What Is a Bad Credit Loan?
A bad credit loan is a financial fix for consumers who need help paying bills, but have an unattractive credit score and weak credit history.
It’s the choice your left with when a few missed payments or overspending with your credit cards has taken the shine off your credit score and left you with few options for financial relief.
It is not a match made in heaven – a low credit score means you’re going to pay some serious interest to get this loan – but if you need to borrow money, this is one way.
You probably will feel better about things if you use the other name for a “bad credit loan,” which is the much-more acceptable term “personal loan.” By either name, this is a is a viable debt-relief option, especially if you’re in an emergency financial situation.
Bad credit loans work in exactly the same way a personal loan does. It’s money you borrow and pay back in fixed monthly installments, usually over the course of one year, but it could go three years. The loan can be used for just about anything, including consolidating credit card debt, https://slickcashloan.com/rapid-cash.php paying off medical bills, buying a car or even making a major repair to your own car.
Finding a bad credit loan might be a chore, but if you’re diligent, you’ll be rewarded. It could come from a bank, but more affordable interest rates and flexible qualifying requirements, probably will be found at these places:
Credit unions. A great option. Maximum allowable interest rate is 18%.
Family or friends. Easier to qualify and hopefully lower interest rates.
Find a co-signer. Use someone else’s high credit score to get a lower interest rate.
Tap home equity. Credit score not a factor. If you have equity, you can get a loan.
Online or P2P. Huge market of lenders who can be very flexible with terms.
Use a long-term relationship to convince your bank to agree to a short-term loan.
Cash advances. This is a really, really expensive option, but it’s available.
You could add more options like payroll advances, loans from retirement accounts or borrowing against life insurance to the list, but those are last-ditch choices best left untouched unless everything else fails. There are better alternatives to consolidate debt with bad credit.
What Is Considered a Bad Credit Score?
Credit scores range from 300-850 and while there is no official start to the “bad credit score” category, it’s safe to say if you’re under 650, you are considered a high risk and pay the highest interest rates.
People in this category are prime candidates for bad credit loans.
The definition of a “good” and “bad” credit score does vary from lender to lender. Some won’t touch anyone with a credit score under 650, some actually market to consumers with a sub-650 score.
So it’s hard to say what makes you “good” or “bad” on the credit scoreboard, but the accepted range looks something like this:
760-850 – Excellent
700-759 – Very good
660-699 – Fair
620-659 – Poor
Scores under 620 – Extremely poor
How Bad Credit Scores Affect Borrowing
Consumers in the good-to-excellent credit score category (700 and above) receive the lowest interest rates and best loan terms. Consumers in the poor and extremely poor categories (anything under 620) are burdened with high rates and may not be approved for a loan at all. Folks in the middle (621-699) have to weigh the cost of a bad credit loan versus the gain they hope to make by using it to pay off bills.
In other words, the higher your credit score, the more likely you’ll get a good deal on a loan. Low credit scores are risky business and borrowers are punished for it with high interest rates.
Many consumers get that message and that is why the average credit score for U.S. consumers has risen to an all-time high of 705 in 2020. That’s a 16-point jump over the last decade. However, the real numbers worth paying attention to are the combination of score and age, which say a lot about how our economy operates.
According to FICO, people ages 60-and-above have an average credit score of 743, while those in the 18-29-year-old bracket average just 652. It’s one of the few places in life where being old pays off.
Still, that’s a 91-point difference, which is very costly when you are shopping for home and auto loans as the graphic below demonstrates. Check out the payment differences in September of 2020 among credit scores for a 30-year, $200,000 home loan.
How Your Credit Score Effects a 30-year, $200,000 Home Loan
Score Interest Rate Monthly Payment Total interest paid
760-850 2.727% $814 $93,057
700-759 2.949% $838 $101,578
660-699 3.34% $880 $116,916
640-659 3.77% $929 $134,261
620-639 4.316% $992 $156,984
How Your Credit Score Effects a 6-year, $25,000 Auto Loan
Score Interest Rate Monthly Payment Total interest paid
720-850 3.65% $387.16 $2,875
660-719 4.68% $398.92 $3,722
620-659 7.65% $434.07 $6,253
619-and lower 11.92% $487.72 $10,115
How to Get a Loan with Bad Credit
If this is not an emergency, the first step to get a loan with a bad credit is to improve your credit score so you are able to afford the loan you need.
Start by making on-time payments, especially on credit cards; and reduce the balance on cards to under 30% of the credit limit allowed. Finally, don’t apply for any new credit.
The combination of those three factors – on-time payment; low credit utilization; no new credit applications – account for 75% of your credit score. It’s not unrealistic to think that making an effort on those three fronts could raise your score by 100 points in as little as 3-6 months.
If, however, this is an emergency and your application for a loan has been turned down repeatedly due to poor credit or no credit, it might help to ask a bank or credit union loan officer for an in-person interview to convince them you are creditworthy.
If you get that interview, be sure you are prepared with documents that prove you’re a good risk. Lending institutions love stability. It definitely helps your case if you can show them that you’ve lived in the same house (or city) and worked the same job (preferably for the same employer) for several years.