It’s not easy knowing you owe more money than you currently have. For those times, personal loans can provide people with the resources and relief they need. But when you have bad credit, relief from personal loans can be difficult to come by. Poor credit can prohibit access to a lot of financial resources that those with good credit can use. For those who have thought “I desperately need a loan for bad credit,” we have the information you need.
There are many ways to get a loan with bad credit. In this post, we’ll talk about what they are and how you can get them. Additionally, we’ll also look at a couple of ways to find money without a loan and share some advice on how to start turning that bad credit score into a good one.
If you have bad credit and need a loan, this is the post you’ve been looking for.
Understanding your credit score
We all know that having a good credit score is better than having a bad credit score. However, many people don’t understand what makes up their credit score—or even what it is.
A credit score is a rating of your ability to repay a loan or line of credit. It is an assessment that financial institutions, retailers, utility companies, and many other businesses use to determine your creditworthiness.
Your credit score is a part of your credit report. And a credit report is a detailed summary of your relationship with money and your creditors, both past and present. Credit bureaus issue these credit scores, companies that compile and analyze this consumer data. With this information, the three major credit bureaus issue credit reports.
Credit reports are used by lenders and creditors (like banks or car dealerships). They determine loan amounts, down payments, and interest rates. The three major credit bureaus in the United States are Equifax, Experian, and TransUnion.
It would help if you never were charged to view your credit score or credit report; credit bureaus are required by law to make them available to consumers at no charge at least once a year. Let’s take a look at what you’ll find on your credit report. Here are the five major factors that are analyzed to determine your credit score:
Payment history is the record of all the payments you’ve made to creditors or other businesses. From here, potential lenders can see how you repay the money you borrow and if you do so on time. A payment history full of delinquent payments will quickly sink any credit score. Your payment history has the most impact of all five determining factors, accounting for 35% of your credit score. This is why we are constantly reminding you to pay your bills on time. It matters.
Credit utilization is the percentage of how much of your available credit you are using. If you have a balance of $200 on a card with a $1,000 limit, then your credit utilization is 20%. To maintain a good credit score, credit utilization should be kept no higher than 30%. Keeping utilization low will show a pattern of responsible use of credit. This factor accounts for 30% of your overall credit score.
Credit history (or credit age) records all the past and current credit accounts under your name. A long history of accounts in good standing will show creditors that you manage lines of credit well. Credit history composes 15% of your credit score.
The variety of credit accounts you have is known as your credit mix. An ideal credit mix would be managing a car loan and a credit card. Maintaining these accounts could show creditors that you can sufficiently care about another personal loan or credit line. This factor has the lowest impact on your credit score, at just 10%.
Credit scores are three-digit numbers that range from 300–850 along the following scale:
- 300–499 Very Poor/Bad Credit
- 500–600 Poor/Bad Credit
- 601–660 Fair Credit
- 661–780 Good Credit
- 781–850 Excellent Credit
As the range above displays, a credit score of 600 or below reflects poor credit. People with good credit are viewed as a lower risk to lenders. They are more likely to receive personal loans and assistance at lower interest rates and better loan terms. For the 20% of Americans with bad credit, the road to getting out of debt can be challenging.
Secured vs. Unsecured Loans
Loans are divided into two categories: secured and unsecured.
A secured loan is a loan that is backed by collateral—property or assets like a home, car, or even a savings account. Common types of fast loans include mortgages and auto loans. A secured loan usually comes with a lower interest rate since the collateral the borrower puts up reduces the overall risk. However, if the loan can’t be repaid for any reason, the borrower could lose the collateral to the lending institution.
An unsecured loan is a loan that is backed only by the creditworthiness of the borrower. Unsecured debt examples include credit cards and student loans. Since unsecured loans don’t have any collateral, lenders consider these as higher-risk loans. That means that interest rates and loan terms for unsecured loans can be higher and stricter than those found with secured loans.
Secured and unsecured personal loans with bad credit are available, but a low credit score can still present problems. If you have collateral, consider using it to apply for a secure personal loan. If you have bad credit, collateral could make the difference between denial and approval.
Loans for Bad Credit
It is not impossible to get a personal loan with bad credit. Although the options are different than those offered to folks with good credit, there are ways for people with bad credit to get the help they need. Let’s start with one of the most popular, fastest, and riskiest ways to get a personal loan with bad credit: The payday loan.
