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When you borrow a fixed amount of money to be repaid on a set schedule, that’s called an installment loan.
Mortgages, auto loans and personal loans are examples of installment loans. Installment loans involve a set timeline for repaying the loan. And monthly payments are calculated so that you repay the loan on schedule.
While installment loans are common, not all have good terms. Good credit can make it easier for borrowers to qualify for a loan and possibly get a better interest rate. But when you have lower credit scores, you may end up with an installment loan with a higher interest rate and expensive fees.
Whenever you’re shopping for any kind of credit, it’s important to understand the terms you’re agreeing to — and also to know where your credit stands. In this article we’ll keep the focus on personal loans. Here are some things to be aware of as you’re looking for this kind of installment loan.
What are installment loans for bad credit?
Installment loans for bad credit are personal loans specifically designed for people with lower credit scores, or imperfect or no credit history.
Some online lenders market installment loans for borrowers with low credit scores. Some local banks and credit unions may also consider applications for personal loans for bad credit.
Personal loans for credit-challenged borrowers may be secured (meaning borrowers must put up collateral in order to get a loan) or unsecured (no collateral required). But higher interest rates are a common characteristic of both secured and unsecured installment loans for borrowers with bad credit.Secured and unsecured personal loans: What’s the difference?
Common features of bad credit installment loans
Bad credit installment loans function just like any installment loan.
- Loan amounts range from a few hundred to a several thousand dollars.
- Repayment schedules are set up as a series of payments over a fixed timeline, ranging anywhere from a few months to several years.
- Fixed or variable interest rates could apply. Fixed rates means interest rates that can stay the same for the life of the loan. Variable interest rates are tied to a financial index, so your interest rate (and therefore payments) could fluctuate over time.
Interest rates and terms can vary from lender to lender, but bad credit installment loans typically have…
- Higher interest rates. Lenders often charge borrowers with lower credit higher interest rates than they give to borrowers with strong credit. For example, a lender may tailor specific loan terms depending on a borrower’s credit history and other factors.
- Higher (or more) fees. While any personal loan could come with fees, bad credit installment loans often have higher fees. For example, a lender specializing in bad credit loans may charge an administrative fee while a lender offering loans to borrowers with better credit may charge no administrative fee at all.
Installment loans for bad credit vs. payday loans
While installment loans for bad credit may have higher rates and less-borrower-friendly terms, these loans are not the same as payday loans. Here’s how installment loans for bad credit and very short-term payday loans differ.
|Installment loans for bad credit||Payday loans|
|APRs may be wide ranging but typically top out around 36%||APRs can effectively be close to 400%|
|Repaid in a series of fixed payments over a period of time||Repaid in a single lump sum with your next paycheck (typically two to four weeks after you get the loan)|
|Loan amounts may range from several hundred to several thousand dollars||Loans are for very small amounts (typically $500 or less)|
|Lender usually makes a hard inquiry on your credit||Lender usually does not do a hard inquiry on your credit|
|Loan repayment history may be reported to credit bureaus (could help you build your credit)||Typically don’t report repayment history to credit bureaus (won’t help you build your credit)|
Beware: Some lenders of short-term loans may blur the lines between an installment loan and a payday loan. For example, you might see “installment loans” advertised for small amounts with repayment terms ranging from one to 12 installments and APRs as high as 749%. And both online installment loan lenders and payday lenders may promise delivery of funds on the next business day.
So when shopping for a loan, don’t just focus on how the lender labels it — look carefully at the APR and repayment terms to know what kind of loan you’re getting and if it’s right for you.
Eligibility for installment loans for bad credit
Eligibility requirements for installment loans for bad credit vary by lender. You’ll usually need to provide at least the following:
- Your full name
- Your age and proof of identity
- Your Social Security number
- Details about your income
Lenders may let you find out if you’re likely to qualify and check your estimated rates without a hard credit inquiry. When shopping for loans, look for lenders that provide this info with only a soft credit inquiry, as too many inquiries could hurt your credit scores.Learn more: Hard credit inquiry vs. soft credit inquiry
Alternatives to installment loans for bad credit
While installment loans for bad credit will almost always have better terms than payday loans, interest rates can still be pretty high.
Before applying for a new loan, you might want to explore some alternatives to borrowing — like seeking credit counseling, negotiating with your current creditors for more time to repay what you owe, or shopping around for a lower-interest credit card.
Payday alternative loans, which are small-value loans issued by some federal credit unions, can also be a more affordable alternative — but you’ll need to be a member of the credit union you’re applying with. And you’ll still need to look closely at the terms of these loans.
Because rates can be high on many bad credit installment loans, shopping around to find the right lender is especially important if you need an installment loan, or any kind of credit, and you have less-than-perfect credit scores.
Today, borrowers with bad credit have many options for installment loans thanks to online lenders. But before you decide to apply for a loan with the high interest rates that typically go along with these loans, make sure you explore all potential options to figure out which will work for you.
And be careful not to fall for marketing that tries to disguise a very-high-interest, short-term payday loan as an installment loan. Always check loan terms and look for financing with favorable interest rates and a repayment schedule that works for you.