Bad Credit Loans: What Should You Know?

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.

Credit Scores: The Good, The Bad, and The Fair

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:

• Payment History: This is whether you make on-time payments on your debts or not—on-time payments help, and late ones hurt.
• Credit Utilization Ratio: A bit more complicated, this factor looks at how much credit you are using relative to the amount you have available (a credit card with a $5000 limit and a $1000 balance on it would amount to 20% utilization, 1000/5000 = 0.20)—a lower ratio is looked on more favorably than a higher one.
• Age of Credit Accounts: The older a line of credit you have the better it reflects on your credit score (e.g. borrowers with a year-old credit card look better than a six-month-old credit card).
• Variety of Credit Accounts: The more diverse your credit portfolio the more it will help your score as it shows you are able to manage your debts well (e.g. having only a single credit card open would be less impactful than having two credit cards, student loans, and an auto loan). NOTE: this does not mean you should recklessly take out lines of credit in an attempt to raise your credit score, always make sure you are able to pay your debts or you will end up doing more harm than good to your score.
• New Credit Inquiries: The number of inquiries on your credit can impact your score in the short term, especially if you have a thin credit file (credit report). If you have numerous credit inquiries in a short amount of time you will find your credit score decreases slightly, but it will rise back up as time passes.

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.

So, What Can You Do to Improve Your Credit Score?

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:

• Be smart with your debts and make sure you have a plan to pay them off when you take them out. Late payments can really hurt your credit.
• Avoid having a high credit utilization ratio if you can avoid it. A good rule of thumb is to keep it below 30% even if it means paying off part of your credit card bill early.
• Think twice about closing lines of credit if you don’t have to. Leaving them open allows your average credit account age to remain high, which helps your credit. 
• Monitor your credit. Keeping tabs on your credit is not only a good way to track your progress, but also to catch any attempts at identity theft.

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.

Types of Bad Credit Loans

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…

Bad Credit Personal Loans

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:

• Unsecured Loans: Unsecured personal loans are also called ‘signature loans’ because these loans are only backed by your credit score and your word that you’ll repay (i.e. your signature on the loan documents). This type of personal loan is normally harder for bad credit individuals to get and—regardless of credit score—tend to carry a higher interest rate than secured loans as they represent a larger risk for the lender. A good example of an unsecured loan is a credit card or a payday loan with loan amount of around $500.
• Secured Loans: Secured personal loans, on the other hand, differ insofar as they are backed by collateral. This collateral is, most commonly, either a home improvement loan or a car in the case of mortgages and auto loans respectively. You will find that secured loans are easier to get because the lender feels more comfortable extending the loan (and lower interest rates!). If you don’t make your payments, they can take possession of the property used as collateral until your debt is repaid. Due to this, you will want to consider your ability to pay back secured loans or risk the loss of property. Likewise, if you have bad credit some secured loan lenders require a co-signer. A co-signer is someone that agrees to be liable to pay your loan should you fail to. This is another way for the lender to ensure they get their money back.

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.

Bad Credit Payday Loans

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.

Is There Another Way? Best Bad Credit Loan Alternatives

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: 

• Secured Credit Cards: Secured credit cards are a great way for those of us who have bad credit to build a better score. These cards are opened by making a cash deposit with a lender such as a bank or credit union who then extends you a line of credit equivalent to the deposit you made (e.g. a $300 deposit would result in a $300 line of credit or credit limit). This allows the lender to repossess the initial deposit if you fail to pay back your debt much like the secured personal loan we looked at earlier. The best part about a secured credit card is that it helps you build your credit as you make payments without the possibility of maxing out your card with no way to pay it back.
• USDA or FHA Loans: Maybe you are looking to become a homeowner, but don’t qualify for a traditional personal loan. Perhaps then it is worth looking into a government-sponsored lending program like a USDA loan (United States Department of Agriculture) or FHA loan (Federal Housing Association). These two programs are designed to help lower credit and income individuals own homes by providing a reasonable loan offer if certain prerequisites are met. For example, the USDA program requires the home you’re looking to purchase to be in a certain location while the FHA program has maximum income limits. If you want to learn more we recommend reading the sites we linked above.
• Title Loan: A title loan, as one might expect, works much like a secured loan with your car title as collateral normally up to $1000. This is different from a normal car loan. This means if you do not pay your debt to the lender then your car could be repossessed to pay off your loan. A title loan is certainly a fast way to get money if you need it, but with 100% to 300% APR interest rates it should be a loan of last resort—you don’t want to find yourself without a car if you can’t pay back the loan.
• Pawn Shop: Made relevant in popular culture most recently by certain reality shows, pawn shops are an institution as old as time. Much like a title loan and more formal secured loans, a pawn shop gives out loans on a collateral basis. You provide the shop with a piece of property—most commonly jewelry, electronics, and other valuable objects—and the shop provides a loan based on the value of the pawned object. Interest rates for these types of loans range from as low as 10% to +240% depending on state regulations. You can also expect to pay for storage and insurance fees based on the object you are pawning. Naturally, if you do not repay your loan in the allotted time your pawned object is sold off to make up for you defaulting on your loan.

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. 

The Best Bad Credit Loan Option: Possible Finance

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!