Types of bad credit loans and their uses

If you have bad credit and need cash fast, you may not realize that you may still have loans you qualify for. A loan for bad credit could be an option if you have been refused by your bank or credit union and borrowing from relatives or friends is not an option.

There are several types of bad credit loans to choose from. They often come with high interest rates that could cost you several hundred or thousands of dollars more over the life of the loan. It is therefore worth exhausting all your options and exploring other alternatives before applying for a loan for bad credit. However, if you’re in trouble, a bad credit loan might be what you need.

What is a bad credit loan?

Bad credit loans are designed for consumers with low credit ratings who cannot be approved for financing elsewhere. You can expect higher interest rates and fees with these loans because the risk of default is higher.

The FICO scoring model, which 90% of lenders and creditors use to make a loan decision, ranges from 300 to 850. Lenders who offer bad credit loans typically target consumers in these FICO score ranges:

  • Bad credit: 300 to 579
  • Fair credit: 580 to 669

Although these loans are expensive for borrowers, the advantage is that you can get the money you need to meet an unexpected expense or financial emergency. Additionally, some lenders offer a simplified application process and same-day or next-day financing.

Secured loans

Secured loans are for consumers whose credit is not perfect, but require some form of collateral to be approved. Title loans and home equity loans are popular secured loan options, but you risk losing your car or home if you fail to repay the loan.

Still, they might work if you haven’t found better options elsewhere and don’t anticipate any problems repaying the loan on time.

Before applying for a secured loan, research several lenders that offer title and home equity loans to determine if you meet their eligibility criteria. You’ll probably have better luck with a title loan if your credit score is in the trenches, but you may qualify for a home equity loan from some lenders.

Loans without credit check

As the name suggests, these loan products do not require a credit check to be approved. They are attractive to borrowers with very low credit ratings who have been turned down for other loan products, but come with high interest rates to compensate for the risk they pose to the lender. As a result, you could get a monthly payment that doesn’t quite fit your budget and find yourself in even more financial trouble over time.

Some lenders will extend the loan term on these loan products to give you a lower, more attractive monthly payment. However, this simply means that you will pay more interest over the term of the loan, as the lender will have more time to collect the interest from you.

Common loans without a credit check include payday loans, installment loans, auto title loans, and cosigner loans.

Payday loans

Payday loans offer a short-term solution for borrowers in credit difficulty. These loans usually come with exorbitant interest rates, sometimes well into the triple digits, and capped at around $500.

Most payday lenders won’t check your credit to qualify for a loan, and you could get the loan proceeds within hours. Nevertheless, payday loans should only be used as a last resort, as the cost of borrowing is high. Plus, you’ll usually have to pay back what you borrow before the next payday or face high fees if you extend the term of the loan. This could lead to a vicious cycle that is difficult to escape.

Cash advances

A cash advance allows you to withdraw funds from your credit card’s available balance up to the preset limit established by your credit card issuer. The amount you borrow is added to your outstanding credit card balance. You will likely pay a higher interest rate than on regular credit card purchases.

Cash advances are usually made by withdrawing cash from an ATM. You can also request a cash advance from a cashier at the physical branch of the credit card issuer (if applicable).

If possible, use cash advances only in times of financial emergency. Although they offer a quick fix if you’re in financial difficulty, they can be expensive and keep you in credit card debt for an extended period of time.

Banking agreements

Some banks offer short-term loans for smaller amounts to account holders with a positive banking history. However, the qualification criteria differ depending on the financial institution. You should therefore contact your bank or credit union to determine if this option is viable for you.

Alternatives to Bad Loans

Although bad credit loans are designed to help consumers who have difficulty accessing finance, they can be expensive and predatory in some cases. If you are facing a financial emergency or unexpected expenses, here are some viable alternatives:

  • Asking a relative or friend for money. Be sure to write out a repayment plan that works for both parties to avoid problems later.
  • Use a credit card. If you have available credit on a credit card, the cost of reading it is likely much less than what you’ll pay if you take out a bad credit loan. However, you want to pay back what you spend as soon as possible to avoid spending a fortune on interest.
  • Find local help. Some communities have religious and non-profit organizations that offer financial assistance to those going through a financial crisis.

Most importantly, work on building your emergency fund and improving your credit. That way, you might not have to borrow money the next time life comes around. Plus, you’ll potentially qualify for loan options with better terms and more competitive interest rates if you don’t have enough savings to cover a financial emergency should it arise.

About Selena J. Killeen

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