Do You Have Bad Credit and Need a Loan? Here Are 4 Options
Finding the right bad credit loan means doing your research, understanding the pros and cons of each product, and finding the loan that works best for you.
If you have bad credit but you need to get a loan to cover a surprise expense, you’re going to have to make some hard choices. Whereas someone with a good score could borrow that money at fairly low rates, you’ll have to make do with more expensive options.
Still, you’ll want to make sure you know exactly what you’re getting into before you borrow. With that in mind, here are four of your primary bad credit loan options. And remember: The smarter you borrow, the better off you’ll be.
1. Payday loans.
Payday loans are one of the most common types of no credit check loans. The idea behind them is that they serve as an advance on your next paycheck. (For this reason, they are also sometimes referred to as “cash advances.”) They are available as online loans and can also be obtained from local brick-and-mortar storefronts.
Payday loans are small-dollar loans, meaning that the most you’ll be able to borrow is usually just a few hundred dollars. They also come with very short terms: The average repayment term for a payday loan is only two weeks, and the loans are repaid in a single lump sum payment.
When you borrow a payday loan, you will oftentimes have to make out a post-dated check for the amount owed or sign an automatic debit agreement. When the loan’s due date arrives, the funds owed will then be automatically removed from your bank account.
Unlike installment loans, payday loans charge interest as a flat fee, with an average rate of $15 per $100 borrowed. If you were to borrow $300 with a payday loan at that rate, you would be charged $45 in interest and owe $345 in total. That flat rate means that early repayment won’t save you any money.
While a 15 percent interest rate might not seem that high, payday loans are much more expensive than traditional personal loans, which calculate interest on an annual basis, not a weekly one. 15 percent interest on a two-week payday loan comes out to an annual percentage rate (APR) of 391 percent!
Due to payday loans’ high interest rates, short terms, and lump sum payment structure, many borrowers have difficulty paying their loan off on-time—or they find themselves having to choose between making their loan payments and paying other important bills.
Payday loan borrowers in this situation are often faced with two options: They can either take out a new payday loan or they can “roll over” their old loan, paying only the interest due and receiving an extension on their due date … in return for a brand new interest charge.
Either way, rolling over and reborrowing a payday loan can end up trapping borrowers into a dangerous cycle of debt. According to a study from the Consumer Financial Protection Bureau (CFPB), the average payday loan user takes out 10 payday loans every year.
2. Title loans.
Title loans are another kind of short-term bad credit loan. But while they are similar to payday loans in many ways, the two products also have some key differences.
While payday loans are unsecured loans—meaning that the borrower doesn’t have to offer any collateral—title loans are secured by the title to the borrower’s car or truck. In order to qualify for a title loan, a person must own their car free and clear—meaning they don’t owe any money on an auto loan.
This collateral means that the average consumer can borrow more with a title loan than they can with a payday loan. It should be noted, however, that title loan amounts rarely equal the full resale value for the vehicle being used as collateral.
And even with that additional collateral providing decreased risk for the lender—which would normally mean lower interest rates—the interest charges for title loans are still extremely high. They have an average repayment term of one month and an average interest charge of 25 percent, which works out to a 300 percent APR.
While the average borrower can expect a larger loan principal with a title loan than they could get with a payday loan, the downside to title loans is also clear: If the borrower cannot repay their loan, the lending company can repossess their car and sell it in order to make up their losses.
And this isn’t just a hypothetical either: According to research from the CFPB, one in five title loans ends with the borrower’s car being repossessed. In some states, title lenders don’t have to recompense borrowers if the car ends up being sold for more than was owed.
3. Pawn shops.
You might not think of pawn shops as a place where you go to borrow money, but that’s exactly how they work. Customers bring in valuable items that are then used to secure small-dollar loans; if the borrower can’t pay the loan back, the pawn shop gets to keep the collateral and sell it.
Similar to title loans, the amount you can borrow with a pawn shop loan will vary depending on the worth of the item being used as collateral. The more valuable the item, the more money you’ll be able to borrow but the more you’ll stand to lose if you default on the loan.
All small-dollar loans are regulated at the state and local level, meaning that loan terms and interest rates will vary depending on where you live. But even compared to payday and title loans, the rates and terms for pawn shop loans vary wildly. Most pawn shop loans are issued on a month-to-month basis.
Pawn shops charge anywhere from 15 to 240 percent interest depending on local and state regulations. Before deciding whether a pawn shop loan fits your bad credit borrowing needs, you should do research on your local laws to see what kinds of rates you’ll be charged.
4. Installment loans.
Unlike the other loans included in this list, installment loans come with repayment terms that are longer than two weeks or a month. Your typical installment loan often comes with repayment terms anywhere from nine to 18 months.
In some ways, bad credit installment loans are the same thing as regular personal loans; they simply come with higher interest rates. Installment loans are paid off in a series of regularly scheduled payments—instead of just one lump sum—and they charge interest as an ongoing rate instead of as a flat fee.
Installment loans are also amortizing, which means that each payment goes towards both the interest and principal loan amount. Early payments mostly go towards interest, while later payments are almost entirely principal. The ratio between the two changes according to the loan’s amortization schedule.
Since installment loan interest is charged as on ongoing rate, paying the loan off early will save you money. Before borrowing, however, you should check to see whether or not the lending company charges prepayment penalties, which penalize you for doing just that.
The rates for installment loans differ from loan to loan, lender to lender, and state to state. Still, the rates for installment loans are oftentimes lower than the rates for title and payday loans. One of the few downsides is that longer loan terms can mean more money paid towards interest overall compared to short-term loans.
Still, the smaller individual payments for installment loans could end up negating that extra cost. If a borrower is unable to pay off their short-term loan, they will be forced to roll it over or reborrow it. And every time they do, their cost of borrowing goes up. Meanwhile, making regular payments on an installment loan keeps costs steady.
With payday loans and title loans, it is rare that a lender will run any sort of check on their customers’ ability to repay the money they’re borrowing. With installment loans, this practice is more common. They often perform their due diligence by verifying an applicant’s income or running a soft check on their credit history—one that won’t affect their score.
Lastly, some installment lenders—like OppLoans—report their customers’ payment information to the credit bureaus. This means that on-time loan payments will be reflected in customers’ credit history and can help them build their credit scores.
Borrow now, plan for later.
Even the best bad credit loan is no match for a well-stocked emergency fund. Instead of paying money towards interest, your long-term financial plan needs to involve money that’s been set aside to deal with surprise bills and other unforeseen expenses.
While you’re building those savings, it wouldn’t hurt to tackle your credit score as well. Even if you end up needing to borrow money to pay for a car repair bill or a medical expense, a good credit score will mean you can take out a loan with much lower interest rates to do so.
If you have bad credit, you should focus on paying your bills on time and paying down your debt, as those two factors make up 65 percent of your overall score. For debt repayment, you should try either the Debt Snowball or the Debt Avalanche methods.
And no matter what steps you take to improve your financial situation, one of those steps needs to be building a budget and then sticking to it. Without that, all your other efforts to pay down debt, improve your credit, and build up your savings will fall flat on their faces. To learn more, check out these other posts and articles from OppLoans:
- How to Raise Your Credit Score by 100 Points
- Save More Money with These 40 Expert Tips
- Financial Basics: Expert Tips for Smarter Spending
- Building Your Financial Life: Budgeting for Beginners