Securing a loan can be difficult when you have bad credit since banks don’t typically grant loans to borrowers they deem risky. However, not all lenders require a credit check, and not all loan products come with strict credit score requirements.
This guide will discuss unsecured loans for bad credit, what they are, how they compare to their secured counterparts, and just how easy it is to obtain an unsecured loan for bad credit.
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What Is an Unsecured Loan?
An unsecured loan is a type of loan product that’s characterized as a personal loan offered by an online or traditional lender that doesn’t require any collateral to guarantee the loan. This means that you’re not borrowing against any type of property or valuable item; instead, your eligibility for unsecured loans is primarily based on your credit score and your promise to repay the loan.
What also makes these loans appealing to borrowers is their flexibility. Unsecured loans are often used to cover medical or other expenses, financial emergencies, home improvement or home renovation, car repair, and debt consolidation.
However, the lack of collateral that would otherwise back up the loan puts lenders at risk of losing money, which is why unsecured loans often come with higher interest rates and unfavorable loan agreements. They’re also based on rather strict credit criteria, with traditional lenders outright denying borrowers with bad credit who had applied for the loan.
Your credit score is a reflection of your financial responsibility and creditworthiness. It also signals just how risky you are as a borrower, with individuals with lower credit scores and poor credit history being perceived as higher-risk borrowers by the lenders.
This is why lenders perform credit checks. Not only do they determine your eligibility for the loan, but they’re also used to determine the appropriate interest rates and loan repayment terms. Naturally, borrowers with higher FICO scores receive lower interest rates and better loan terms, while those with poor credit are either denied their loans or charged exorbitant interest.
It’s also worth noting that most unsecured loans come with origination fees, fixed monthly rates, and prepayment penalties, though the latter is mostly associated with all types of long-term loans.
Types of Unsecured Loans
Though the lack of collateral is a shared characteristic of personal unsecured loans, not all loans are made the same, and some loan products make more financial sense than others. Here’s a complete breakdown of different types of personal unsecured loans:
Unsecured Loans for Bad Credit
As previously mentioned, the eligibility for an unsecured loan is determined by the borrower’s credit score, and traditional lenders, such as banks or credit unions, don’t usually approve loans to borrowers whose FICO score is lower than 670.
Direct and online lenders often have lower minimum credit score requirements and will approve unsecured loans to borrowers with a FICO score over 580. In rare instances, even to those whose FICO score falls below 579 on the FICO scale. These loans are known as unsecured bad credit loans.
Due to the lack of collateral and a higher perceived risk by the lender, unsecured loans for bad credit often come with higher interest rates and unfavorable loan terms compared to unsecured loans provided by more traditional lenders.
With that said, they still pose a viable financing solution for borrowers who can’t obtain a loan from traditional financial institutions because of a low credit score. Loan amounts typically range from $1,000 to $50,000 or even $100,000 and are usually granted in the form of installment loans paid back through recurring monthly payments.
As a result, some borrowers employ these as credit card repayment or debt consolidation loans. A debt consolidation loan allows you to take out one larger loan to pay off numerous smaller ones.
Payday Loans
Payday loans are short-term, unsecured personal loans that also don’t require collateral, but unlike typical unsecured loans, your eligibility for this type of loan isn’t determined by your credit score. Though they’re marketed as no-credit-check loans for borrowers with bad credit scores, the lenders usually conduct a credit inquiry to help determine the appropriate interest rates.
Since they’re not backed by collateral and your credit score, payday loans often come with exorbitantly high interest rates, extreme annual percentage rates (APRs) that may go as high as 400%, and relatively short repayment terms, usually two to four weeks. Since they’re really expensive to secure and repay, payday loans should be avoided and treated as a last resort.
Student Loans
Personal loans can’t be used for educational or business purposes, so traditional and online lenders offer specifically designed loans to cover post-secondary education expenses. They’re a fantastic solution since they offer significantly lower interest rates and more lenient repayment terms. However, they’re use-specific and lack the flexibility and versatility of personal unsecured loans.
