Many individuals struggle in the world of finance due to one thing, and that is bad credit. Your credit score is an indication to potential lenders on how you are likely to handle debt. The higher your score the better your odds of being approved and receiving a lower interest rate.
On the other side, if your credit score is low you may find obtaining a loan more difficult and if you do get approved your interest rate may be higher than average.
Obtaining a loan with bad credit isn’t impossible, but rather you must know where to look. Throughout this ultimate guide to bad credit loans, we’ll walk through all the details and information to consider when looking for a loan geared towards less than average credit scores.
What Are Bad Credit Loans?
First off, what exactly is a bad credit loan? Well, a bad credit loan is a loan type that is geared towards individuals who have less then average credit. Your credit score could have been negatively impacted by late payments, bankruptcy or bills that have gone to collections.
These loans typically come with smaller amounts and higher interest rates. This is due to the risky nature of lending to individuals with less then stellar scores. Also, since the lending business is built around taking higher risk, they must be compensated appropriately for that risk.
How Do Bad Credit Loans Work?
How a bad credit loan works is very much like any other loan on the market. The first data point the lender will need is your income, which is usually gross, not net. They need your income information because there are certain lending limits depending on the loan type, and many lenders want to stay within a certain debt to income ratio.
The next thing you’ll likely notice are the terms being shorter. This is because the lender wants to ensure they get their money back quickly. As you build your credit and become more appealing to lenders, you’ll be able to obtain longer term notes.
From there, a bad credit loan will require further paper work and signatures. You will also find that many bad credit loans are unsecured, meaning there is not collateral backing the note.
Loans for People With Bad Credit
Now that you understand how a loan geared towards individuals with bad credit works, you need to know your options. There is a plethora of options, but most of them can be segmented into short-term and long-term loans.
Short-term loans include payday lending, title loans, tribal loans and many more. Long-term notes include car loans, home equity lines of credit and debt consolidation. In the next section, we’ll go over in detail what each entail and if they are the right type of loan.
Short-Term Unsecured Bad Credit Loans
In this section, we’ll review the various types of unsecured bad credit loans. There are many options, which makes it a bit easier to find the right one for your situation. Again, these are unsecured meaning you do not need collateral to back the note.
First on our list are payday loans, which are short-term notes that typically only last until your next paycheck, hence the name. Payday loans are on the smaller side and used for emergency situations. In the United States, payday lending is not legal in every state, and for the states that do allow this lending there are strict rules.
States that allow payday lending include:
Alabama, Alaska, California, Colorado, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Wisconsin and Wyoming.
If you are looking for a loan and have less than average credit, this may not be the best option for several reasons. The first is the extremely higher interest rates, which typically magnify your financial issues. Also, they are meant to be repaid quickly and for many, coming up with extra money quickly is not an option. Many politicians continue to try and remove this lending practice as it’s perceived as a predatory type of loan.
Car Title Loans
Next on the list are title loans, which similar to payday loans are short-term notes that carry higher interest rates and smaller loan sizes. Also like payday loans, there are only select states that allow title loans.
States that allow car title loans include:
Alabama, Arizona, California, Delaware, Florida, Georgia, Idaho, Illinois, Kansas, Louisiana, Mississippi, Missouri, Nevada, New Hampshire, New Mexico, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and Wisconsin.
Also, similar to payday loans, title loans are not the best choice of bad credit loans because of their lump sum repayments and high interest rates. Many interest rates will exceed 100% and even though these are short-term notes, that’s still a lot of money to be repaid in a short period of time.
Lastly, a title loan typically requires a title, meaning you are putting your vehicle up for collateral and should you fail to repay the note in a timely manner, you risk losing your asset.
Moving on to a less known loan type, tribal loans offer an option for individuals with less than stellar credit. One thing to note right away are tribal loans are not governed by state laws, but rather tribal law. This means should you run into an issue or need legal assistance; you may find it difficult to obtain legal advice.
Many tribal lenders offer short-term installment loans for individuals looking to take out a loan with less than average credit. Installment loans give you the ability to repay the note in equal payments over a fixed period of time. For many though, the lender encourages early repayment to save on interest expense.
However, when looking to take out a tribal loan you will find that interest rates are extremely high, like payday lending or title loans. Again, these are not supposed to be long-term financial solutions, rather used in case of an emergency or short-term cash flow issue.
While emergency loans are not a specific type of loan, the event of an emergency might cause you to seek out a short-term loan. Keep in mind though, short-term borrowing should only be used in the event of a true emergency. For example, if you find yourself in the hospital or in need of a car repair, those are true emergencies.
On many of the websites of short-term lenders, they state it is not a long-term financial solution, meaning it is not meant to be used indefinitely. Also, it’s an expensive form of borrowing and will nearly never work out in your favor.
Depending on where you are located, a micro loan can be as little as $25 all the way up to $50,000, which is the micro loan cutoff according to the Small Business Administration. Micro loans would be an effective way to truly only borrow what you need and depending on where you get the proceeds from, your interest rate may be small.
