Bad Credit Loans
There are a variety of reasons why people take out personal loans. Medical bills, debt consolidation, car repairs, and large purchases are just a few examples of unexpected expenses that many people encounter every day. In an ideal world, we would all have an emergency fund or savings account to help with these bills. But the reality is, 28 percent of Americans have no emergency savings for unexpected expenses.
If you don’t have an emergency fund or savings, then taking out a personal loan may be a good option.
Depending on the type of personal loan you choose, this option could end up being safer and saving you money on interest rates in the long run.
But what if you need fast cash and you have a low credit score? It will likely mean that you have fewer options to choose from for your personal loan. These options are sometimes referred to as “bad credit” loans.
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What Is Bad Credit?
In order to understand bad credit, you’ll first need to know what a credit score is and how it is calculated. In the simplest terms, a credit score is a three-digit number which tells lenders how trustworthy you are when you borrow money. This score is calculated by several bureaus that review your payment history, your credit accounts, and your level of debt. The more trustworthy you are when you borrow, the higher your credit score, and the higher your credit score the more options with lower APRs you’ll have for personal loans and credit.
There are a few different types of credit scores out there. One is called your FICO score, which is calculated by Fair, Isaac and Company. A FICO score will ranges from 300 to 850, with anything below 580 being considered bad credit. The other common credit score is called a VantageScore, which also ranges between 300 and 850. With a VantageScore, anything below 600 is considered bad credit.
It’s important to build and keep track of all your credit scores so you know whether you have good, fair or bad credit, and how you’ll be assessed by lenders when you’re seeking a personal loan. You’ll also be able to contact credit bureaus to fix errors in your credit score report if you find any.
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Types of Bad Credit Loans
There are two basic types of personal loans: secured and unsecured. And this goes for bad credit loans as well.
A secured loan is one that requires you to offer up collateral in order to get the loan. This means that if you aren’t able to pay it back, the lender will keep your collateral in order to recoup their loss. Common secured loans include title loans and pawn shop loans. Secured loans usually have lower APRs as well.
An unsecured loan is just the opposite, in that the lender doesn’t require any collateral in order to provide a loan. Common unsecured loans include payday loans, installment loans and bank loans.
When it comes to having bad credit, it’s typically easier to get a secured loan because the lender has a way to get their money back if you can’t repay the loan. That being said, it’s also riskier for the borrower, as they may be leading to the loss of their collateral. Unsecured loans may end up having higher interest rates and a more selective application process, as an added layer of security for the lender.
If you’re searching for a bad credit loan, a payday loan may be an option you should consider. This is a short-term, unsecured loan that usually carries higher interest rates than some alternatives. Typically, payday loans are required to be paid back in a very short amount of time, usually within two weeks or on your next payday, hence the name.
Payday loans are an expensive option for people looking for a bad credit loan, but could be a better alternative to a secured loan (like a title loan) because you won’t lose your vehicle if you aren’t able to repay the amount borrowed.
Payday loans do carry high APRs, but may be a valid option when comparing them to other bad credit loans. The important thing to remember is to only take out a payday loan if you’re sure you can pay it off in time, as there will likely be additional fees associated with late payment or defaulting on the loan.
Another example of a so-called “bad credit loan” would be a title loan. This is a secured loan that requires the borrower to offer up the title to their vehicle in exchange for a small-dollar, high-interest loan.
Because this is a secured loan, the lender has the right to take your vehicle if you aren’t able to repay the money. Many people would consider this too risky even for a bad credit loan. Title loans also have generally high APR’s even though they’re secured.
While other bad credit loans may lead to a cycle of debt for the borrower, this one could end up being even more disruptive by leaving you stranded without a car to get where you need to go.
Cash Advance Loans
This bad credit loan is very similar to a payday loan, with some minor differences. Some payday lenders may offer this, in addition to their normal payday loans.
With a cash advance loan, you write a check dated for your next payday. The check will be for the amount you’re borrowing, plus any interest and additional fees. The lender then gives you the agreed upon amount, and on your next payday they will deposit your check to recoup their money. This can be an expensive option for a bad credit loan. But if it’s between this and risking your vehicle, it may be a safer alternative.
Bad Credit Installment Loans
When it comes to bad credit loans, an installment loan may be the wisest option if you qualify for one.
An installment loan is an unsecured loan that can range from a few hundred dollars, all the way up to a few thousand. These loans typically have lower APR’s than other bad credit options. They’re also more manageable as repayment is spread out over a much longer time period than payday, title, or cash advance loans. If you’re considering an installment loan, you’ll likely need to have a slightly higher credit score than you would for a payday or title loan.
The APR for installment loans is usually fixed, which means that it’s a set rate that won’t change throughout the life of the loan. This, along with the longer repayment period, makes an installment loan a more attractive option for those with bad credit. While payday loans and other short-term loans might need to be repaid within a matter of weeks, installment loans are usually paid back over several months or even up to a year or more.
Installment loans are an example of a bad credit loan that may potentially help customers build their score over time and qualify for more premium loan options in the future.
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Considerations Before Taking a Bad Credit Loan
Living life with bad credit is not easy, and surprisingly, it may be quite expensive to have a low credit score. That means that focusing on building your credit should be a top priority. While some loans may seem like a good option by promising “fast cash now” or “money when you need it,” you should make sure that you have the ability to repay before taking one.
Building your credit takes patience, hard work, and a little bit of financial know-how. It’s all about making the best decision for the situation you’re currently in. Find a loan that you can pay back and do your best to make on-time payments to build your credit score. Then you may be able to qualify for a better option like an installment or bank loan next time.
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¹Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications approved before 10:30 a.m. CT Monday – Friday are generally funded the same business day. Applications approved after this time are generally funded the next business day. Some applications may require additional verification, in which case, the loan if approved, will be funded the business day after such additional verification is completed.