Bad Credit Loans
You need money now, and it’s as simple as that. Because things happen. Maybe a big expense popped up, maybe you need to pay off bills, or rent a moving truck to relocate for a job. And the amount you need isn’t all that much—500 dollars, or maybe a thousand.
In a perfect world, everyone would have a healthy savings account to dip into. But the reality is quite different, because recent studies show that 60 percent of Americans have less than $500 in savings.(1) To make matters worse, more than half of Americans have “bad credit”—a FICO score of 620 or below.(2)
So, if you have bad credit and need money now, you’re not alone. But where can you turn? There are lenders out there who offer “bad credit” loans, and you’ve probably seen them advertised online and in storefronts. But are they safe?
What is a Bad Credit Loan?
A bad credit loan is a type of personal loan offered to borrowers with weak, bad, or no credit. There are many different loans and many different types of financial institutions that offer them—banks, credit unions, and online lenders, among others.
One characteristic of bad credit loans is that they will generally be expensive. This is because lenders charge higher interest rates to borrowers with bad credit than they do to borrowers with good credit.
So what is a good credit score and what is a bad one? Generally, a FICO score below 630 is considered bad. To see where you fall, use the table below. If you don’t know your credit score, you may be able to access it through your online bank account or credit card statement. You can also get a free credit score through sites like CreditKarma.com and Experian.com.
How do Bad Credit Loans work?
At this point, you may be thinking: Wait a minute! I have bad credit AND I’m broke. And because of that, a lender wants to charge me EXTRA interest?
Well the answer, sadly, is yes. Lenders are going to charge you extra.
When you have bad credit, it means you have a history of paying your debts late or not at all. (You can read more about credit scores and what they mean in our guide to improving your credit score here.) This makes it riskier for lenders to let you borrow money. From their perspective, you already have a history of not paying your debts, so why should they expect it to be any different with them? If they lend you a thousand dollars, there’s a very real risk that they’re not going to be repaid.
To compensate themselves for that risk, lenders charge higher interest rates (the cost of borrowing money) to borrowers with bad credit. This way they make more money on these risky lending arrangements, which offsets the very real possibility of many of their borrowers defaulting (failing to repay their debts).
Say 100 people borrow money and 20 of them don’t pay it back. The lender needs to make enough money on the other 80 to cover the loss on the 20 and make a profit. When they lend to people with good credit, they get paid back more often, so they don’t charge as much.
A bad credit loan may sound like a great idea when you’re desperate for cash, but look a little closer and you’ll see that most bad credit loans will make your financial life much worse in the long run.
Even Bad Credit Borrowers Have Options
There are two basic types of bad credit loans: secured and unsecured.
An unsecured bad credit loan means that borrowers sign a contract and promise to repay their loan according to the terms and conditions of their loan. If they fail to repay their loan, the lender may pursue collection of the money owed through a collections agency or other legal mechanism. Typical unsecured bad credit loans include personal installment loans, credit cards, and student loans.
A secured bad credit loan requires that the borrower use a valuable item—like a car, a home, or a piece of jewelry—as collateral to “secure” the loan. This means that if a borrower is unable to repay the loan, the lender is legally allowed to seize the collateral and sell it to recoup their losses. Typical secured loans include mortgages, car title loans, and pawnshop loans.
Technically, a payday loan is a secured loan. You’re not offering your car or the deed to your house, but with a predatory payday loan, you are securing the loan with a check for the amount you’ve borrowed, plus interest or fees. If you’re unable to repay the extremely high-interest loan by the due date (most borrowers aren’t), the payday lender will cash your check.
Are Bad Credit Loans safe or dangerous?
Bad credit loans—or no credit check loans—are risky. If your lender doesn’t check your credit, or your ability to repay your loan, that’s a sign that they aren’t offering you a responsible loan. If they don’t care about your credit, they don’t care about you.
Dealing with the Risk in Bad Credit Loans
Say you want to buy a set of used furniture for your living room. You could visit the online used furniture store website with great customer reviews—an A+ Better Business Bureau rating, and friendly and knowledgeable customer service reps you can actually talk to on the phone—or you could buy it from a sketchy looking stranger selling it out of the back of his truck. It’s the same furniture, right? What’s the difference?
Well, whether it’s furniture, cars, home appliances or personal lenders, knowing and trusting the businesses you’re working with matters.
If you need a bad credit loan, you can expect a lot of sketchy strangers to come calling for your business. They’ll promise cash right now without a credit check. And while that all might sound well and good in the moment, you can be sure there’s a catch—sky-high annual percentage rates (APRs), short terms, and a long future of debt rollover.
But don’t panic! If you need a bad credit loan, it can be done safely. Here are the steps we recommend to find socially responsible, legitimate lenders who can get you the money you need now and even help you improve your credit score.