Micro loans are a little more on the uncommon side so you may have to look before you find a lender you like. These are good for small emergencies are enough money to get you to your next paycheck.
A more general option when looking for a loan geared towards poor credit borrows are installment loans. You typically want to avoid lump sum repayments because you’ll need to repay the borrowed amount plus interest at the due date, which typically is only a couple of weeks out.
Tribal lenders are a popular installment lender. While the interest rates are still high, having an installment loan gives you’re the flexibility to pay it off over a longer period of time.
401(k) Loan or Withdrawal
An option to consider that isn’t necessarily a loan, would be to withdraw out of your 401(k) early. Now, keep in mind there are steep penalties associated with early withdraw of your 401(k) funds and you’ll have to pay income taxes on your proceeds.
If you have money in your 401(k) plan you can look to take out a 401(k) loan, which is a loan secured by the assets in your 401(k) plan. Each employer is different so you will want to consult with your human resource department before going down that road.
Credit Union Short-Term Loan
The last on our short-term list is looking at your local credit union. Many people fail to go here because they think they won’t qualify, or they are unable to join. However, credit unions are not for profit and need to return as much value to their members.
Credit unions offer personal loans which are unsecured, and even if you have less than average credit you may be able to obtain a loan. This is the safest way to obtain a loan as you will have equal payments and the terms are longer, typically ranging form 2-5 years. Also, you are usually allowed to repay the note early without penalty.
Long-Term, Secured Bad Credit Loans
Now that you have your option of short-term bad credit option, it’s time to look at something a little more long-term. Even if you have poor credit you can still obtain a long-term loan, but it will likely require collateral. Below are several options to consider if you need something a little more long-term.
Home Loans and Mortgages
The first on our list of long-term loans for individuals with poor credit is a traditional home loan. Even with poor credit, you can certainly obtain a home loan, but you may have to jump a few extra hurdles that begin with the down payment size. If you are looking to purchase a home, you may be limited in how much of the purchase you can finance.
If you find that you still need assistance, you can turn to the state or the Federal government to find assistance. Luckily, the government believes everyone should own a home so there are plenty of tools you can visit, such as USA.gov.
Home Equity Loans
Next on our list are for individuals who already own a home and have equity in the home. If you already have equity in your home, you can begin the process of taking out a home equity loan. Now, keep in mind that if you have poor credit it can be difficult to obtain a loan against your home, even with it being collateralized.
The first option is to go visit your current bank and especially if you have a healthy relationship, maybe they can work a deal out with you. If you do not have a traditional bank nearby, look into a credit union. Credit unions have competitive rates and are more apt to lend to someone who has less than average credit. Your interest rate will likely be higher with a lower credit score, but at least you’ll be able to have a proper loan through a trustworthy financial institution.
Sub-prime auto lending continues to grow in popularity and with that comes the accessibility to obtain an auto loan with poor credit. There are many bad credit car dealerships that will lend to individuals with bad or no credit, and part of the reason is the loan is collateralized by a car. Also, the loan terms aren’t very long, typically ranging from 2-5 years, and slightly longer for new cars.
The two places you are likely to find the best deal for bad credit individuals are the dealership or credit union. Dealerships have several financial institutions that they work with to secure financing for the buyer and even with poor credit, there are lenders that will lend, just at higher interest rates. Credit unions are also great because they have competitive rates and tend to lend to lower tiered borrowers.
If you find yourself with a high interest rate auto loan and poor credit your options may be limited. Similar to the initial financing of an auto loan, you may want to look at credit unions to refinance. They offer competitive rates and can usually help with refinancing.
Another option would be to take out a personal loan and pay off the car note that way, only if the interest rate terms are better. Since many of the auto loans are shorter in length, you can likely pay off the loan quickly and eliminate the payment all together.
If you’re an individual with poor credit and you’re looking for a business loan, you may be in luck. With a business loan, many lenders care more about the profitability of the business. Also, if you have an LLC or corporation, the lenders are not looking at your individual credit score, but rather the company’s financials.
There are several websites you can turn too or start with your local bank. Certainly they might question your credit score but try to focus them on your business and how it makes money. Also, if you already have assets, look to pledge those as collateral to help increase your odds of being approved for a loan.
Debt Consolidation Loans
Debt consolidation is an effective way to take all your debts and bundle them up into one payment. However, if you have poor credit it can be difficult to find a lender that will consolidate your debts, depending on the size.
You can first try the route of a credit union or the current bank you’re at. If that doesn’t work, you can look into taking out a home equity loan and consolidate your loans that way. Other options beyond those may carry higher interest rates that are larger than your current debts, meaning it would be taking a step back to refinance with those options.
If you have poor credit, it can be difficult to obtain a student loan because they are uncollateralized. The first option would be to limit your financing needs by either paying as much as you can in cash, or taking a smaller class load.
Another option would be to have an individual you trust such as your parents co-sign a loan or take out a parent plus loan. Student loans are tricky because they are essentially a bet on your future earnings. Credit unions, government entities and co-signers are your best paths to obtaining a student loan with less than average credit.
