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It happens to all of us: situations occur where we need extra cash, whether it’s for a car repair, an unexpected medical bill or something else. Whatever the reason you find yourself here, if you have bad credit and limited options, you may be considering a ‘bad credit’ loan as an avenue to get you the money you need quickly.
You’re not alone, either. Many people end up in similar situations. Especially for those with minimal savings, it’s tough to pay for unplanned bills or cover living expenses if you lose a job—which can also impact your credit.
However, before you make the decision to apply for a ‘bad credit’ loan, make sure you understand the risks and other options available. Some ‘bad credit’ loans offer better terms than others, too. Our guide walks you through everything you need to know about ‘bad credit’ loans, and how Lexington Law Firm can help you repair your credit score.
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‘Bad credit’ loans are personal loans offered to individuals with weak, poor or nonexistent credit. The loans can be used for anything from medical bills and home repairs to the purchase of a used car. A range of financial institutions provide ‘bad credit’ loans—such as online lenders, credit unions and banks.
In general, ‘bad credit’ loans tend to have higher interest rates and fees, along with less than desirable terms for the borrower. When you have poor credit, lenders interpret this to mean you’re a higher credit risk and more likely to default on a loan than someone with good credit. To offset this risk, lenders charge much higher interest rates. If you declare bankruptcy or otherwise default on a loan, the lender has that additional money from the high interest rates to cover the loss.
Therefore, borrowers with good credit tend to be approved for loans with better interest rates and terms. Each lender gets to choose their own criteria for deciding whether to lend to someone and with what terms, but there are some general guidelines for credit score ranges that can be helpful for you to know.
When shopping for lenders who offer ‘bad credit’ loans, these are the four main costs to consider.
The fee percentages and amounts range depending on your loan terms and lender policies. Before signing, read through these policies on your loan agreement.
A bad credit score is generally considered anything below 670 on the FICO® scoring scale. (A score between 300 and 579 is “poor,” while a score between 580 and 669 is “fair.”) A low score might be due to things like failing to make payments on time, maxing out your credit cards or having a negative item, like a foreclosure, on your report.
Below are the official FICO score ranges. Other scoring methods, like VantageScore®, might have slightly different ranges. Remember that when it comes to applying for a loan, these ranges are only estimates, as each financial institution has a slightly different definition of good and bad credit.
If you have a credit score in the 500s, qualifying for some loans might be difficult or costly. But sometimes, you can still be approved—even with a low score—depending on an individual lender’s criteria.
Unsure of your credit score? You may be able to get a copy of your score through your bank or credit card, or a free online service. You can also purchase a credit score check from any of the three main credit bureaus: Experian®, Equifax® or TransUnion®.
Getting a loan with bad credit can present more challenges, but it’s still possible. Here are some steps to take to qualify for a loan with bad credit:
Credit repair involves working to use credit responsibly and addressing errors on your credit report that shouldn’t be there to begin with. Many Americans have inaccurate credit reports and scores.
However, the law allows individuals to challenge any questionable items in their credit reports, and getting these removed can often lead to credit score improvements. Lexington Law Firm helps consumers address these questionable negative items.
Bad credit’ loans are available at a range of institutions, including those where you would usually apply for other loan types. The three most common institutions are:
When comparing institutions, consider whether you prefer an online service or a traditional establishment. Most credit unions and banks offer online loan applications, but some may require you to finish your applications in person. With online lenders, the loan application progress is fully online and streamlined.
