How to choose the best bad credit loan company
If you can’t get approved for a loan through a bank, credit union, or borrow money from friends and family, a bad credit loan can be a viable option.
It is relatively easy to apply and most lenders issue quick loan decisions. Interest rates on both unsecured and secured bad credit personal loans can reach up to 36 percent or triple digits for payday loans and cash advances.
However, not all loan options are the same. Before you apply, see how to choose the best bad credit lender.
What is a bad credit loan?
Bad credit loans are personal loans that cater to credit-challenged customers. You can also qualify for a bad credit loan if you have little or no credit history.
Bad credit loans usually have no restrictions on how the funds can be used. Some borrowers cover financial emergencies, medical expenses or expensive home repairs. Others use the money to collect debt or otherwise they see fit.
These loan products usually come with high interest rates as they are risky for the lender. But most bad credit loans have a fixed interest rate, so the monthly payment amount will not change. The proceeds of the loan are shared together and payable in equal monthly installments over a fixed period.
Payday loans and cash advances are bad credit personal loan options. However, the interest rates and fees make these loans very risky options.
Types of bad credit loans
There are four primary types of bad credit loans.
Secured Loans
You will need collateral to get approved for a secured loan. However, the rate will usually be lower than what you get with an unsecured loan. If you don’t default on the loan, your lender can seize your assets and sell them to recover their losses.
It is also easy to qualify for these loan products if you have bad credit. However, it should be used only if you can comfortably afford the loan payments.
Unsecured loans
If you need a bad credit loan then this type of loan is preferred. You won’t need collateral to qualify and you may be eligible for a larger amount. The downside is that your interest rates will be higher with a lower credit score.
Consider checking out online lenders. They have more flexible personal loan options for borrowers with bad credit than traditional banks and credit unions.
Payday Loans
Payday loans can be used as a last resort if you don’t qualify for a personal loan or can’t borrow from family or friends. It is a short term loan for $500 or less. It comes with an exorbitant interest rate, usually three-figures, and is payable on your next payday.
These loans are extremely risky and can trap you in a dangerous debt cycle if you are unable to make the payments and are forced to extend the loan tenure. You can rack up several hundred dollars in interest and fees every time you roll over a balance.
Cash Advance
Like payday loans, cash advances are another expensive way to borrow money. It’s available through some credit card issuers and involves withdrawing funds from your credit card’s available balance.
The amount you borrow will be rolled into the existing balance on your account, but you can expect to pay a higher than assessed interest rate for purchases made on the card.
Related: Best Personal Loans Companies in Canada in 2022
How to choose a bad credit loan company
In addition to funding time, there are other factors to consider when evaluating bad credit loan companies.
Loan costs
Borrowing costs vary by lender and loan product. Get options from several lenders and compare them to decide which one offers the most competitive interest rate and doesn’t charge a fortune in fees.
Lender reputation
Bad credit loans are readily available through many financial institutions, both brick-and-mortar and online. Not all lenders are the same, and some should be avoided altogether. Some lenders can also be scammers.
Stay away from lenders that aren’t registered to do business in your state, offer guaranteed approvals without a credit check, or require an upfront payment to get you approved for a loan. It is equally important that they have a secure website and physical address.
Loan conditions
An extended repayment term means your monthly payment will be lower, but you will pay more interest over the term of the loan. Therefore, a shorter term loan may be more ideal if you want to make your repayments faster and save a bundle in interest.
Customer experience
The lender should offer customer support by phone, online, or both while working around your busy schedule. The application experience should also be seamless, and the lender gives you the ability to manage your loan online through a mobile app once it’s approved and you’ve started making payments.
Bottom line
Some bad credit loan options may be suitable. But before you apply for a loan, research loan types and shop around with lenders to get rate quotes. When narrowing down your options, you’ll want to evaluate lenders based on their reputation, loan costs, terms and customer service to find the best fit for you.
Where can I get a personal loan with bad credit?
Getting a personal loan with bad credit can be a challenge. However, you may find multiple lenders willing to do business with you (at a higher interest rate than if you have good credit). There are two primary loan sources to consider:
- Online Personal Loan: Online lending networks take your loan application and connect you with lenders who are willing to approve you for a personal loan. You can often submit an initial form and compare offers from multiple lenders.
- Direct Lender: Direct personal loans come directly from the financial institution where you are approved. These may include local banks and credit unions, online banks, and online direct lenders. If you have bad credit, it’s usually best to apply only with direct lenders who are willing to do business with credit-challenged borrowers.
- Local lender. If you use a local bank branch or credit union, you may be able to find a loan officer willing to work with you. Your personal relationship can influence the criteria they use to evaluate your application, including not factoring in your credit score too much. Even if you have bad credit, they can offer you better terms, interest rates, and lower fees.
Can I get a personal loan with guaranteed approval?
While there is no guarantee that you will be approved for a personal loan, especially if you have bad credit, there are steps you can take to increase your odds.
First, choose a lender that is friendlier to borrowers with bad credit (and if you don’t know your credit score, you can check it for free). If your score is low, you can work to improve it before getting a loan, but if you need the funds right away, try to find a co-signer with good credit. A co-signer is someone who promises to pay back the loan if you can’t, and can make you less of a risk in the lender’s eyes.
And finally, consider applying with multiple lenders. The more lenders you try, the better chance you have of finding one that will approve you. Just make sure they do a soft rather than a hard credit check as the latter can further lower your credit score.
How we choose the best loans for bad credit
Our team evaluated 38 lenders and collected 1,520 data points before choosing our top picks. We weighed more than 20 criteria and gave more weight to those with a more significant impact on potential borrowers.
The top picks were selected based on factors such as membership requirements (weighted 15%), average fixed APR (weighted 15%), and average origination fee (weighted 10%).
We also considered flexibility of repayment terms, helpful features like prequalification and whether co-signers or joint applications are allowed to ensure borrowers get the best possible experience. For more information on our selection criteria and process, our full methodology is available.
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