Do You Have Bad Credit and Need a Loan? Check Out These 4 Options

If you need to get a loan with bad credit, you might be feeling discouraged.

Having bad credit or credit reports with derogatory marks isn’t uncommon. About one in 10 people has a FICO Score 8 below 550, according to April 2018 data from FICO, which is considered poor credit. And 23% of people have one or more accounts with a collection agency, according to FICO — another factor that could influence your credit scores.

Your credit history is your track record of how well you use and repay credit. If good credit makes it easier to get loans at good rates, bad credit can have the opposite effect. So what should you do if you want to get a loan for bad credit?

Option #1: Apply for a loan at a credit union

Since the purpose of a credit union is to serve its members, they’re known for offering top-notch customer service and can be more flexible and forgiving of consumers who have less than perfect credit. 

Credit unions are similar to banks; however, they aren’t legally allowed to serve the general public like banks do, so you have to be a member.

Different credit unions have different membership requirements, such as working for a certain employer, in a particular industry, or living in a certain city or county. However, in some cases joining can be as simple as making a one-time $10 donation to a charity that the credit union supports. Also, most credit unions extend eligibility to the immediate family of all their members.

Since the purpose of a credit union is to serve its members, they’re known for offering top-notch customer service and can be more flexible and forgiving of consumers who have less than perfect credit.

Option #2 Get a Co-Signer

If borrowing from a friend or relative is not possible, you can still approach someone you know with good credit about co-signing on for a bad credit loan.

With a qualified co-signer, the lender will set the loan terms based on the credit score of the person with good credit, who will then be equally responsible for repayment. All payment information will be recorded on both your credit report and your co-signer’s, so if you default on the loan, or you’re late with payments, you both suffer. However, if you make timely payments, your own score will improve, making it easier to obtain future loans without a co-signer.

Option #3 Payday Loans

Payday loans might be the most ubiquitous loan for people with bad credit. Unfortunately, they’re also almost always a bad deal for you.

Payday loans are typically small, usually $500 or less, and made for a short period of just a week or two before repayment is required on your next payday. They’re easy to get as long as you provide proof of income. The lender usually requires you to write a check for the loan amount plus interest that can be used for repayment. You may even give the payday lender electronic access to your account.

The main problem with payday loans is the astronomical finance charges. According to the Consumer Financial Protection Bureau, you may pay $10 to $30 in interest and fees just to borrow $100. If you pay $15 to borrow $100 for two weeks, that’s an APR of a whopping 400%. Meanwhile, when that two-week deadline comes around, many payday lenders allow you to pay only the interest and roll over the loan. This tempting scenario traps many low-income borrowers in a cycle of debt since they can only afford to pay back the excessive interest.

Bottom line? You’re best off avoiding payday lenders if you need a bad credit loan.

Option #4 Installment Loans

It is possible to take out an unsecured loan with bad credit, although your interest rates may be considerably higher than with a secured loan.

Remember that an unsecured loan has no collateral attached to it — that is, you don’t risk any of your assets if you default on the loan. However, this presents a higher risk to lenders, so interest rates tend to be higher. Most bad credit loans are unsecured, and because the loans are for people with bad credit, the interest rate is high.

Yes, you can take out an unsecured loan with bad credit, and sometimes it’s the only product a lender will offer. However, you should only consider a secured loan if you’re positive in your ability to repay. You don’t want to risk your car or your home for the sake of a better interest rate on a bad credit loan. That’s not a good route to go.

Unlike the other loans included in this list, installment loans come with repayment terms that are longer than two weeks or a month. Your typical installment loan often comes with repayment terms anywhere from nine to 18 months.

In some ways, bad credit installment loans are the same thing as regular personal loans; they simply come with higher interest rates. Installment loans are paid off in a series of regularly scheduled payments—instead of just one lump sum—and they charge interest as an ongoing rate instead of as a flat fee.

Installment loans are also amortizing, which means that each payment goes towards both the interest and principal loan amount. Early payments mostly go towards interest, while later payments are almost entirely principal. The ratio between the two changes according to the loan’s amortization schedule.

Since installment loan interest is charged as on ongoing rate, paying the loan off early will save you money. Before borrowing, however, you should check to see whether or not the lending company charges prepayment penalties, which penalize you for doing just that.