A payday loan is a short-term personal loan that is specifically designed to address short-term cash flow problems. It is essentially a cash advance that can get people the cash they need to pay bills and expenses that are due before their next payday. Payday loans walk the line between secured and unsecured loans; while they need no collateral upfront, they are backed by the borrower’s promised earnings. Payday loans are relatively small loans that usually range from $50 to $1,000. According to the Consumer Financial Protection Bureau (CFPB), the average lending amount is about $350.
Payday lenders can be found nationwide; there are approximately 23,000 payday lenders in the United States, operating in brick and mortar locations and online. Payday loans typically require no credit check. Instead, a borrower only needs a valid ID, active checking account, and proof of employment to apply. Then, loan applications are processed, and payment is disbursed, usually within a day or two. And with some mobile and online payday lenders, many people can see cash deposited in just a couple of hours.
To get a payday loan, a borrower visits a payday lender to fill out an application. If approved, the borrower writes the lender a personal check for the cash they want to borrow, plus the lender’s origination fees and interest. The lender then gives the borrower the loan amount and then cashes the check at the end of the loan term, anywhere between 14-30 days. For payday loans over the phone or online, the borrower will provide his account information to be used for direct deposits for loan disbursement and automatic withdrawal for the repayment.
Dangers of Payday Loans
Payday loans work great when they can be repaid within the terms of the loan agreement. If they are not, then typical payday lenders will roll over any outstanding balance on a current loan into a new loan. This is the part where payday loans can get tricky.
Let’s look at a simple example. Suppose you borrow $100 from a payday lender that offers loans at 30% interest, with origination fees (the lender’s administrative costs) that total $20. You take your $100 from the lender, promising to pay back $150 at the end of the loan term. But when it’s time to pay the loan, you are coming up short; your other bills and needs ate up your funds, and you have nothing left. The lender then puts that balance into a new loan. But instead of just paying the balance that is already due, that $150 is now the new principal, which means that it is subject to another round of origination fees and another 30% interest fee.
That means that at the end of your second loan term, you will now owe $215. And if that loan goes unpaid in full again, that $100 loan will cost you just under $300! And with loan terms running about two weeks each time, this is how payday loans can end up with very high annual percentage rates (or APRs) of 300-400%; the interest is compounded over time. It is also how people with bad credit and low incomes get stuck in a cycle of debt. The CFPB estimates that 80% of payday loans are taken out less than two weeks after a previous payday loan.
Payday Loan Advice
If you decide to take on a payday loan, you must repay it on time and in full. Unfortunately, many people take on payday loans without fully knowing the payment structure and negative consequences. Unfortunately, the confusion is part of the design of many unscrupulous payday lenders—many of whom advertise the ease and accessibility of payday without educating desperate consumers. Although the fast cash that payday loans can provide relief right now, they can lead to a lot of financial trouble if they are not appropriately managed.
If you are a member of a credit union, you may be able to secure a personal loan with bad credit.
Credit unions are organizations that provide financial services to their members. They perform many of the same functions that a bank would; they hold checking and savings accounts, manage investments, and provide personal loans. However, unlike banks, credit unions are formed and ordered to serve the best interests of their members instead of generating profit. Credit unions are usually created to suit specific peer groups, like professionals, labor unions, and the military. Most credit unions offer a lifetime membership.
Credit unions can also provide an option called an alternative payday loan. Just like a regular payday loan, these loans can be quickly processed and disbursed. However, they are subject to much lower interest rates and more accessible terms for repayment. If you are a member of a credit union and need a personal loan, explore the options available to you.
Peer-to-Peer (P2P) Lending
Peer-to-Peer lending is a relatively new lending option that provides people with bad credit an opportunity to secure small loans with lower interest rates and better terms than payday lenders. In addition, with P2P lenders operating nationwide, they do virtually all of their business online, which allows them to approve loans and disburse funds rapidly.
P2P lending shifts the power in lending away from traditional financial institutions and towards private investors looking to provide loans to people in need as investments. With P2P lending, borrowers are connected with lenders that can offer rates on a sliding scale based on the borrower’s conditions and the risks to the lender. Those risks, however, are not necessarily measured by the same factors that banks may use (like credit scores). Instead, investors involved in P2P lending will look towards payment history and income factors to help them decide on approvals. P2P lenders are thinking more about market trends and consumer behaviors across different investment opportunities to maximize their profits. Investors want a return on their money. That means that P2P lenders will be less concerned about your past mistakes and more concerned about whether or not you can pay back their loan.
