Bad credit loans are, as the name implies, loans one can take out with a bad or less-than-perfect credit score. A quick Google search turns up hundreds of thousands of options for such loans from bad credit payday loans all the way to the less-formal pawn shops that borrowers.
Of course, with so many options, it’s important to know what’s out there to not only avoid the all-too-prevalent scams but also to find the best option for your unique financial situation. If you’re interested in learning more about how to make the most of a poor credit score (and possibly increase it!), continue along with us as we take a closer look at bad credit loans.
First, we’ll be unraveling some of the mysteries behind credit scores, what constitutes a good/bad score, and what you can do to boost yours. Then we’ll be exploring a few different types of bad credit loans and the average costs involved. And, lastly, we’ll be looking at bad credit loan alternatives like the one offered by us here at Possible.
Your credit score—just three short digits—determines the amount you can borrow, the rates at which you can do so, and sometimes, even the places you can live (yes, some landlords require a credit check to rent from them). And yet, despite their importance, these scores can be confusing and, at times, seem like nothing more than an arbitrary number generated by the credit bureaus. Thus, before we continue with bad credit loans, it’s worth taking a moment to understand how credit scores are determined and what is considered a good/bad score.
The first thing to understand is, contrary to popular belief, there is no single ‘credit score’ or credit report. In fact, different industries will use different scores; when you go to get an auto loan your score may be slightly different than when you go to get a home loan. This is because different lenders and financial institutions value different attributes in who they lend to, so the three major credit bureaus (Experian, Equifax, and TransUnion) generate various scores that cater to a lender’s wants/needs, with the most popular variant being the FICO credit score. Luckily for us, however, the credit bureaus tend to use five major factors when generating a score:
While the weighting of these factors changes depending on the type of score a lender pulls and is kept a closely guarded secret by the bureaus, you can generally expect your payment history and credit utilization ratio to factor most heavily into your score and to be on your credit report. So, if nothing else, it is important to stay on top of your payments and not overuse your lines of credit.
With all these factors considered, the credit bureaus then generate a score from 300 to 850 with a larger number indicating a more positive credit score. Here is where we can really break down the scores into ‘good’ and ‘bad’. With a good score, you will be better able to receive favorable loan terms while a bad credit score will result in worse terms or an inability to get a loan altogether due to a minimum credit score required. You may be forced to apply for a no-credit-check loan. Generally speaking, any score below 620 is considered ‘bad’ while anything above it is ‘fair’ to ‘good’.
Fun Fact: Your income does not directly influence your credit score, but a 2018 survey showed a good credit score could save you $45,000+ over your lifetime.
The average FICO score for borrowers in the US currently (2019), according to an Experian study, is 703. This means that the average American is doing pretty well when it comes to their credit score. However, as we all know, averages are not always representative of one’s individual experience and life happens, so what can you do if you find yourself with a less-than-perfect credit score?
Well, the first thing to do is understand that improving your credit score—no matter how good or bad it is currently—is a marathon, not a sprint. There are no silver bullets or shortcuts on the path to a perfect score and any person or product that claims there is probably isn’t to be trusted. That said, here are some great tips that will get you started on your journey to good credit:
Lastly, it’s important to remember that, like any journey, there may be setbacks on the road to good financial health. If those setbacks come, don’t be discouraged. It’s just a short-term financial hiccup. The beauty of one’s credit score is that it can be improved with a plan and a bit of time—bad credit is not permanent.
Borrowers don’t, however, have to wait until you have good credit to take out a bad credit loan. Sure, you won’t get the same rates or terms as you might with better credit and you might not qualify for some loans due to a minimum credit score requirement, but taking out a loan with bad credit is certainly possible and sometimes necessary when an unexpected emergency strikes. So, let’s take a closer look together at some types of bad credit loans and the costs involved for borrowers taking one out…
Typical Loan Size: $1000 to $50,000
Interest Rates / Annual Percentage Rate (APR): 5% to 36%, dependent on credit score
Origination Fee: Usually 0-8% of the loan amount
Loan Repayment Period: 12 to 60 months
Personal loans are taken out from a bank, credit union, or online lender and are typically a longer-term loan (with monthly payments) for a greater sum of money than one might find elsewhere. This makes these types of loans more appropriate for borrowers with larger emergencies/expenses like damage to your home, medical emergencies, or education. Of note, these loans can also sometimes carry a 0% to 8% origination fee of your loan amounts to cover the paperwork costs. This means a $1000 loan could carry an $80 fee (8% of $1000) for paperwork, which is normally deducted from the loan before disbursement (i.e. your $1000 loan would only be $920).
