6 types of bad credit loans and their uses
Key takeaways
It’s possible to access emergency funding with less than perfect credit.
Bad credit loans often come with steep borrowing costs.
Low-cost alternatives are available for credit-challenged borrowers.
If you’ve been turned down for a loan due to bad credit, you’re not completely out of luck. Traditional personal loan lenders may have said no, but bad credit loans exist for borrowers with low credit scores who can’t get approved for funding elsewhere.
Most are convenient as they come with fast funding timelines and may not require a credit check. Still, bad credit loans come with their fair share of drawbacks, including possibly facing higher costs to borrow or needing to use your assets as security.
No-credit-check loans
As the name implies, these loans do not require a credit check. However, they come with steep interest rates to offset the risks they pose to the lender. This means you could get a steep monthly payment that stretches your budget thin and entraps you in a dangerous debt cycle.
Some lenders offer extended loan terms to lower your monthly payment. While this option seems more appealing and can work better for your budget, you’ll pay more in interest over the life of the loan.
Common no-credit-check loans include payday loans, auto title loans and co-signer loans.
Pros
No impact on credit score.
Secured and unsecured loans available.
Cons
Not legal in every state.
High interest rates and monthly payments.
Best for
Individuals seeking a bad credit loan with an extended term.
Cash advances
A cash advance lets you pull funds from your credit card’s available balance, up to the preset limit set by your credit card issuer. The amount you borrow is rolled into the outstanding balance on your credit card. You’ll likely pay a higher interest rate than on regular credit card purchases, but there are ways to limit the total cost.
If possible, only use cash advances for emergencies. Although they offer a rapid solution if you’re experiencing financial hardship, they can be costly and can keep you in credit card debt for an extended period.
Pros
Funds available instantly.
Less predatory than payday or no-credit-check loans.
Cons
High interest rates, though lower than other bad credit options.
Must have a credit card with an available balance.
Best for
Individuals who need cash right away and can repay what they borrow promptly.
Payday loans
While expensive, payday loans provide a short-term solution to borrowers who don’t qualify for anything else and who may not have a bank account. They can be quite predatory, so be careful if you need to borrow them.
Most payday lenders won’t check your credit and offer loans up to $500. Since brick-and-mortar lenders offer checks, you may be able to get your loan within a few hours.
Still, payday loans should only be used as a last resort because the cost is steep — often well over 300 percent. You will also have to repay what you borrow by the next payday or face hefty fees if you choose to extend the loan term.
Pros
Same- or next-day turnaround.
No credit check required.
Cons
Extremely short repayment period.
High interest rates — often 300 percent or more.
Best for
Individuals who’ve exhausted all other options and can afford to repay the loan by the due date.
Bank agreements
Some banks offer short-term loans for smaller amounts to account holders with positive banking history. The qualification criteria differs between banks, so reach out to your bank to determine if this is a viable option.
Credit unions also offer short-term loans with interest rates capped at 18 percent. You will need to be a member of the credit union to qualify, but they often have less strict criteria than banks and other lenders.
Pros
Lower interest rates than other bad credit options.
Funds available quickly.
Cons
Much more difficult to qualify for.
Must have an open checking account.
Best for
Individuals with poor credit scores who can access this option through their bank or credit union.
Car title loans
Car title loans let you borrow between 25 and 50 percent of your vehicle’s value. But there’s a catch — you must own your car outright and hand over the title until the loan is paid in full. Most car title loans come with short repayment periods between 15 and 30 days, and loan amounts generally start at $100.
They are quick, but the ease of access comes at a price. Interest rates are very high, and if you are unable to pay back your loan within the short repayment term, your car can be repossessed.
Pros
May not require a credit check.
Rapid approvals and funding timelines.
Cons
Exorbitant interest rates.
Risk of repossession if you default on the loan.
Best for
Individuals with limited borrowing options who have a vehicle they can use for collateral.
HELOCs or home equity loans
Home equity lines of credit (HELOCs) and home equity loans are another popular secured loan option for borrowers with less-than-perfect credit. These loans act as second mortgages and allow you to convert a percentage of the equity you’ve built up in your home to cash. Even better, there are very few limits on how you can use your funds.
The downside is they’re secured by your home. You risk foreclosure if you default on the loan. Still, they could work if you haven’t found better options elsewhere and don’t foresee any issues paying on time.
Before you apply, research potential lenders to determine if you meet the minimum eligibility criteria. It can be challenging to find a suitable lender if your credit score isn’t at least in the mid-600s. However, some lenders may be willing to do business with you if you have an acceptable debt-to-income (DTI) ratio and meet other guidelines.
Pros
Potential to qualify for a higher loan amount.
More competitive terms than bad credit personal loans.
Cons
Risk of foreclosure.
Funding may take longer, usually 30 to 45 days.
Best for
Individuals who need to borrow a sizable amount of cash.
Alternatives to bad credit loans
Although bad credit loans are designed to help consumers who have trouble accessing funding, they can be costly and predatory. If you’re facing a financial emergency or unexpected expense, there may be some viable alternatives.
Consider a charity. Local charities organizations, churches and nonprofits frequently offer help to members of their communities. You can join forums like Reddit and find local Facebook groups to see what options may be available to you.
Ask a relative or friend for money. Be sure to draft up a repayment plan that works for both parties to avoid problems later on.
Use a credit card. If you have available credit on a credit card, the cost of swiping it is probably much lower than you’ll pay if you take out a bad credit loan.
Take out a 401(k) loan. It provides easy access to funds without a credit check (if available), but should only be used as a last resort.
Inquire about a hardship loan. Some employers offer hardship loans to provide financial support to employees facing unexpected expenses or other financial challenges.
Most importantly, work towards building your emergency fund and improving your credit. This way, you can potentially qualify for loan options with better terms and more competitive interest rates in the future.