Home Equity Loans
If you own a home and need an emergency loan, then a home equity loan could be a solid choice.
Home equity is the difference between the amount of your home’s mortgage and the home’s market value. Let’s say, for example; you bought a house with a mortgage for $100,000. After a few years, the home increases in value on the market to $150,000. That means that you have $50,000 in home equity.
With a home equity loan, that $50,000 can be turned into cash for you to use now and then repaid in an installment plan that can run alongside current mortgage payments. If you have ever heard of someone “taking out a second mortgage” on a home, they’re talking about a home equity loan.
Since home equity loans use the home itself as collateral, interest rates are usually lower than those you would find at a bank or credit union.
Home Equity Line of Credit (HELOC)
Another way to tap into your home’s equity is with a home equity line of credit (HELOC). Instead of turning the equity into a loan, HELOCs allow a borrower to use only a portion of the home’s equity by turning it into a line of credit. That means that the borrower can control the amount of credit they use—and how much they have to repay.
No matter how hard we try to save and prepare for life, we can never prepare for everything. In those instances, emergency loans can help. Emergency loans are personal loans used for those completely unforeseen circumstances, like medical expenses or critical car and home repairs. Emergency loans can either be repaid as a short-term loan or through an installment plan.
The application process for an emergency loan is a lot like applying for any other kind of loan. But instead of looking at your credit score, emergency loan lenders consider your payment history and income to make sure that you can repay the loan.
If approved, emergency loans can be disbursed almost as quickly as a payday loan. And just like any other unsecured personal loan, an emergency loan will almost always come with a higher interest rate than a secured loan.
Before you apply for an emergency loan, see if you can prequalify with several lenders so that you can compare loan terms and interest rates. This loan will be a debt that you will have to include in your budget, so you want to be sure that you can afford to take on this loan in addition to covering your basic needs and other responsibilities.
If you can, get a co-signer for your emergency loan. Having someone able to assume responsibility for the loan if you can’t make a payment can help your chances of getting approved. An ideal co-signer for a personal loan would have good to excellent credit and the means to handle at least 2-3 consecutive installment payments on the loan.
In addition to an unsecured personal loan lender, types of emergency loans include:
Pawn Shop Loans
When you consider their functions, you may realize that pawnshops offer secured emergency loans with terms like unsecured loans. In exchange for a valuable item (collateral), the pawnbroker issues a borrower a loan amount from 25% to 60% of the item’s value. A pawn shop loan usually carries an interest rate of about 25% every month —which is the annual percentage rate of many credit cards. And, if a borrower misses loan repayments, they cannot get their item back; it entirely becomes the pawnbroker’s property to sell. Because these personal loans are hazardous and expensive, they should be used only when necessary.
Auto Title Loans
As their name suggests, auto title loans are emergency loans that require the title (proof of legal possession) of the car to be used for collateral. Car title loans require no credit check and are typically approved with an interest rate of around 25%. Car title loans last for about two weeks to a month and can be repaid in installments or a lump sum. Unfortunately, missing payments could mean having your car repossessed by the auto title loan company.
Credit Card Cash Advance
If you have a credit card, you may be able to turn your available balance into cash. Many credit cards allow cash advances that can be accessed at almost any ATM in the world. While cash advances are straightforward to access, they have a very high-interest rate that is usually higher than the card’s APR on purchases. Moreover, credit card cash advances do not have a grace period for repayment before interest in accrued; interest on cash advances is applied when the money is withdrawn. If you are desperate enough to use this option, it may be one of the most expensive loan options.
Alternatives to Bad Credit Loans
Because loans for bad credit usually have strict conditions, people who are already in financial trouble may not want a personal loan. After all, a loan is essentially another bill that has to be paid. So instead of taking on a loan, try these practical ideas:
Negotiate With Your Creditors
If you want to explore emergency loans because you can’t pay your bills, you may be able to work with your creditors before going deeper into debt. Many lenders can adjust due dates to accommodate pay periods or income changes. Utility companies that provide gas and electric energy often work with customers to keep their accounts current and vital services flowing to them. Additionally, many companies offer “budget billing” options that allow customers to pay a flat monthly rate based on their annual average usage. These companies want their money and are willing to work with you. Contact them today to see if you can get your accounts in proper order.
