Many people often find themselves saddled with short-term cash-flow problems that they didn’t see coming. Things like unexpected job loss, home repairs, car troubles, and medical emergencies will drain a bank account quickly and leave us in need of the type of quick cash infusion that comes with a solid personal installment loan. Read on to learn more about easy approval installment loans for bad credit direct lenders.
A simple credit check can drastically affect the installment loan options available. In short: Good credit will get you lower interest rates and better terms, while bad credit can leave a potential borrower subject to higher interest rates.
Using an installment loan is one of the safest ways to fix a current financial problem. Not only can you get the money you need right now, but you can also pay it back over some time with a series of monthly payments that don’t change. It may seem like getting a good installment loan with bad credit is an impossibility, but there are lenders out there that can provide people with installment loan options that can help them find their way out of trouble.
Do I Have Bad Credit?
Many people struggle with bad credit, and others aren’t truly aware of whether or not their credit score is good or bad—or what a credit score really is.
A credit score is a rating that any lender or creditor uses to determine your overall behavior as a borrower. Your credit score assesses your creditworthiness or your ability to repay a debt in full and on time.
If you rent or purchase a home, buy a car, or apply for a credit card, you will go through a credit check to ensure that you will pay what you owe. For a creditor, a credit score is essentially a risk assessment for a particular investment. And the investment, in this case, is you.
Credit scores are determined by the following factors, with their impact on your credit score (in percentages):
Credit History (35%)
Your credit history is the record of your payments to your creditors. Lenders want to know, above all else, if you will be able to repay any debt owed to them, so this factor is the most critical determinant of your score. This is why it is so important to pay your bills on time, every time.
Credit Utilization (30%)
Credit Utilization is the ratio of your available credit to the amount of credit that you are using. For example, if you have a balance of $200 on a credit card with a $1,000 limit, then your credit utilization is 20%. An ideal credit utilization rate stays below 30%.
Credit History (15%)
A history of your accounts can tell potential lenders a story about how you have dealt with credit in the past. While it’s good to have an extensive credit history, it doesn’t necessarily mean your score will be drastically affected by it.
Credit Mix (10%)
Credit Mix refers to the variety of lenders and loans you’ve had in the past or are currently working with. A profile of accounts that display a borrower’s experience with credit can impact a credit score.
New Credit (10%)
Opening new accounts in a short amount of time can tell loan lenders that you could have poor spending habits. If you’re applying for an installment loan anytime soon, don’t open any new accounts—especially credit card accounts.
The credit bureaus track this data then calculate your credit score as a number between 300–850. The higher your credit score, the more attractive you are to potential installment lenders:
- 300–499 Very Poor/Bad
- 500–600 Poor/Bad
- 601–660 Fair
- 661–780 Good
- 781–850 Excellent
As the chart illustrates, a poor credit score falls between 300–600. About 20% of Americans live with bad credit. This makes it challenging to locate and secure the low-interest debt relief that can come with a personal installment loan.
What Is an Installment Loan?
A personal installment loan is one where the borrower repays the loan in scheduled portions or installments. The lender bundles the principal and interest in these installment plans. Other fees typically included are origination fees, service charges, warranties, and insurance. If you own a home, your mortgage is a perfect example of an installment loan; it covers your homeowner’s insurance and taxes as well as the repayment for the loan itself.
Examples of installment loans include:
You get an auto loan to purchase a car. Auto loans are usually a low risk for the lender because they use your property as collateral—in this case, the vehicle itself. If you can’t repay the loan, the lender can repossess the car and sell it to another buyer.
These are loans secured by the government and used for college tuition and expenses. The government offers these loans to students in need. They require no collateral to apply, as they are usually guaranteed loans (you’ll read about those a little later).
People take out personal installment loans to cover lots of expenses—many of them are for unexpected emergencies and large purchases for which we typically don’t save. People use personal loans for weddings, big vacations, medical emergencies, and home repairs or renovations.
Even though they are essentially large pieces of debt, a personal installment loan can be very beneficial to a borrower’s overall financial health under the right circumstances.
If you pay on time and keep track of your loan, installment loans can help people with no credit establish a good credit history. And if you have bad credit, an installment loan can help you improve your credit score by showing creditors that you are adopting good financial habits. Time and effort can do wonders for almost all credit score damage.
Installment plans are also ideal lending options for borrowers who budget. Since the installment payments are consistent, they make them easy to plan for in your monthly expenses. A regular debt like an installment plan can help you focus on regulating or managing the more complicated costs you may have.
Keep in mind that you could be subject to penalties if you pay off the entire loan early, depending on the lender. Essentially, your installment plan is a contract, and ending the agreement early means that you are breaking that contract. Paying off your loan early isn’t a guaranteed way to improve your credit score. On the other hand, every loan payment you make on time will help to build and lengthen your credit history—an action that will improve your credit score.
What is a Guaranteed Installment Loan?
A guaranteed installment loan is a loan backed by a third party (or guarantor) who agrees to pay the loan should the borrower default or fail to pay the loan amount back under the terms of the agreement.
Guarantors are different from co-signers because they don’t have any claim or ownership of the loan or the asset purchased with the loan, like a home or a car. Instead, they only become involved in the case of a defaulted loan.
A guaranteed loan has advantages for both the borrower and the lender. They can give people who have bad credit an opportunity to get a loan for the cash they need while ensuring that the lender doesn’t lose any money. Government agencies ensure that the lender won’t lose their money.
