If you’re looking to cover an emergency expense or pay off high-interest debt, you may be considering a personal loan. These loans allow you to get the money you need without putting up any collateral. And since you can pay off these loans over 2-5 years, they could take some financial pressure off of you.
But when you have bad credit, it could be tough to qualify for a loan. Even if you do qualify, you may not get the most favorable repayment options. There are such things as poor credit loans and bad credit loans, so it’s not impossible to get loans with bad credit. But before you start searching for one, make sure you know what a bad credit loan involves and when it could be a good idea to get one.
What are Bad Credit Loans?
Simply put, bad credit or poor credit loans are any loan given to someone with a bad credit score. Different lenders have different definitions of “bad credit” but most lenders think of a bad credit score as any credit score lower than 670.
If you recently made a loan request and were denied, a bad credit score could be to blame. Here’s how credit scores are broken down according to FICO, one of the largest credit scoring companies in the U.S.:
|Poor||579 and lower|
Your credit score is based on many different factors, including your payment history, credit utilization, length of credit history, and more. To find out what your credit score is, you can request a free copy of your credit report at www.annualcreditreport.com.
You could still get loans with bad credit, just know that lenders take your credit into consideration when deciding how much they are willing to lend to you and under what terms they will lend to you.
Why Is It Harder to Get a Loan with Bad Credit?
Since lenders only make money if you repay your full loan amount plus fees and interest, they want to make sure you’ll actually pay all that money back. That’s where your credit score comes in. Your credit score is a number that lenders use to determine your likelihood of paying back their loan. If a lender sees that you have a low credit score, they may view it as a sign that you aren’t as likely to pay back the money they lend to you.
A low credit score may not prevent you from getting a personal loan, but it could require you to work harder to get the money you need.
Here’s how a low credit score could affect your loan:
- It’s harder to qualify: Since a low credit score signals to creditors that you are less likely to pay back their loan, some lenders will deny you a loan outright.
- You may have to add a co-applicant: To ensure that they will get their money back, lenders may require you to add a co-applicant to your loan. Your co-applicant will be responsible for the loan if you stop paying it back. Adding a co-applicant could help you get approved, but it could also put your co-applicant’s credit at risk.
- Your rate could increase: When you have a great credit score, lenders will offer you low rates. But when they see you have a low credit score, they may do the opposite. A bad credit loan is like a risky investment. The lender has to balance the possibility of losing money with the reward of a higher payoff. That’s why interest rates are higher for bad credit loans—to increase the lender’s chances of making money from the loan.
- Less favorable terms: When you take out a bad credit loan, your options may be more limited. Instead of giving you a choice of rates and terms, your lender will only present you with options they think are safe. As a result, you may have to pay additional fees in order to get the money you need, and you may have less time to pay back the loan once you’re approved.
Various kinds of lenders and financial institutions offer bad credit loans, including online lenders, banks, and credit unions. No matter if you take out a personal loan from a bank, credit union, or online lender, your loan’s interest rate will typically range between 5-36% APR with a term between 2-5 years.
If you’re strapped for cash and willing to deal with high interest rates, less favorable terms, and stricter qualification standards, a bad credit loan could be the right option for you—especially if you’re dealing with a financial emergency. But typically, using a bad credit loan to deal with high-interest debt is not a good idea because chances are that your rate will be the same or higher than your current debts. Before you take out a bad credit loan for any reason, you need to make sure the lender you’re working with is not a scam.
How to Make Sure Your Bad Credit Loan Is Legitimate
After deciding that a loan is your best option, it’s time to start getting quotes from multiple lenders so that you can get the best deal for yourself. Before you agree to take out a loan, there are a few questions to consider to make sure that the company you’re planning to work with is legitimate:
- Who are you borrowing from? If you’re borrowing from a lender you’ve never heard of before, it’s time to do some research. A simple internet search of the lender should clue you into some key details about them. Make sure that your lender has reviews from real clients on reputable, third-party website like TrustPilot. If they’re highly rated on sites like the Better Business Bureau, even better. If you can’t find information about them or you see lots of bad reviews, you may want to start considering another lender.
- Will they check your credit score before offering you a loan? If you have bad credit, a lender that says they won’t check your score might sound like a great option. But the truth is, any lender who won’t check your credit score before offering you a loan is not working in your best interest. Legitimate lenders need your credit information in order to determine whether or not to lend you money. If a lender won’t check your credit score, that means they don’t care whether or not you can pay back the loan. Instead, they are more concerned about trapping you into high interest debt that’s impossible to pay back and taking as much money from you as possible.
- Are there upfront costs? Another easy way to tell if a lender is scamming you is if they ask you to pay them upfront fees. It is illegal for a lender to charge upfront fees to borrowers just for considering their application. However, once you have signed your loan agreement, you may have to pay an origination fee to cover the cost of processing the loan.
- Do they guarantee you’ll be approved? If a lender guarantees you’ll be approved for a loan before looking at your application, gathering information about you, and checking your credit score, you should not work with that lender. No legitimate company can guarantee you a loan, and many scammers use false guarantees to collect upfront fees from you and then leave you high and dry.