Sell Your Old Stuff
Maybe your current financial situation is just the motivator you needed to host that big yard sale you’ve wanted to organize. Many people (including us!) love to find their treasures among the stuff that others don’t want. But if the idea of spending an afternoon haggling with your neighbors isn’t your idea of fun, consignment shops and vintage clothing stores will either buy your things outright or sell them for you (for a fee).
Get a Side Gig
When you need more money, you have to make more money. Although places like grocery stores and warehouses work around the clock, with evening shifts that complement a full-time work schedule if you have reliable transportation, companies like DoorDash, Uber, Lyft, and others in the “gig economy” contract with drivers who set their hours and work when they want to.
Additionally, the restaurant industry is exploding with opportunities for servers, bartenders, and cooks to help reopen restaurants as pandemic-related restrictions are being lifted. Because of the worker shortage, many restaurants are hiring at record-high wages and offering signing bonuses.
Sometimes, just asking for help is the best way to get out of debt. Online crowdfunding has become a smart way to raise emergency funds. Sites like GoFundMe and Plumfund give people the power to potentially connect to thousands to help them with donations to solve their financial issues. Because of their reach, crowdfunding campaigns allow lots of people to give small amounts of money in a short amount of time. The most successful crowdfunding campaigns are heartfelt pleas from those who genuinely need cash.
Improve Your Credit Score
As you can see from the examples in this article, loans with bad credit have restrictions that you wouldn’t find on loans given to people with good credit. Remember, your credit score is an assessment of how risky it would be to loan you money. Therefore, the only way to change your credit score is to change the level of risk associated with doing business with you.
Improving your credit score is not an overnight process. However, as it is a determinant of your behavior over time, it will only change with steady progress.
As you move out of your current financial trouble, consider these tips that can help move the needle on your credit score:
Pay Your Bills
Since your payment history accounts for over one-third of your credit score, it makes sense that making on-time payments to your lenders and creditors is the best way to improve your credit score. In addition, even if you have poor credit (a FICO score of 650 or below), decent payment history will make the difference in a close decision on a loan or line of credit application.
Become An Authorized User
Being listed as an authorized user on another person’s credit card can help your credit score. Your credit score can be positively affected by being a user; you don’t have to make payments on the account or even purchase anything. However, for many cards, the primary account holder can set spending limits for other users if they choose.
Since you wouldn’t be the primary account holder making the card payments, your credit will see only a modest rise with this tactic. Moreover, this will only benefit your score if the account remains in good standing. Therefore, it’s best to partner with a person that has a good credit score and solid financial habits.
Dispute Credit Errors
When you get access to your credit report (remember, it’s free!), you must review all the details. Credit reports are subject to several errors ranging from paid accounts showing as delinquent to listing funds that don’t belong to you. Any mistake on your report can negatively affect your credit score. Stay vigilant and review your entire information regularly to ensure that the only credit activity listed on your account is your own.
Secured Credit Card
Did you know there were two types of credit cards?
Unsecured credit cards are issued with lines of credit based on the creditworthiness of the cardholder. A secured credit card is used for a line of credit that is funded (or backed) with money from the cardholder/borrower, in the form of a deposit made to the credit card company; for example, if you deposited $250 on your secured credit card account, then your card’s max limit would be $250. A secure credit card can help people with bad credit introduce good spending habits and credit care. Making on-time payments while keeping credit utilization low will help borrowers with bad credit move their score up.
Personal loans for bad credit are available, and they can do more than provide quick solutions to short-term cash problems. By borrowing only what you need and making on-time payments, a personal loan can help you raise your credit score. With a better credit score, you will have even more choices for help with times get tough.
When you are desperate for a loan, it can feel like there is little time to make the right decision for you, your family, and your overall financial health. When the bills are due, and your basic needs have to be met, it’s easy to take the first option that comes available. The consequences can be considered later.
Before you do that, take a moment to consider the long-term effects of your loan. Even though it’s solving the problem in front of you, you must think about the issues you could create for yourself in the future. A loan is a bill that will be with you long after your short-term financial trouble is gone. To break a cycle of debt, you need to execute a solid financial plan not only to solve today’s problem but to prevent another one tomorrow.