In addition to a student loan, another excellent example of a guaranteed installment loan would be an insured mortgage. The Federal Housing Administration (FHA) backs these loans for people with bad credit.
As long as the borrower pays mortgage insurance and their monthly payments, the lender is protected from any loss if the borrower defaults. Guaranteed installment loans are one of the most robust financial solutions to a short-term money problem. Let’s take a look at the most viable guaranteed installment loan options for people with bad credit.
Payday Loans/Cash Advances
A payday loan is one of the most popular and accessible loan options available. But the risks may outweigh the rewards in most cases.
There are thousands of payday loan companies across the United States. And with some lenders providing online installment loans, you can find, apply for, and receive a loan 24 hours a day, seven days a week. Moreover, these loans are easier to use and secure than a traditional loan—all you usually need is a job and an active checking account.
More like a cash advance, payday loans are viable short-term loans to handle short-term money problems. These loans work best for people that have the money to pay the bills, but the bills happen to be due in between pay periods.
Explained in its simplest form: A borrower applies for a loan from a payday lender. If the lender approves the loan, the borrower then writes the payday lender a check for the principal and interest/fees. The lender then gives the borrower the desired loan amount and then cashes the check on the borrower’s next payday, when their checking account should have the money to cover it.
How Do Payday Loans Work?
Payday loans are typically issued under tight loan terms that include a brief window of time to repay the loan without penalty. Suppose the loan isn’t repaid within the terms of the agreement (which is usually only 14 days or so). In that case, the borrower’s remaining balance then becomes the principal for a new deal, which is subject to its fees and interest compounded on top.
As we mentioned earlier, payday loans work best when the loan can be repaid within the time dictated by the loan agreement. However, the fees and very high interest rates that come with payday loans can often be too much for the borrower to manage—after all, they had less than that loan amount available to begin with.
To cover other expenses in their lives (food, housing, utilities, etc.), people default on their payday loans and are left with a balance at the end of the loan term. The payday lender then rolls that balance into a new loan, which comes complete with another set of fees and interest added on.
The Dangers of Payday Loans
Let’s say that you default on a $500 payday loan with a 25% interest rate, leaving you with a balance of $625. As the principal of your new loan, the amount owed now has swelled to $781. In just a month or so, you will owe close to double what you originally borrowed, and payments will continue to be drawn from your checking account.
To fight the spread of fraud, the Consumer Financial Protection Bureau enforces laws to protect consumers. Further action and regulations are also enacted in each state.
When you can’t use a bank or a credit union to get a personal installment loan, payday loans might help, but they require diligent management to avoid being consumed by their cost. You must know any loan agreement you enter into from every angle and take accurate stock of your current need and how the loan you take now will fit into your future.
Are There Other Bad Credit Installment Loans Available?
If you have bad credit, the fact is that your options for personal installment loans are different. However, they don’t all have to come attached to lending terms that may be difficult to incorporate into your life. Here are some alternatives to the payday loan route:
Credit Unions & Payday Alternative Loans
Typically, credit unions provide services that you can get at a bank but at a lower overall cost.
Credit unions are usually organized into social, peer, and professional groups whose makeup helps determine the credit union’s actions regarding investments and the operations of the general fund. Because the financial health of its members determines its strength, credit unions are financial institutions that put the goals and needs of their members ahead of making profits.
Some credit unions also provide a service called an alternative payday loan. Like its more famous counterpart, an alternative payday loan can come in quickly dispersed small amounts. Still, the repayments can be set under terms that are significantly lower than traditional quick cash loans.
If you are a credit union member, you should explore its lending options, even if you have bad credit. The opportunities may surprise you.
Peer-To-Peer Lending (P2P)
Usually, when you apply for a loan, you request money from a bank, credit union, or some other financial institution. With Peer-to-Peer lending (P2P), borrowers are connected with investors looking to finance loans to people without the intensity of a cash advance situation.
P2P lending is a relatively new lending option that gives people with bad credit a better chance at getting a lower interest rate on an installment loan. Traditional lenders may rely more on your credit score to decide on your loan application than a P2P lender. Instead, these investors focus on other behavioral determinants to decide approvals.
Investors involved in P2P lending are more likely to use credit history and income factors to determine which lenders to finance. P2P lenders first watch market behavior and consumer trends across multiple industries to make profits where they can. That being said, P2P lenders are less interested in your past credit habits and more concerned about whether you will be able to pay it back on time.
While P2P installment loans still won’t provide the low-interest rates that a good credit score might earn at a bank, the opportunity that they provide for a fixed monthly payment over a long period makes them a solid choice.
Getting Installment Loans With a Poor Credit Score
For those with bad credit, the financial relief of a low-interest installment loan can indeed be hard to come by. Luckily, there are lenders out there who will be able to get you the money you need. As you search, remember that not all lenders are created equal. Do your best not to settle on a choice until you know it’s right for you.
Whatever solution you choose, do not hesitate to ask the lender questions to help you understand the terms and conditions. Even though it solves today’s problem, the installment loan that you choose will be with you for months or years. With that in mind, take special care in learning the ins and outs of any loan agreement. And make sure that this is a financial responsibility you can genuinely bear.
Average U.S. FICO Score Ticks Up to 706, Ethan Dornhelm, September 2019
How Payday Loans Work: the Truths, the Myths and the Potential Trap, Christine DiGangi, August 2019