elenaleonova/GettyImages; Illustration by Hunter Newton/Bankrate
Key takeaways
- Bad credit lenders may approve borrowers with credit scores in the upper 500s or lower.
- Loans for bad credit usually come with high annual percentage rates (APRs) and high costs.
- Beware of lenders that guarantee approval or require upfront fees — these are signs of a scam.
Getting approved for a loan with bad credit can be challenging. Fortunately, you can get bad credit loans from many lenders if you can afford the higher interest rates and payments.
Before applying, learn how bad credit personal loans work and what borrowing costs you can expect. Some bad credit lenders are predatory, and knowing how to spot them could keep you from being exploited.
What is a bad credit loan?
A bad credit personal loan is a loan for borrowers with FICO scores below 580 — though some lenders consider credit scores into the low-600s bad. They can provide funds if you need a loan but have past credit issues.
How does a bad credit loan work?
The main difference between a bad credit personal loan and any other personal loan is the APRs and fees are usually much higher with bad credit. Otherwise, they work the same. You receive all your funds at once, and pay back the balance plus a fixed interest rate monthly over the course of one to seven years.
What to consider when getting a bad credit loan
Bad credit personal loans come with a number of risks.
They are more expensive because lenders will charge higher interest rates or more fees. You may also be limited in how much you can borrow and how long you have to repay your loan.
Bad credit loans cost more
A low credit score tells lenders you may have had past issues with missing payments or defaulting on loans. They see a low credit score as a sign of higher risk to them. So, they charge higher interest rates to help ensure they make money. Bad credit personal loan rates may reach 35.99 percent. They can be even higher for other types of bad credit loans.
Higher interest rates also mean higher monthly payments and more interest paid over the term of the loan. You may also be charged higher origination fees, which are usually deducted from the loan funds. You’ll receive less money to use but will still be charged interest on the full amount.
You may not be able to borrow as much
Lenders may limit how much lend to a bad credit borrower. That’s because borrowers with a history of credit trouble are more likely to default. Lenders often cap the loan amounts to reduce the amount of money they could lose.
Your term will likely be shorter
If you have a bad credit history, you may not be eligible for a lender’s maximum term. Bad credit loan lenders may prefer that you pay your loan off faster to reduce the odds that you’ll default over a longer time period. Use a personal loan calculator to make sure the payment fits into your budget.
How do you avoid predatory bad credit loans?
People with poor credit are common targets for financial predators. Not all bad credit loans are legit, so take extra precautions to avoid being a victim of predatory lending.
- Did the lender reach out to you unsolicited? You should always be the one starting contact with a lender, not the other way around. If you suddenly start getting calls about bad credit loans, you may be dealing with a scam.
- Is the lender asking for upfront fees? No legitimate personal loan lender will collect fees upfront. All of their fees should be collected when they fund your loan.
- Is the lender reputable? The lender should be registered to do business in your state and have a physical address and a secure website. Check the Consumer Financial Protection Bureau’s (CFPB) complaint database for any actions against the lender.
- Does the lender market “guaranteed approvals?” No lender can guarantee a loan approval without reviewing some of your financial information. If they do, they are probably not legit.
- Does the lender charge prepayment penalties? Check the terms of any bad credit loan with prepayment penalties. While this isn’t a red flag for a scam, you don’t want to be stuck in a loan you must pay a hefty fee to refinance if your credit improves in the future.
- Do you feel pressured to accept the loan? Never, ever take a bad credit loan out because a salesperson pressures you to do so. Any reputable company should share the benefits of the loan and show you how it can improve your financial situation. Strong-arm sales tactics are a red flag that you’re dealing with a predatory lender.
Bad credit loans are an expeditious source of last resort liquidity. Unfortunately, this market is filled unscrupulous players looking to take advantage of consumers. Stay clear of any lender that is not registered with your state … or has been censured or penalized by the CFPB for regulatory violations.
— Thomas Brock, CFA, CPA
The bottom line
Bad credit personal loans come with high APRs and fees. Explore cheaper alternatives first. If you’re having trouble getting approved for other types of loans and need cash, a bad credit loan may be worth considering. But it should be part of a bigger strategy to improve your credit and finances over the long term.
If you’re not sure about the loan program, talk to a credit counselor before making a decision. If you determine that it’s the best financing option for you, compare personal loan rates, terms and fees to find the best deal.
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