Some important things to remember when looking for a personal loan when you have bad credit is that you shouldn’t go in expecting to get the lowest interest rate. When applying and qualifying for your loan, the loan rates you will be offered won't be great, especially if you have a low credit score. A loan company or other lenders such as a bank and credit union will look at your credit score and probably offer higher interest rates. Or they might not give you a loan altogether due to a minimum credit score requirement. Some lenders will also typically look at your debt-to-income ratio or other factors. As such, it is important that you shop around for loans to find the lowest interest rate and payment fee possible. Also, determine your repayment options. See if you can use a feature like autopay from your savings account so that you're sure to remember to pay your loan back. Likewise, note if there is a prepayment penalty should you want to pay your loan off early. It is also worth knowing about the two types of personal loans:
The Verdict: Personal loans are a good way to pay for those larger expenses that crop up in life. They can also be helpful in debt consolidation by using a larger personal loan to pay off your smaller debts and only have to worry about paying a single lender at a single (hopefully lower) interest rate. That said if you need to take one out, make sure you do your research to get the best deal possible for your financial situation.
Typical Loan Size: $50 to $1000
Interest Rates / Annual Percentage Rate (APR): 391% to 1000%
Origination Fee: Usually $0
Loan Repayment Period: two to four weeks
Payday loans, cash advances, and short-term loans are always an option when you have bad credit as many store-front and online lenders don’t even bother to check your credit score and have a very quick application process and quick loan approvals. However, it is important to know what you are getting into before taking one out as they can be dangerous. Carrying astronomically high interest rates, payday loans are often paid back in a lump sum on your next payday (thus the name). Online payday lenders can take money directly from your bank account on your payday. Typically, these loans are smaller in nature and a better fit to cover small emergency costs that come up like a fender bender or unexpected medical bills.
The Verdict: Even though they will lend to you despite bad credit, payday loans can lead to dangerous cycles of debt that leave you worse off than you were initially because most don’t even report to the credit bureaus.
Check your payday lender at NMLS Consumer Access for more information on your lender. It might be worth considering alternatives to such loans like the one offered by Possible or other more customer-friendly options like payday advance apps.
For example, Possible has much friendlier repayment terms. If, however, you find yourself without any other options, make sure you understand the terms of your loan and have a plan to get it paid off as soon as possible to avoid the crushing interest rate.
Life happens and sometimes you won’t be able to make a payment as scheduled. It isn’t the end of the world, but it is important to understand what might happen. The first thing you might see is damage to your credit; if you are borrowing from a lender who reports to the credit bureaus they will report your loan as in default. Depending on the type of loan (like a payday loan or cash advance) and who your lender is they may report this on the first missed payment or after multiple—it’s worth understanding your lender’s default rules before you take a loan out.
Beyond damage to your credit, lenders may take alternative actions against you to recoup their debt. Most commonly, they will sell your debt to a collections agency which will then become the entity you are responsible for making your payments to. In more extreme cases, a lender may pursue a lawsuit against you in an attempt to garnish your wages. If you encounter such legal action we recommend reaching out to a qualified legal expert in your area to better understand the steps you need to take.
There is also the consequence of defaulting on a secured loan that we discussed earlier. That said, it bears reiterating: if you default on a secured loan you risk losing the asset you used as collateral for the loan. On a final note, if you know you will not be able to make a payment, we recommend reaching out to your lender to see if they will be willing to work with you on your payments—it is, after all, in their best interest to make sure you are able to repay your loan.
Maybe the types of personal loans we’ve discussed so far aren’t for you, though. We get that here at Possible and, luckily, there are alternatives that might work better for you. So, without further ado, let’s jump right into some alternatives to the types of loans we’ve discussed so far:
There you have it – a few other options for those of you with a poor credit score. There are even more options we have not mentioned including peer-to-peer lending, borrowing from family or friends, and more. As before, don’t rush into any of these options before researching them yourself—it’s always good to look before you jump, especially when it might be your credit and long-term financial wellbeing on the line.
We like to think we’ve saved the best for last. Here at Possible, we are proud to offer a strong alternative to traditional payday loans to help you make ends meet without the oppressive interest rates (our rates range from 150% to 200%) charged by most payday lenders. Our installment loan is repaid in four easy repayments and each payment is reported to 2 major credit bureaus (TransUnion, and Experian). This means that while repaying your loan on time you are actually helping build your credit history—it’s a win-win, you get the money you need and hopefully improve your credit score!
Though, as we’ve counseled throughout this article, don’t just take our word for it, do your own research and see what our customers have said about us in the app store. And, if it interests you, download the app to submit your loan application. It only takes a few minutes and you could be approved for a loan and get up to $500 the same day!