Secured Loans vs Unsecured Loans
Unlike secured loans, which don’t require any collateral, secured loans require collateral in the form of different assets, such as real estate, valuable possessions, savings accounts, or vehicles. Since they’re backed by collateral, which is required to obtain the loan, secured personal loans pose very little risk to lenders.
However, the same can’t be said for consumers and borrowers. Since you’re borrowing against collateral, the lender has the right to repossess your collateral assets if you miss on-time payments and default on your loan.
Additionally, loan amounts associated with this type of loan can be quite substantial because the lender has to match the collateral value the borrower offers. As such, secured loans feature less strict credit score requirements compared to unsecured loans.
This allows lenders to approve loans to borrowers with bad credit. The lenders will still conduct a credit history check with the credit bureau to determine eligibility and interest rates, but the criteria for reliability are much lower. In fact, some lenders market secure loans as loans for bad credit.
Different Types of Secured Loans
Some of the most common types of secured loans include:
- Secured installment loans: These are long-term loans whose value is backed by collateral. As such, these offer more favorable rates and terms. Otherwise, they work just like any other installment loan; you borrow a lump sum, which you then repay over several months or years through recurring loan payments.
- Car title loans: Car title loan lenders offer secured loans that you back up by using your vehicle as collateral. In other words, you transfer the title for the car to the lender in exchange for the loan, and you get to drive your car for the duration of the loan, as long as you’re making timely payments. Additionally, most car title lenders offer same-day or next-business-day fast funding, with loan funds reaching your checking account within 24 hours of signing the loan agreement.
- Mortgages: Mortgages are typically used to purchase real estate, which then serves as a collateral asset. These loan options are use-specific and usually require a downpayment and a credit check, and they aren’t typically granted to borrowers with bad credit.
- Home equity lines of credit: Home equity loans and lines of credit (HELOCs) often come with the lowest rates and more favorable terms because they’re backed by your equity in your home.
Can I Get an Unsecured Loan with Bad Credit?
Of course, many lenders offer unsecured loans for borrowers with bad credit. However, there are certain things you need to consider before applying for a loan, like your credit score, debt-to-income ratio, payment history, and income.
Even though unsecured loans for bad credit are specifically aimed at individuals with bad credit, lenders prefer working with good or even excellent credit, and they reserve the best loan terms for such borrowers, so expect higher interest if you don’t have good credit.
Some lenders also check your debt-to-income ratio, with most requiring a DTI of 45% or lower to qualify for the loan. Additionally, you’ll also have to submit proof of income to demonstrate your ability to repay the loan.
As long as your credit score matches the lender’s minimum requirements and you can repay the loan, you should have no issues with getting an unsecured loan with bad credit.
How to Apply for an Unsecured Loan for Bad Credit
Most lenders nowadays offer online applications, which adds a layer of convenience to the loan application process, since the whole thing can be completed from the comfort of your home. The process is usually straightforward: visit the lender’s website, submit your information, and wait for a response.
We suggest applying with several different lenders simultaneously to increase your chances of securing the loan. You need to submit your government-issued ID, proof of income, proof of residency, personal details, and other loan-specific documents the lender might require.
Once the lender reviews your information and approves the loan, they’ll contact you with the loan offer. Upon signing the loan agreement, the loan funds will be deposited into your bank account on the same or the next business day.
However, this approach is time-consuming because you have to apply with several different lenders and juggle different offers in your inbox. Fortunately, we have a solution; you can apply for the loan at Loan For Any Purpose, and we’ll share your loan application without trustworthy lenders.
This saves plenty of time because you’re applying only once, but achieve the same exposure, which might result in you receiving several different loan offers to compare and find the one that suits you the best.
Summary
Unsecured loans for bad credit can help you get access to funding and cover your financial emergencies or other expenditures. If you’re interested in obtaining an unsecured loan for bad credit, simply visit our website and fill out our online form; we’ll help connect you with a reputable lender that offers the loan product you need.