| Type of ‘bad credit’ loans |
What it is |
Pros |
Cons |
|---|---|---|---|
| Secured loans |
A loan granted to borrowers who provide collateral. |
Lower interest rates |
Risk collateral asset |
| Unsecured loans |
A loan granted to borrowers qualified based on credit score and history. |
Don’t need to risk collateral |
Higher interest rates |
| Joint personal loans |
A loan granted to two or more borrowers based on joint financial history. |
Lower interest rates |
Joint responsibility |
| Cash advances |
A short-term loan that you can take out in cash. |
Quick solution for cash |
Higher interest rates |
| Bank agreements |
A short-term loan or opportunity to overdraw a bank account. |
Quick solution for cash |
Must have a good standing relationship with bank |
| Home equity loans |
A loan granted to borrowers who use their home as collateral. |
Large sum of money |
Risk home as collateral |
Most loans are categorized as either secured or unsecured. Secured loans are granted to borrowers who own a valuable asset—generally referred to as collateral. Most secured loans use vehicles as collateral, but other eligible assets include a house, boat or savings account. With a secured loan, if you’re unable to pay back the amount you borrowed, the lender is legally permitted to seize your asset.
Secured ‘bad credit’ loans often have lower interest rates and can provide larger cash amounts than unsecured loans, but keep in mind that the lender can assume possession of your asset if the loan is not repaid.
An unsecured loan is granted based on the borrower’s credit score and history rather than collateral—meaning the loan doesn’t require an asset like a car or home to be approved, and the lender can’t seize an asset if the loan isn’t repaid. Unsecured loans are often harder for borrowers with bad credit to be approved for, but it’s still possible. Interest rates for unsecured loans depend on the lender but are typically higher than those of secured loans.
Both secured and unsecured ‘bad credit’ loans require completing a contract if you receive approval. You’ll have to agree to the terms, rates and conditions of the loan. If you fail to repay your loan, the lender may sell your account to a collection agency, and the negative mark will likely appear on your credit reports and damage your credit. That’s why it’s important to be confident you can repay a loan, so it doesn’t negatively impact your credit history for years to come.
A joint personal loan is granted to two or more borrowers who are both legally responsible for completing loan payments. Joint loans are ideal for borrowers who have a poor credit history and don’t meet the requirements of the personal loan on their own. With a joint loan, lenders consider both borrowers’ financial histories.
A joint personal loan can also provide a lower interest rate, depending on the joint-borrower’s credit history. However, the joint borrowers are equally responsible for paying off the loan. If payments aren’t made, all parties’ credit can be negatively affected.
A cash advance is granted by a credit card institution, which allows borrowers to take out cash. The cash advance can only be withdrawn to a certain limit, usually lower than the current credit card balance. A cash advance is ideal for those who need cash urgently. However, it runs the risk of a much higher interest rate and additional fees, such as a cash advance fee.
A bank agreement can be granted to those with a good, long-standing relationship with their bank. Your bank’s policy may offer the ability to overdraw your account to a certain amount or offer a short-term loan. Not all banks offer these agreements, so contact your bank to see what’s included in their policy.
A home equity loan is granted using the borrower’s home as collateral. This loan is ideal for those who need a large sum of money and have built equity in their home. This should be a last-resort decision because if you fail to make the monthly payments, you risk losing your home.
Being selective with your lender will save you plenty of stress and money. Interest rates and repayment terms differ among lenders, so doing your homework is well worth your time. Be sure to follow these steps when looking for a ‘bad credit’ loan.
What annual percentage rate (APR) does the lender offer? How quickly do you have to repay the loan? What happens if you don’t repay the loan on time? Read through all of these details closely before signing a contract.
Payday and title loans often have extremely high interest rates and are more difficult and costly to repay than other loans. Personal loans, for example, usually have longer repayment schedules and lower interest rates.
Any responsible lender will verify your information to confirm your ability to repay the loan. A predatory lender aims to catch you with a high-interest loan that you won’t be able to repay—giving them the upper hand to seize more money or your collateral.
A responsible lender will review details like your previous bank statements and proof of income. And no matter the circumstances, a lender should always perform a credit check (also known as a credit inquiry). If a lender doesn’t check your credit, they’re not interested in your ability to repay the loan, which signals that they may be a dangerous or predatory lender.
A hard credit inquiry can negatively affect your credit, but the temporary mark can be worth it if you need to be approved for a loan.
