to expect and help you choose the best loan term for your financial situation.
3. Pre-qualify or try to determine what your offers would be
Get prequalified online with the lenders you are considering to assess your chances of approval. The process is simple and can usually be completed online in minutes without hurting your credit score, as it only requires a soft credit check. If there’s a match, you can view potential loan offers, including loan amount, term, interest rate, and monthly payment, before moving forward with a formal request.
4. Calculate loan costs
Once you’re prequalified with a few lenders, compare the interest rates on offers for the same loan amount and repayment period to determine which are the most competitive. Evaluate each lender’s fees before making a formal request.
You might find that one lender charges a higher interest rate but far less in fees than another option with a much lower rate. And in this case, they might be the best choice to minimize overall borrowing costs.
5. Review customer experience and reviews
The lender should offer customer support by phone, online, or both at times that suit your busy schedule. It’s also essential that the application experience is seamless and that the lender allows you to manage your loan online.
Also, you should look online for reviews to get an idea of the level of service they offer. It’s not unusual to see a few negative reviews here and there, but most should indicate a satisfying customer experience. Otherwise, you may want to look elsewhere to borrow the funds you need.
6. Identify helpful perks
In addition to giving you a seamless application experience and fast funding, some bad credit lenders offer other perks to help improve your overall financial health. For example, you can have free access to your credit score directly from the online dashboard. Or there may be an assortment of financial tools, including calculators and educational articles, to provide the information needed to make sound financial decisions in the future.
7. Beware of predatory lenders and scams
Loans for bad credit are readily available from several financial institutions, both physical and online. Not all lenders are the same and some should be avoided. Some lenders may even be scammers.
Avoid lenders that aren’t registered to do business in your state, offer guaranteed approvals without a credit check, or require an upfront payment to approve you for a loan. It is equally important that they have a secure website and a physical address.
At the end of the line
Several loan options for bad credit could be suitable. But before applying for a loan, research loan types and shop around for quotes. When narrowing down your options, you also want to evaluate lenders based on their reputation, loan costs, terms, and customer service to find the best one for you.