Are you in a bind until payday and a cash advance isn’t enough to help you get by? A bad credit loan may be a viable option. But before you apply, it’s important to understand how they work, what your options are, and how to evaluate lenders.
What Are Bad Credit Loans?
Bad credit loans are designed to help consumers with less than perfect credit get the cash they need when life happens. Consumers with past credit troubles know first-hand how difficult it can be to get approved for a loan. Most traditional lenders have stringent qualification criteria and if your financial profile falls short, that equals an automatic rejection. But even if the traditional lenders have said no, a bad credit lender may be able to say yes.
The application process for bad credit loans is relatively simple. All you have to do is enter information about your finances and employment in your application and you could receive an answer in just minutes. If approved, you will receive the funds in your account in as little as one business day. Some bad credit lenders also offer same-day funding.
Types of Bad Credit Loans
There are two types of bad credit loans to choose from: unsecured or secured.
Unsecured Bad Credit Loans
Unsecured bad credit loans do not require any form of collateral to get approved. Instead, you sign a legally binding contract to make timely payments on your loan. In the event you default, the lender cannot take possession of your personal assets to remedy their losses.
Instead, they will report the account to the credit bureaus and use collection agencies to pursue you. The lender may also sue you in a court of law and possibly get a judgment against you for the amount owed. Both collection accounts and judgments have harsh consequences for your credit rating and the latter could tarnish your finances if wage garnishment is implemented (meaning that a court orders your employer to send a portion of your paycheck directly to the lender to whom you owe money, until your debt is paid off).
Common types of unsecured bad credit loans include:
- Personal installment loans: The proceeds for personal installment loans can be used to cover an array of expenses.
- Student loans: These loans are used to cover the cost of higher education.
Secured Bad Credit Loans
When you take out a secured bad credit loan, it is backed by collateral. This protects the lender from the risk of loss in the event you default on the loan. But unfortunately, it also means that you stand to lose your vehicle or asset that was used to obtain the loan, if you default on your repayment.
Common types of secured bad credit loans include:
- Auto title loans: The loan amount is based on the value of the vehicle and your ability to repay. Bad credit is accepted because the lender isn’t concerned about your creditworthiness since they have collateral to cover the losses if you don’t pay. The lender takes possession of your vehicle’s title when the loan proceeds are disbursed, but the vehicle is yours to keep. The title must be free and clear of any encumbrances. When the loan is paid in full, the lender will return the title to you. But if you fall behind on loan payments or vanish into thin air and ditch payments altogether, the lender will repossess and sell your vehicle to pay off the loan.
- Pawnshop loan: You won’t need to provide any information about your income when applying for a pawnshop loan, and there aren’t any credit checks. Instead, the amount you’re approved for will be based on the value of the item you’re using to secure the loan. The pawnshop will require that you hand over the asset in exchange for loan proceeds. The item will be held until the loan is paid in full. If you’ve satisfied your outstanding obligation, you are free to pick up your property. Otherwise, the pawnshop will retain possession and sell the item to recoup the loan amount.
- Payday loans (cash advances): Unlike other secured bad credit loan products, payday lenders do not require that you put up your car or asset to secure funding. Instead, they’ll ask that you write a postdated check or provide your banking information electronically. You’ll be expected to repay the loan plus any applicable interest and fees by the due date, which is usually the next payday. And if you don’t do so, they’ll cash your check, which could result in additional penalties and fees from the lender. Payday lenders will also allow you to refinance or extend the loan if you know you won’t be able to pay the loan in full when your next payday rolls around. However, doing so is costly and could result in you owing more in interest than the actual value of the initial loan.
Key Benefits of Bad Credit Loans
More cost-efficient than payday and title loans
Bad credit loans are usually more expensive forms of credit due to the risk you pose to the lender. Having a lower credit score is an indicator that you’ve had trouble making timely payments on your debts in the past. For this reason, lenders increase the interest rate to protect themselves in case you default on the loan.
However, the interest rate on installment bad credit loans is only a fraction of what you’d pay for a payday loan or cash advance. In fact, payday loans can have APRs of 400 percent or more in some states, which is far more costly than what you’d find for installment bad credit loan averages.
(Quick note: if your credit score is low due to inaccuracies or untimely information, file disputes with each of the credit bureaus as soon as possible. That way, your credit score will be an accurate reflection of your credit history).
Longer repayment periods
Most consumers with bad credit resort to cash advances because they are relatively easy to get, offer fast funding, and don’t require a credit check. Unfortunately, they must be repaid by the next pay period or you’ll incur penalties and even more interest charges. But with bad credit installment loans, you’ll have more time to pay, usually ranging from six months to three years. Plus, the likelihood of default will be lower since your monthly payments will be more affordable.
The opportunity to rebuild your credit rating
Some bad credit lenders report payment activity to the credit bureaus. If you’re able to manage the loan responsibly by making timely payments each month, your credit score could receive a generous boost. That’s assuming you properly manage all other components of your credit profile.
Do You Qualify for a Bad Credit Loan?
Lenders that specialize in bad credit loans have relatively more lenient qualification criteria than traditional brick and mortar lenders. They understand that you are more than a credit score and use other criteria to determine whether or not you’ll be approved.
When applying, expect to provide the following:
- Your Social Security Number
- Your home and work phone number
- Proof of income
- Banking information, including your routing and account number if the lender requires that you make payments via electronic funds transfer (EFT)
Unfortunately, major issues with your credit could prevent you from qualifying. These include a current or recent bankruptcy, multiple high-valued collection accounts, or judgments. Why? Well, the lender has to protect themselves against the risk of default, and you may pose too much of a risk to extend a loan.
Where to Find Bad Credit Loans
Bad credit loans are available through brick-and-mortar and online lenders. Some credit unions also offer these loans to credit challenged consumers, and they have less stringent qualification criteria than brick and mortar banks.
But before you apply, it may be worthwhile to explore your loan options through an online loan search and comparison tool. Doing so will allow you to have your information shopped around to a vast network of lenders and be matched with the most competitive loan offers that best suit your needs.
How to Evaluate Lenders
- Does the lender offer fixed-rate installment loans? Payday loans are convenient, but installment loans will save you more in the long run in the form of interest and fees. But you want to confirm the rate is fixed so the payment doesn’t increase out of the blue during the repayment period.
- Is the evaluation criteria fair? Look for a lender that evaluates your loan application based on your ability to repay the loan and not some arbitrary calculation. At a minimum, they should do a soft credit pull to get an idea of how you’ve managed debt in the past and gauge your ability to repay based on all your other current debt obligations. A soft inquiry won’t hurt your score, and it demonstrates that the lender is doing their due diligence to make sure they don’t give you a loan that will easily cause you to be overextended. Otherwise, you know their only motive is to collect interest and fees.
- Is the loan offer adjustable? The idea is to make you as comfortable as possible with the payments, and the longest term isn’t always best. In fact, the longer you pay on the loan, the more in interest the lender will collect. So, it’s best to take the shortest term possible without getting in over your head with the payments or pay the loan off early. Just be sure to confirm that there are no prepayment penalties.
The Bottom Line
Having a bad credit score isn’t the end of the world, and it’s highly possible that you’ll still qualify for a loan. However, you’ll have to do a little legwork to find a lender that specializes in helping those with less than perfect credit secure the funding they need.