In addition to reviewing interest rates and terms, look for a loan company that is reliable, is trustworthy and abides by lending laws. If you can, read other borrowers’ reviews of the company to make sure they’re an honest lender.
Some lenders will try to lock you into a short-term repayment schedule, which is often difficult to repay, especially if you don’t have a lot of extra cash on hand. For example, payday lenders may only give you two weeks to pay back an entire loan. Instead, look for a 12- or 18-month repayment schedule. You’ll have more opportunities to make payments on time, and the repayment amounts will often be smaller.
If you make timely payments on your loan, it can improve your credit in the long term. However, the lender needs to report your payments to the three main credit bureaus (Experian, Equifax and TransUnion) to make it count. Check with your potential lender to ensure they report on-time payments.
Before agreeing to a ‘bad credit’ loan, be sure you’re aware of the associated risks and costs.
First, a ‘bad credit’ loan often comes with higher interest rates—meaning you’re paying back much more on a loan than someone with good credit. This extra cost can be quite steep. Depending on the size of your loan and interest rates, you could pay hundreds, thousands or tens of thousands more than if you had better credit.
Second, if you choose an untrustworthy lender—like one who doesn’t check your credit and ability to repay—you could end up with worse credit than when you started. Such lenders are considered predatory because they aim to trap you in a loan you won’t be able to repay. That’s why we strongly recommend choosing a lender carefully.
When considering a ‘bad credit’ loan, many people feel stuck with their current credit score. If you’re in this situation, consider exploring your options. For example, is there a family member or friend who could lend you money while you work to repair your credit? There are several ways to fix bad credit, most of which take a couple of months or more.
If you can’t make important payments, such as a medical bill or mortgage payment, consider enrolling in a payment plan or requesting an extension. For the payment plan, look for plans that are low-interest or interest-free so you can potentially save on interest charges.
If you urgently need the money, such as paying off an unexpected expense, consider borrowing money from a family member or reliable friend. To maintain healthy boundaries, work with them to create a repayment plan that includes payment frequency, interest and loan terms.
Credit unions are financial institutions owned and operated by their members. Credit unions tend to have more flexible loan eligibility criteria. To apply for and receive a loan, you’ll need to be a member of the credit union. Credit union membership requirements vary, so shop around to find the ones you are eligible for.
Found a highly favorable personal loan with low interest rates and fees that your bad credit score can qualify for? Unfortunately, this loan could potentially be a scam, so it’s important to do thorough research to protect yourself.
Here are the common signs of a loan scam:
Below are commonly asked questions about bad credit loans.
The minimum credit score you need for loan approval will depend on the lender. According to both the FICO and VantageScore scoring ranges, a 550 is considered poor and very poor, respectively. It’s not likely that a lender will approve an applicant with a credit score in that range.
However, there are other options that can help you become eligible for a loan. Ask a trusted friend or family member with a good credit history to cosign onto a joint personal loan. Their credit history is evaluated, increasing the potential of your application being accepted. You can also apply for a secured loan and use a valuable asset, like your car, as collateral.
The amount of money you can borrow with bad credit will depend on your lender, the type of loan you’re applying for and other variables like collateral. However, personal loans usually range from $1,000 to $50,000.
You can receive a loan with no credit check. However, these types of loans, also known as payday loans, can be predatory and have very high interest rates. We recommend avoiding these types of loans and shopping for loans from reputable lenders.
With any loan, you run the risk of paying more than what the loan is worth. A borrower with bad credit will also likely have higher interest rates than those with good credit history. This can be difficult for those already dealing with debt and having a hard time completing payments.
While ‘bad credit’ loans may seem like one of your only options for getting the cash you need, know that bad credit doesn’t have to be permanent. You can take steps to fix your credit and work to improve your score over time.
By taking positive actions, such as getting errors removed from your reports and making payments on time, your credit can begi
