In a NutshellSome lenders will consider people with lower credit scores or shaky credit for personal loans that can be paid back in installments, rather than on their next payday. But these loans can come with high interest rates and fees.
You may be able to get a bad credit personal loan that isn’t a payday loan, but it probably won’t come cheap.
Although some personal loan lenders do offer loans that aren’t payday loans to people with less-than-perfect credit, the interest rates and fees can still be pretty steep.
Learn more about how to approach getting a personal loan if your credit is limiting your loan options but you want to try to do better than a payday loan.
What is a bad credit loan?
The term bad credit loan is just an informal way to describe a loan that’s marketed to people with credit issues — things like late payments, high credit utilization, foreclosure, accounts in collection or bankruptcy. Lenders typically see these issues as signs of risk, and they can make it tough to get approved. With so-called bad credit loans, many people with issues like these are still considered.
One kind of bad credit loan is a payday loan. Payday lenders typically don’t run credit checks, so a lot of people with rough credit turn to them. But high fees (which can equate to sky-high interest), other costs and short repayment terms make these loans difficult to repay on time, trapping many people in a cycle of debt.
If you’re strapped for cash, bad credit personal loans that are installment loans, not payday loans, can be a better option, depending on the terms. While payday loans typically must be repaid on your next payday, installment loans can allow for a longer repayment period that’s more manageable. The catch: The costs can still be high if your credit isn’t great.
Should I get a bad credit personal loan?
If you’re facing a financial emergency and you’re considering a bad credit personal loan, make sure you’re clear on the costs.
Interest and fees that equate to APRs around 400% are common for payday loans. With a personal loan, you’ll probably still have to pay a pretty high interest rate if you don’t have good credit. One thing you can do to minimize those costs is to pay more than the minimum payment due on your loan each month. Just make sure your loan doesn’t have a prepayment penalty before paying more than the minimum amount or else you could be hit with fees.
In addition to high interest rates, you may be charged additional fees, including …
- Origination fee: This is a one-time fee that’s charged to process your loan application. It’s added to your loan amount and paid when your loan funds are issued or taken from your loan proceeds.
- Late fees: If you don’t make your payments on time, you might have to pay a fee.
- Insufficient-funds fee: You may be charged a fee if you don’t have enough money in your account to cover an automatic payment or check.
- Prepayment penalty: Some lenders charge a fee for paying off some or all of the loan early.
Lenders that offer loans to people with bad credit often have shorter repayment terms compared with other lenders. Again, look at each option carefully. Consider what monthly payment you can handle, and for how long.
And remember: A longer repayment term can make a loan seem more affordable. But with a high interest rate, the total cost of over the term of the loan will add up.
Personal loans can help you build your credit when you make your payments on time, if lenders report payments to the three major credit bureaus — so it’s a good idea to check with your lender to see if it does. Payday loans aren’t usually reported so they can’t help you build your credit.
What are other alternatives to payday loans?
If at all possible, it’s a great idea to hold off on borrowing while you save up or work on building your credit so you can qualify for a lower interest rate in the future.
But if you really need the cash and want to avoid the costs of a payday loan or a bad credit personal loan, here are some other options.
- Credit cards — While credit cards can be more expensive than some other forms of credit, the interest rate on your card will be lower than what you’d pay for a payday loan. If you can’t use your card and must have cash, consider a credit card cash advance. Again, the cost might be high — but it’ll probably be less than what you’d pay for a payday loan.
- Payday alternative loan — Some federal credit unions offer short-term loans to help members who need cash quickly. You may be charged an application fee of up to $20, but interest rates on PALs are capped at 28%, which usually makes these loans more manageable and less costly than payday loans. PALs are available in loan amounts of $200 to $1,000 and must be repaid in one to six months.
- Side gig — Taking on an extra job to pay for unexpected expenses can help you avoid expensive loans that may cause you to accumulate more debt.
Before taking out a loan of any kind, map out your budget to decide how much (if anything) you can afford to borrow and pay back over a certain period of time.
If you can hold off, consider waiting to take out a loan until you’ve had a chance to improve your credit, which can increase your chances of being approved or possibly qualifying for a lower interest rate.
But if you can’t wait, be sure to compare the costs of all your options before deciding the best way to get the extra cash you need.