Loans for people with bad credit: Your options

A young businessman is drinking coffee and working on a digital tablet in a public park.Image: A young businessman is drinking coffee and working on a digital tablet in a public park.

In a Nutshell

Loans for people with so-called bad credit may carry unfavorable terms, including high fees and interest rates. Before you borrow money, take a hard look at your loan terms and options, which could include payday loans, car title loans, peer-to-peer lending and personal loans. And keep this in mind: Just because these options are out there doesn’t mean they’re the right choice for you.
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When you have bad credit, qualifying for loans can be a challenge.

Lenders use your credit as a way to determine how likely you are to pay back a loan. Some lenders may not want to loan you money if your credit reflects some financial bumps in the road — or if you haven’t had time to build a credit history.

The good news is that there are different types of loans for people with bad credit. The bad news? There are also lenders that prey on people with bad credit, offering financing with very unfavorable terms that could trap applicants in a cycle of debt.

The key is to do your research and read the fine print to avoid predatory lenders. Instead, you should aim to find lenders that are affordable — and that may even help you build your credit. Let’s review what kinds of loans for people with bad credit may make the most financial sense for you.

What exactly is ‘bad credit?’

First things first: It’s important to understand what “bad credit” really means.

Bad credit typically refers to low credit scores. Things like late payments or maxed-out credit cards can bring your scores down. A few things that could help you improve your credit scores include developing a history of on-time payments and keeping your credit utilization low.

Different credit-scoring models, like VantageScore and FICO, use different formulas for determining your scores, typically on a scale of 300 to 850, and may identify a specific range as “bad credit.” FICO, for example, considers scores between 300 and 579 as “poor.” Each lender can also define bad credit differently.

If you want more loan options with better terms, you’ll want to work on improving your credit.

Loans for people with bad credit

Here are the pros and cons of some of your loan options if your credit falls within the bad credit zone.

Payday loans

Payday lenders typically don’t look at your credit when deciding if you’re eligible for a loan.

Payday loans are for short terms and often for $500 or less. This type of loan is typically due by your next payday and often carries extremely high fees. In fact, the Consumer Financial Protection Bureau has found that the fees for a typical two-week payday loan can equate to an APR of almost 400%. Payday loans are banned in some states, while other states set limits on payday loan sizes and fees.

Car title loans

Car title loans are also short-term loans that may be an option for people with bad credit. Lenders may be more willing to offer these loans because a borrower uses their vehicle’s title as collateral to secure the loan.

Car title loans typically have to be repaid within 30 days or less, and are often for an amount that is 25% to 50% of the value of the vehicle you’re borrowing against. In fact, the Federal Trade Commission warns that most car title loans have APRs in the triple digits.

Finally, these loans can be especially risky because if you can’t pay back the title loan, the lender could repossess your vehicle, so that’s important to keep in mind if you’re thinking of going this route.

Personal loans

Personal loans are installment loans issued by banks, credit unions and online lenders. This type of loan can be secured or unsecured. An unsecured loan doesn’t require collateral, while a secured loan requires you provide property, like a certificate of deposit or vehicle, which the lender can take if you can’t repay the loan.

Secured loans could be easier to qualify for, depending on a number of factors. But some secured loans — and many unsecured ones — are available only to borrowers with good or excellent credit.

There are loans for people with bad credit, though. While these loans usually have higher interest rates than personal loans for people with good credit, they can be cheaper than payday or car title loans.

Personal loans can often be made for larger amounts than payday or car title loans, and they usually have longer repayment periods. It’s not uncommon for borrowers to repay personal loans over 12 to 84 months.

Peer-to-peer lending

Peer-to-peer lending — also known as marketplace or P2P lending — is a system where individual investors fund loans to would-be borrowers. Requirements for these loans vary, but your credit might not be scrutinized as closely by P2P lenders as by traditional financial institutions like banks.

Like other personal loans, those issued using peer-to-peer lending networks often have lower interest rates than payday or car title loans and can offer both longer repayment terms and larger loan amounts.

Payday alternative loans

Payday alternative loans are short-term loans available at some federal credit unions. They typically have much lower fees and annual percentage rates than the typical payday loan.

Several rules apply to payday alternative loans, including …

  • Interest rates can’t exceed 28%, though interest rates may change during the life of the loan.
  • Loan amounts may be up to $2,000.
  • Loans must be repaid within one to 12 months.
  • Application fees can’t be more than $20.

Getting a loan could help improve your credit

If you qualify for a loan with bad credit, you may be able to use it to help build your credit. You can start doing this by paying your loan payments on time. This will help you develop a record of a positive payment history, which is an important component of your credit scores.

But in order for your loan payments to boost your credit, make sure your lender is reporting your record of on-time payments to the three major consumer credit bureaus. Payday lenders often do not report to the credit bureaus, so taking out these loans may not help you improve your credit. That’s yet another reason to consider alternatives to payday loans.

Bottom line

If your credit history contains negative marks and you need to borrow money, there are some options out there — but they’re not all good.

Look closely at the terms of each type of loan, choose carefully and have a plan for paying it back. Some loans might even help you build — or rebuild — a positive credit history.

About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbo… Read more.