If you have bad credit and need a loan, look for a lender who…
Offers personal installment loans, rather than payday loans
Payday and title loans are the quickest way to ruin your finances. Getting a payday loan is never worth the risk. Remember: four out of five payday loans are rolled over or renewed,(3) and the typical payday borrower spends more than half of the year in debt to their payday lender.(4) And all this for a loan that was supposed to only last two weeks! No matter how you look at it, the odds are stacked against you.
Instead, you can find a bad credit loan from lenders who offer personal installment loans. Personal installment loans come with longer terms, lower rates, and—unlike predatory payday and title loans—are designed to be repaid.
Considers your ability to repay
Your ability to afford your loan is the single most important factor that both you and your lender should consider before you decide to borrow money. While a predatory lender wants to trap you with a short-term, high-interest debt that you won’t be able to repay (leading to a toxic cycle of re-borrowing or extending the life of your loan at the cost of additional fees and interest), a socially responsible lender will verify your income, look at your bank statements, and decide to approve or deny your loan not based on your ability to repay what you borrow.
Performs a soft credit check
You can bet that a lender who doesn’t check your credit at all isn’t interested in your ability to repay your loan. If your potential lender performs no credit check whatsoever, run.
You should also avoid lenders who perform what’s called a hard credit inquiry. These credit checks signal the credit bureaus and can harm your credit score. Hard credit inquiries (or hard credit checks) are typically initiated by lenders or credit card companies—and require your authorization. When a hard credit check is run, it can remain on your credit report for up to two years.
Alternatively, you should seek a lender who will run a “soft credit inquiry” or soft credit check. You can run a soft credit check on yourself, or it could be initiated by a lender, potential employer or landlord. Soft credit checks do not negatively impact your credit score. These are a safe alternative to hard credit checks.
Offers you flexible terms and repayment plans
When looking for a bad credit loan, one of the surest signs you’re dealing with a predatory lender is a short-term repayment structure. Typical payday lenders offer terms of two weeks. Typical title lenders offer terms of 30 days. These short terms (and the astronomically high APRs) make on-time repayment very difficult.
Instead, look for a personal installment loan with longer terms. Generally, longer terms will translate into lower monthly payments, and a more affordable loan that borrowers will be able to repay.
Reports your payments to the credit bureaus
Speaking of repayment… You’re looking for a bad credit loan because you have bad credit. When you repay an installment loan with a lender who reports payments to the credit bureaus, you can actually improve your credit score over time! Check with your potential lender and ask them, do they report on-time payments to the credit bureaus. If they do, you can use that installment loan to solve your short-term problem and grow your credit over the long term.
OppLoans is Different
If you have bad credit, then you are likely all too familiar with the frustrations a low credit score can bring.
You don’t have to live with bad credit forever. Even the most damaging credit mistakes can be repaired over time. The first step toward fixing your credit is to put a stop to the habits that are contributing to your low credit score. Don’t open new credit card accounts, don’t let lenders run hard credit checks on you and don’t let predatory lenders deceive you into taking out harmful, short-term loans that you won’t be able to repay.
With a safe, personal installment loan from OppLoans, you can be certain that our soft credit inquiry won’t impact your credit. We’ll focus on your ability to repay what you borrow. And we’ll work with you to set a flexible repayment plan that fits comfortably into your life. And if you ever have questions, or need help, you can call us! (We’re a lender who answers the phone and actually wants to speak with you—how different is that?)
Taking out a bad credit loan is a major decision. Make sure you’re not just selecting a loan, but also a financial partner who wants to help you succeed today and in the future.
- Vasel, Kathryn. “6 in 10 Americans don’t have $500 in savings.” Money.CNN.com. Accessed February 7, 2017 from http://money.cnn.com/2017/01/12/pf/americans-lack-of-savings/.
- Meni, David. “The Importance of Credit Reports & Credit Scores for Building Financial Security.” CFED.org. Accessed on February 8, 2017 from http://cfed.org/assets/pdfs/Credit_Fact_File_07-2016.pdf.
- “CFPB Finds Four Out Of Five Payday Loans Are Rolled Over Or Renewed.” ConsumerFinance.gov. Accessed on February 8, 2017 from http://www.consumerfinance.gov/about-us/newsroom/cfpb-finds-four-out-of-five-payday-loans-are-rolled-over-or-renewed/.
- Morran, Chris. “The Average Payday Loan Borrower Spends More Than Half The Year in Debt To Lender.” Consumerist.com. Accessed on February 6, 2017 from https://consumerist.com/2013/04/26/the-average-payday-loan-borrower-spends-more-than-half-the-year-in-debt-to-lender/.