Everyone has unexpected expenses from time to time. For people with high credit scores, it’s easy to take out a personal loan or sign up for a new credit card to cover expenses and move on with life. But what if your credit score is low? Traditional banks may turn down your application, leaving you wondering how to cover a financial emergency.
Loans for bad credit help people with low scores access the credit they need to improve their circumstances. If you have a pipe burst and need to expedite an unexpected home improvement, have medical bills piling up from an accident or simply want to get your student loan payments in check, a new loan could be a great option to get you back on your feet.
What Is Bad Credit?
The term “Bad credit” is used to describe a low credit score. Lenders use credit scores to determine if someone is likely to repay a loan or credit card as agreed. Low scores often indicate that an applicant has a history of late payments, missed payments, charge-offs or other adverse credit items, making a lender less likely to approve their application. Even when they’re approved, people with low credit scores typically pay higher interest rates than applicants with high scores.
Some applicants have low credit scores simply because they don’t have much experience managing credit accounts. Others have bad credit because they lost their jobs or had emergencies that left them with thousands of dollars in debt. No matter why you have a low credit score, it’s important to be able to access credit when you need it. That’s why many lenders offer loans designed specifically for applicants who don’t qualify for other credit products.
If you are curious about your current credit score, you can easily access your credit report online from credit bureau companies like Experian or Credit Karma. They offer free services that tell give you your credit report as well as your FICO score. A quick credit inquiry with these companies will pull all the information for a credit check in one snapshot that tells you your total debts, line of credit usage and more. If you have a bank account with a big bank, they also have a button in their dashboard that offers a quick credit check once you are logged in, making it only a few clicks away!
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Types of Loans for Bad Credit
There are a few different reasons by you might need a loan; here are a few types of loans you can secure with bad credit.
Payday Loans
A payday loan is an extremely short-term loan designed to get you through a financial crisis. These loans have extremely high interest rates, so they’re often a last resort for applicants who need funds. When you take out a payday loan, you agree to pay it back with your next paycheck, but most payday lenders allow you to renew the loan over and over again. Renewing the loan gives you more time to pay, but it also increases the total amount spent on interest and fees. Since payday loans are so expensive, you shouldn’t consider them unless you have no other options for a cash advance.
Auto Loans
Millions of people need reliable cars to drive to work and run errands. If you don’t have a high credit score, it’s more difficult to get a reliable vehicle with a payment that fits your budget. Some loans for bad credit are designed for borrowers who want to use the money to buy a car, truck or van, making it easier to get around town. While the loan approval process might be available for people with poor credit, it is important to review the loan rate and loan agreement to make sure the car is really worth the payment plan.
Home Equity Loans
If you own a home, you may qualify for a home equity loan even with a low credit score. This type of loan allows you to borrow money against your equity, which is the difference between how much your home is worth and how much remains on the mortgage. For example, if your home is worth $350,000 and you owe $300,000 on the loan, you have $50,000 in equity. Loan lenders are willing to do this if you need to do a big home improvement project, as this loan offers you a way to tap into the money you’ve already put into your home.
Bad Credit Personal Loans
Many lenders offer bad credit personal loans, which are installment loans that you can use to consolidate debt, cover an emergency or pay for a large purchase. If you need a new water heater, for example, you might want to use a personal loan to pay for it. An installment loan comes with fixed monthly payments, making it easier to plan ahead for the repayment period.
How to Find a Bad Credit Loan
If you need any of these loans for bad credit, there are a few places to look:
- Traditional banks: If you have a checking or savings account, check with your bank to determine if you qualify for one of its loan products.
- Credit unions: Many credit unions offer an alternative to payday loans to help customers avoid high interest rates and fees. If you have an account with a credit union, ask a representative if you qualify for one of these alternative loans.
- Online lenders: If you don’t qualify for a loan at a credit union or bank, check with an online lender. Many online lenders are more flexible than traditional financial institutions, making it possible to get a loan even if you have a low credit score.
Applicants with low credit scores pay the highest interest rates. If you don’t need the money immediately, you may benefit from waiting a few months and using the time to work on your credit score. Another option is to ask a close family member or trusted friend to serve as a cosigner on your application. A cosigner agrees to pay back the loan if you cannot make the payments yourself. To ensure you’re approved, make sure your cosigner has a high credit score. Having a cosigner won’t help you if their score is similar to yours.
Before you apply for a loan, make sure you understand how much you can afford. For example, you may want to borrow $10,000 to remodel your kitchen, but if you have a score of 660, that loan could cost you nearly $300 per month over the next 5 years. If your budget doesn’t have $300 of wiggle room, accepting a $10,000 loan could make your financial situation even worse.
3 Best Loans for Bad Credit
Here are a few more options for loans with bad credit that have an online process with quick approval times.
1. Upgrade
For people with poor credit scores, Upgrade is like a knight in shining armor. The company offers loans to consumers with credit scores as low as 580, making it easier to access the funds you need. If you want to use the loan amount to pay off debt, Upgrade can even pay your other creditors directly. One of the few drawbacks to borrowing from Upgrade is that the company’s loan origination fees are a little high. If your score is near the minimum, you can also expect to pay the highest interest rate on your loan terms.
2. Upstart
Upstart has a higher minimum credit score (600) than Upgrade but offers faster approvals than many lenders for their loan application process. If you have an emergency and just can’t wait for another lender to review your application, Upstart is an option. The company uses machine learning and artificial intelligence as part of its approval process, reducing the amount of time it takes to make a decision. AI also allows Upstart to approve more applicants than other lenders, expedite sifting through the eligibility requirements, and offer fast funding.
3. Universal Credit
Universal Credit charges one of the highest interest rates for bad credit score loans but has one of the lowest minimum credit scores. The company works with borrowers with scores of 560 and above, making credit more accessible to people all over the United States. One of the main drawbacks of working with Universal Credit is that its loan origination fees may be as high as 8%. These fees come out of your loan funds, so you may need to borrow a little more than you intended to make sure you have enough money left over.
Taking out a loan with bad credit can be difficult but not impossible. With careful research and an understanding of the terms and conditions, one can find lenders that are willing to offer loans despite someone’s bad credit history. It is important to remember that taking out a loan comes with financial responsibility, so it’s best to weigh the pros and cons before making any decisions on the matter. Make sure you understand the loan options, repayment terms, annual percentage rates, and late fee penalties before jumping into any kind of loan. This helps you make informed financial decisions for your future and can help you slowly build back to a good credit score.
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