What Is A Bad Credit Loan And How Much Does A Bad Credit Personal Loan Cost?

The main points

Some lenders will accept borrowers with a credit score of 580 or less.

Bad credit loans usually come with high annual rates and fees (APRs).

Be wary of lenders that guarantee approval or ask for upfront fees - these are signs of a scam.

A bad credit loan is a type of personal loan that caters to borrowers with low credit scores (FICO Scores less than 580 or VantageScores less than 600). They can be used for a variety of purposes, such as covering financial emergencies, consolidating debt or paying medical bills.

Bad credit personal loans work like other personal loans - they usually come with a fixed interest rate and are paid in fixed monthly instalments. But here's the main difference: They often come with high interest rates and fees.

Where can you get a bad credit loan?

You can get bad credit personal loans from a number of lenders, including banks and credit unions. However, you will find that most of the bad credit lenders only work online.

Online lenders. Many online lenders offer bad credit loans. For example, Avant offers loans to customers with credit scores below 580.

Credit unions. Since credit unions are member-owned organizations, they may be willing to lend to you even if you have less than stellar credit.

Banks. Even though banks have stricter credit requirements, you may still be able to get a personal loan — especially if you already have one.

Who wants to consider a bad credit loan?

A bad credit loan is worth considering if you need cash quickly and don't qualify for other loans. If you have the time, you're better off building or saving your credit — but both take time.

If you need the money sooner rather than later, there are still options. Secured loans are suitable if you are confident that you will be able to repay on time - provided you have an asset that you can use as collateral.

Secured loans are generally easier to qualify for than unsecured loans because the lender takes on less risk by asking for collateral. However, these can be riskier for lenders because the collateral you use can be seized by the lender to cover your late payments if you default on the loan.

Unsecured loans have higher interest rates and may be more difficult to qualify for, but they do not require collateral. If making payments on time is a problem for you throughout the life of the loan, check with the lender to see if you qualify for an unsecured loan before applying for a secured option.

How much does a personal loan with bad credit cost?

It is determined by the lender and your credit score. When you take out a bad credit loan, you can expect an annual interest rate of up to 36 percent.

A lower credit score means that you will usually get a higher interest rate because the risk of default is higher. But if you choose to take out a secured loan, the lender may give you a little break on the interest because the risk is less on their end.

How do you avoid predatory bad credit loans?

Not all bad credit loans are the same. When considering your options, there are a few factors that determine whether or not a lender is a safe choice.

Is the lender credible? The lender must be licensed in your state, have a physical address, and a secure website.

Does the lender charge prepayment penalties? You want to get rid of bad credit loans with prepayment penalties. Otherwise, you will be assessed a fee if you get back on track and pay off the loan early.

Is the interest rate excessive? Bad credit loans come with huge interest rates. Research the market and find a lender that offers competitive rates. If you haven't, try pre-qualifying with other lenders to see what your options are.

What are the payment terms? Avoid bad credit loans with long repayment periods. The lender may extend the loan to make your monthly payment more affordable, but you'll also pay a fortune in interest.

Also avoid lenders who guarantee approval before submitting an application or request a down payment to secure the loan. Both are signs of a scam and should therefore be avoided in the future in case of financial loss or benefits.

Bottom Line

Getting a bad credit personal loan can help you cover big expenses and be a way to get the money you need right away. However, do your research before applying and consider whether you can afford the higher interest and fees — and always look for cheaper alternatives first.