If you have a poor credit score, either due to bad luck or bad financial choices, you won’t be able to qualify for a personal loan with traditional financial institutions, such as banks and credit unions, unless you have a co-signer or a co-borrower. Most traditional lenders maintain a minimum credit score requirement of 580, as defined by the FICO scale.
However, you can’t expect to receive the most competitive interest rates as borrowers with a stellar credit history. Bad credit is more than a hindrance; it can actively prevent you from obtaining even small personal loans from traditional lenders simply because you can’t pass the credit check due to poor credit.
Fortunately, there are small loans for bad credit, and in this article, we’ll discuss what they are, what different types of bad credit loans are there, and how to secure a small loan for bad credit.
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What Are Bad Credit Loans?
Bad credit loans are loan products that are specifically designed for borrowers with bad credit scores. Before we dive into how these loans work, let’s discuss the importance of good credit.
There are two types of personal loans: secured and unsecured. Secured loans are backed by collateral, such as property or valuables, and usually feature more favorable interest rates and repayment terms based on your credit score.
Unsecured personal loans aren’t backed by collateral, and your creditworthiness and eligibility are determined purely by your credit score. If you have bad credit, you’re not likely to get approved for a loan, particularly a small-dollar, short-term personal loan. This is where bad credit loans come into play.
These loans are personal loans aimed specifically at borrowers with bad credit, and they’re usually provided by both traditional lenders and bad credit lenders online. They work just like typical personal loans, in which borrowers take out a loan from the lender and pay the loan back based on the type of loan they took; either lump sum or through monthly payments.
However, since your creditworthiness and eligibility are based on your credit report, bad credit loans usually come with more stringent requirements, restrictions, and loan terms, in addition to high interest rates, additional fees, and potential penalties.
This is due to the higher risks perceived by the lender, caused by the lack of collateral the lender could repossess in case of default, and the apparent lack of financial responsibility reflected by the borrower’s credit score.
Bad credit loans aren’t without their benefits, as they often provide a quick loan process and approval, quick access to funds, and a chance to improve your credit score through timely repayment.
Different Types of Small Loans for Bad Credit
It is worth noting that not all loans for bad credit are created equal, and some loan options might be more suitable to your unique situation than others. You’ll find a more comprehensive breakdown of different types of loans for bad credit below:
Payday Loans
Payday loans are short-term, small-dollar loans that usually range between $200 and $1000 (depending on the lender). You repay them once you receive your next paycheck, usually two to four weeks after securing the loan.
Many payday loan lenders don’t require hard credit checks, which makes these loans appealing to individuals with bad credit. However, they come with exceptionally high annual percentage rates, which include origination fees, higher interest rates, late fees, and quite possibly even prepayment penalties.
They often have a bad reputation because of dishonest lenders and predatory lending practices, which is why you might want to consider an alternative. With that said, some lenders provide these loans at more reasonable rates.
Cash Advances
Cash advances are small-dollar loans that you obtain from your credit card company. They’re designed as short-term loans, but they don’t have any hard due dates. You’ll want to pay them back as soon as possible since they come with up to 30% APR, which makes them a rather pricey financial solution.
Your credit card provider might limit the amount of money you can access, making cash advance loans inadequate for covering larger expenses, such as home improvement, vehicle purchase, or financing a wedding.
Cash advances have become interchangeable with payday loans, but the truth is that they’re completely different products, and if you need a small loan for bad credit, cash advances are much preferable to payday loans due to lower interest rates and more favorable terms.
Secured Loans
Secured loans are a category of their own because the borrowers offer collateral, such as valuable possessions and assets, like homes and vehicles, to the lender. Considering that the collateral is a requirement for obtaining a secured loan, these types of loans pose very little risk to the lender.
When collateral backs the loan, the lenders still perform credit checks, but in the case of secured loans, the credit score is mostly used to determine the appropriate interest rates, loan amount (which usually depends on the value of the collateral), and repayment terms.
There are several different types of secured loans, and they vary in loan amounts and repayment, but they’re mostly personal installment loans, which are great for covering financial emergencies and funding larger purchases or projects. They can also act as debt consolidation loans used to repay your student loan and credit card debt. Here’s a breakdown of secured loans:
- Line of credit: You may be able to take out a loan against your available credit card debt if you currently have one. However, you should double-check the terms of your credit card: A cash advance may have a higher APR than your usual purchase APR, as well as a processing fee charged by the credit card company.
- Mortgages: Mortgages are secured long-term loans used to finance the purchase of a home or some other real estate, in which the financed property acts as collateral.
- Home equity lines of credit: Known as second mortgages, or HELOCs, these loans are usually secured for home renovations and home improvement projects, and since they’re following a mortgage, they’re secured by the borrower’s equity in their own home.
- Home equity loans: These are basically the same as HELOCs, but the borrower receives a lump sum of cash based on the equity in their home.
- Car title loans: Car title loans, also known as auto loans or pink slip loans, are personal small loans secured by your vehicle. The borrowers give the lender the qualifying title to their vehicle as collateral but continue driving their car for the duration of the loan as long as they make on-time payments.
With everything said, it’s worth noting that secured loans aren’t risk-free for borrowers, who risk losing their property if they default on the loan.
How to Compare Bad Credit Loans?
Borrowers with bad credit are somewhat at a disadvantage when it comes to choosing loan products because their credit score acts as a limiting factor. With that said, there are online services that allow you to compare different bad credit loans provided by different lenders and find the one that best suits your unique financial situation.
One of the most crucial factors to consider is the APRs associated with different loans. This accounts for interest and any associated fees and provides a much clearer picture of the total cost of the loan.
The same applies to other fees not included in the APR, like the origination fee, prepayment penalties, late payment fees, and other processing charges. Speed of funding is also important, especially if you’re in a pinch. Some online lenders offer prequalification and fast loan application processes, with the funds loading into your bank account the next business day.
The lender’s reputation is also worth considering, so look for reviews and ratings on third-party websites and check whether the lender is registered with relevant financial authorities.
How to Get a Small Loan for Bad Credit?
There are several ways to secure a small loan for bad credit, and it mostly depends on the type of loan you’re looking to secure. If you’re looking for quick access to cash, payday loans or cash advances are easily secured from online and local lenders and your credit card company, respectively.
Installment loans for bad credit, on the other hand, do require collateral, as they’re mostly secured loans. Whatever the case might be, you still need to apply for the loan, submit all the necessary documents, and get approved for a loan. If, by any chance, you’re not approved, you can repeat the process with a different lender.
Alternatively, you can submit an application with Loan For Any Purpose, and we’ll share your application with a large number of lenders within our network, which not only saves time but also exposes you to a larger number of lenders who might decide to offer you a loan for bad credit.
Summary
Small loans for bad credit are specifically aimed at borrowers with less-than-stellar credit scores and payment histories, granting them quick access to funds without having to worry about eligibility. If you’re interested in obtaining a small loan for bad credit, we can help you locate an appropriate lender; just fill out a form on our website.
