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Whether the month lasts longer than your paycheck does or a sudden emergency expense pops up, sometimes you may need a small loan for extra cash.
The good news is that there are plenty of options for small loans with bad credit. The bad news is that many of these loans are financially risky and can put you in a worse position than when you started.
That’s why you need to be strategic about getting a loan if you have bad credit. We’ll review some options and what financial terms and fees you should be aware of.
Loans to avoid if possible
Here are some common types of loans for people with bad credit, and why you may want to think twice before signing on the dotted line.
It might be tempting to go to a payday lender. After all, they usually don’t even check your credit reports, and you can get your money immediately.
Payday loans are short-term loans that are typically made for $500 or less and are usually due on your next payday. You’ll often hear of them as a way to bridge a financial gap until you get paid again.
“Payday loans have long been considered a predatory product and even been banned in some states,” says Thomas Nitzsche, a credit expert with Money Management International, a National Foundation for Credit Counseling agency. “The reason is that they often carry very high interest rates and that consumers often find themselves stuck in a cycle of payday loan debt.”
Like payday loans, title loans can have very high fees. With a title loan, you pledge the title to your car in exchange for the loan.
Title loans can cost you your vehicle if you fail to pay up. And because the higher interest rates on these loans can make them difficult to pay off, that’s a risk you may not want to take. In fact, according to a 2016 Consumer Financial Protection Bureau report, 20% of title loan borrowers have their vehicle repossessed.
Pawn shop loans
You may also be familiar with pawn shop loans. With these loans, you’ll bring in an item of value in exchange for a small loan up to the value of the item.
If you want the item back, you have to repay the loan before the term is up (the term varies state to state). Even then, you may have to pay expensive fees and interest. If you don’t repay the loan, the pawn shop can keep the item and sell it (and typically none of the sale proceeds go to you, the former owner).
Better loan options
These options may be a step up, but you’ll still want to plan how these loans will fit in your larger financial picture so you can make financial progress once the loan is paid off.
Payday alternative loans
You can explore options at credit unions for a small loan. Some federal credit unions offer affordable loans called payday alternative loans.
A payday alternative loan must meet several requirements, including interest rates that don’t exceed 28%, loan terms of one to six months and loan amounts of $200 to $1,000.
“This could be good for someone who is willing to hunt for this product, as it’s not common,” Nitzsche says.
Personal loans from online lenders
Online lenders are another option for small personal loans for people with bad credit.
Personal loans are installment loans where you borrow a fixed amount of money and pay off the debt over a predetermined number of payments.
Some of these lenders are peer-to-peer lenders, where loans are funded by individual investors instead of traditional financial institutions.
In general, the better your credit history the lower your interest rate. But even a loan from an online lender will typically be much cheaper than getting a payday loan.
Alternatives to small loans for bad credit
If you can’t qualify for a loan or find another way to bridge your cash needs, there are a few other options.
Budget cutting or payment assistance
If you need a small amount of cash, the best scenario may be to free up money elsewhere, if you’re able.
“If you are someone with poor credit but have assets that can be liquidated, then perhaps you can sell items of value,” Nitzsche says. “Your credit card company may offer a hardship plan to reduce interest and payment. Your landlord might be willing to offer a one-time extension or break up your payments into two parts.”
In these cases, you don’t even need to take out a small loan at all.
You can inquire with your employer about getting a short-term advance from your paycheck.
“This would depend on your relationship with the employer, and likely its size,” says Nitzsche.
Another option for a small cash advance is getting one right from your credit card. This is a way to withdraw some of your available credit as cash, instead of purchasing something. Many credit cards offer this feature, although lenders often charge high interest rates — but nothing close to payday loans.
Home equity line of credit
If you own your own home, another option is taking out a home equity line of credit, or HELOC for short. This allows you to tap into the equity you’ve built up in your home to bridge short-term cash needs.
When you apply for a HELOC you’ll likely get checks or a credit card you can use to pay for purchases during a special “draw period.” If you choose to spend some of this money, you’ll need to make minimum payments on the outstanding balance until the draw period ends. Then, the line of credit often converts into a “repayment period,” where you repay any outstanding balance over time or all at once, depending on your HELOC’s terms.
Friends and family
Finally, if all else fails, you can consider asking your friends and family for a small loan. We think it’s a good idea to get this in writing with terms that include monthly payment amounts, interest charges and due dates. It’s a good idea to treat the agreement like it’s a loan from a traditional lender.
The downside of this option is that if you fail to pay the loan back, you could hurt your relationship with those closest to you.Family loans: What to know before borrowing or lending money
If you truly need one, it is possible to find a small loan with bad credit. The key is to find the best option that works for you while avoiding predatory payday and title loans.
Once you’ve paid off the loan and the crisis has passed, make sure you make a budget and work toward saving up an emergency fund. That way, the next time you need a bit of cash, you’ll be able to give it to yourself right from your own bank account.