If you’re a person with bad credit and looking for a credit card, luckily there are a few different options you can utilize. The first is a secured credit card, which is geared towards people who have poor credit. How it works is you obtain the card, but put cash in your account as the ‘secured’ part. Then you can use the card as credit, and slowly begin building credit.
The second option is to find a credit card company that provides cards for poor credit individuals. These cards typically have low limits and higher interest rates but are an effective way to have a small line of credit open in case you need to purchase something out of the ordinary.
Thanks to the growth of financial technology, peer-to-peer lending has become another avenue less than average credit score people can utilize to obtain a loan. LendingClub is the most popular and how it works is you request a loan, and other individuals put up money in a pool and once the loan amount is filled, it’s dispersed to you.
Not everyone qualifies and the rates tend to be higher, but if you are out of options this is a great way to obtain financing.
Buy Now, Pay Later
The last on our long-term borrowing options for bad credit is to utilize a buy now, pay later store. Common ones can be Aaron’s, which is known as a rent to own. These stores tend to work with those that have less than stellar credit and can be an option for purchasing appliances or furniture using steady bi-weekly or monthly payments.
As always, ensure you shop around these stores and find the ones that provide you the best rates.
How to Get a Bad Credit Loan
First, we’ll start with the short-term loan. Now that you have all the options laid out you can begin selecting the lender and loan type you wish to choose. Again, you want to avoid payday lenders and title loans as much as possible because these are high interest rate loans that typically are repaid through one lump sum payment.
When you select the lender, you want to first ensure you are getting an installment loan. This ensures you have ample time to repay the loan and have equal payments throughout the life of the loan. From there, check your ability to repay the loan. Taking out a short-term loan should be used only if you are able to pay it back. If you are unable to repay the loan you will likely make the situation worse.
Another detail to look up is if the lender at least does a soft credit check. You want to know that the lender is completing their own due diligence and attempting to give you the best offer. Lenders who do not complete a soft credit check might be shady and is something you want to avoid if possible.
Once you’ve selected the lender, begin to dig into the details and see if they offer a variety of options in terms of repayment. You want to look for installment loans that offer no early repayment penalties. This is ideal because you can pay it off the next day if you so choose without penalty.
Lastly, ensure that your loan payments are being reported to the various credit reporting entities. The idea is if you have bad credit, obtain a loan and repay it on time, it positively impacts your credit score so later loans are given to you with better terms.
Other information to locate include contact information and how long the funding process takes. If you need the money quickly, you’ll want to find a lender that processes applications within 24-hours.
Next is the long-term loan, which unlike the short-term loan will likely need collateral. The types of collateral that will likely be needed include your home, automobiles or physical business assets if you are looking for a business loan.
If you have bad credit and are looking for a long-term loan, you’ll want to ensure the lender you are using has reasonable rates. It’s easy for a lender to use your low credit as an excuse to raise the interest rate. Be sure they are backing it up with other data such as debt to income and equity in the assets being used for collateral.
Same with the short-term loan, you want to ensure you have the ability to repay the loan. Again, if you take a loan out and are unable to repay it, not only will it make matters worse but if you have collateral tied to the loan, you risk losing that asset.
Ensure the lender you use performs at least a soft credit check, but many loans that are long term will require a hard pull, meaning it will show up on your credit report that a financial institution pulled your report. If your credit score is not pulled, you may want to look elsewhere to obtain your loan.
Other items you want to consider are ensuring your payments are being reported to the various credit reporting entities. The goal with obtaining a loan with bad credit is that you eventually raise your score, opening nearly any lending avenue you so choose.
How to Fix Bad Credit
Fixing bad credit is easy on paper but in practice can be much more difficult. If you have bad credit then the question you ask is how to fix your bad credit. Depending on why your credit is bad, here are a few methods you can use to boost your score.
First, if you have debts in collections look to settle those first. Debts that remain in collections will continually bring down your credit score until they are paid. Many collections will settle with you for a lower amount that was originally owed. However, ensure you get the amount in writing before you commit to paying anything.
Next, if your score is low because of late payments, simply begin a new history of paying on time. There’s no quick way to fix this, other than paying on time over several months or years. Lastly, if you went into bankruptcy or defaulted loans, you simply must borrow and pay off loans. Over time, your score will slowly start to increase and from there you’ll begin to borrow with ease.
Some resources you can utilize to fix bad credit are as follows:
You can also read our ultimate guide on repairing bad credit here.
Depending on your needs, these are wonderful resources to start with. For example, Dave Ramsey is a personal finance icon and is known for having a straightforward process to get out of debt. By following the process, you’ll naturally and positively impact your credit score because your debts will decrease, and lenders will be more likely to lend to you.
With this ultimate guide, you now have several places you can start and begin your borrowing journey. Finding what’s right is very much an individual choice, but these tips are effective ways to narrow your search and find what fits you best.
Remember, installment loans are the best way to go and payday lenders and title loans should be avoided as much as possible.