- Are they pressuring you to sign up? As a general rule, lenders who uses scare tactics to get you to sign up for their offer should be avoided. Some scammers may try to rush you through the borrowing process before you read the fine print—which means they could be offering you rates, terms, and hidden fees that will keep you in debt instead of helping you achieve your financial goals.
- Did you read the fine print? Before you sign on the dotted line, check the fine print of your loan contract and make sure that you’re comfortable with all the details. If you’re looking for a bad credit loan and money is already tight, the last thing you want is to get blindsided by unexpected fees or balloon payments. Check the rates, fees, and repayment terms the lender is offering, and make sure you understand the fees and interest rate hikes that may be incurred from missing a payment or paying late.
- Are you sure you can pay back the loan? Most lenders won’t offer you a loan that they don’t think you’ll be able to pay back, but before you take out a loan, make sure you can cover the cost each month. If you can’t afford the monthly payments, it’s best to pass on the loan. Furthermore, some illegitimate lenders may offer you a loan knowing that you’ll never be able to pay it back. That way, they can make more money by collecting additional interest and fees from you when you miss payments on the loan.
Is It a Good Idea to Get a Bad Credit Loan?
Whether or not it’s a good idea to get a bad credit loan totally depends on your current situation. If you have bad credit and you are hit with a sudden unexpected expense, like your car breaking down or your roof caving in, you may not have any other choice than to take out a bad credit loan.
However, you need to weigh the benefits of a bad credit loan with the possible risks and downsides. Taking out a bad credit loan could cost you a lot of money between the fees and interest you may have to pay. And if you’re in dire financial straits, it could be really tough to pay back that loan each month.
It’s also important to remember that, even if you’re able to afford your loan right now, it could take anywhere from 24-60 months to pay off the loan. If you do take out a bad credit loan and end up defaulting, you may incur even higher interest rates than you started out with, making repayment impossible. Not to mention the fact that your credit situation could go from bad to worse. So make sure you’re on strong financial footing before you choose this option.
If you’re already struggling with a significant amount of debt, bad credit loans may not be the right option for you. Consolidating your debt may sound appealing, but a bad credit loan could have an even higher interest rate than what you’re paying right now on your credit cards, medical bills, and other kinds of debt. And since these loan’s repayment terms are not open-ended like your credit card repayments are, you may end up spending a lot more each month on this option. If you’re looking for a faster and more affordable way to get out of massive credit card debt but you have bad credit, there may be better options available to you.
Debt Relief Options for People with Bad Credit
If you’re looking to get out of heavy debt, your first thought might be to take out a debt consolidation loan. But as you have already seen, taking out a consolidation loan may not be the best choice if you have bad credit. Two options you may want to explore instead are bankruptcy and debt settlement.
This is a legal process that could get most of your outstanding debts forgiven. When you file for bankruptcy, a court analyzes your financial situation and determines if you qualify. Then, they may liquidate some of your assets or set up a repayment plan with your creditors to repay a portion of your debt.
There are two main types of bankruptcy:
- Chapter 7: The most common form of bankruptcy, Chapter 7 bankruptcy is also known as liquidation bankruptcy. During this process, the court may sell your assets in order to clear away your debts. After your assets are sold and your creditors are satisfied, you no longer owe the debt.
- Chapter 13: If you have a steady income and don’t qualify for Chapter 7 bankruptcy, you may qualify for Chapter 13 bankruptcy. In this form of bankruptcy, your debt is restructured and repaid over 3-5 years, usually through wage garnishment. You get to keep your assets, but your paycheck will take a hit.
Bankruptcy is usually considered the nuclear option for people in debt because it could affect your credit score for 7-10 years, makes it harder to take out additional credit, and is a matter of public record. If you think this is the right solution for you, consult an attorney in your area. However, if you are drowning in debt and don’t want to file for bankruptcy, debt settlement could be a less drastic solution.
Debt settlement involves negotiating with your creditors to get them to accept less than the full amount you owe so you can get out of that debt faster and for less. This is the type of debt relief that Freedom Debt Relief offers.
When you enroll in a debt settlement program, the company you hire sets you up with a bank account where you save money every month. When you’ve saved up enough money in that account, the company approaches your creditors and negotiates with them, getting them to accept a lower payment on your debt and forgive the rest of what you owe. The lower payment amount is processed from the account you’ve been saving into to the creditor, and the debt is considered resolved.
Debt settlement could save you a lot of money and cost less each month than your current minimum payments, but it does have its downsides. In order to get your creditors to negotiate with you, you will need to stop paying them each month. This could negatively affect your credit score. You may also be subject to collection calls or legal action during the debt settlement process. However, if you are determined to get out of debt faster and save more money, debt settlement may be the right solution for you.
If you’re struggling with $7,500 or more in credit card, medical, or personal loan debt and you have bad credit, a loan isn’t your only option. Request a free debt consultation to find out how the Freedom Debt Relief program could help you significantly reduce what you owe and get your finances back on track now.