Types Of Bad Credit Loans & How To Choose Between Them

If you have a low credit score, getting approved for a loan can be challenging — but not impossible. Bad credit loans are designed specifically for borrowers with poor credit histories. While these loans can often come with higher interest rates and stricter terms, they can offer a crucial financial lifeline in emergency cases. Bad credit loans come in many forms — such as personal loans, payday loans and secured loans. 

Types of bad credit loans

Bad credit personal loans

Bad credit personal loans are unsecured and typically come with higher interest rates. Like any other personal loan, the money can be used for many purposes, including debt consolidation, emergencies or large expenses.

Bad credit loans’ biggest drawback is that you’re likely to be charged a far higher APR than a good-credit applicant would. Your repayment timeline may be shorter than that of other personal loans, though still measured in months or years instead of weeks.

Pros

• Much lower interest rates than most bad-credit options.
• Funds can be used for a variety of needs.
• Repayment term typically lasts at least one year.

Cons

• APR of up to 36 percent.
• Potentially shorter repayment timeline compared to good-credit personal loans.
• Higher origination fees than good-credit personal loans.

Cash advances

A cash advance lets you pull funds from your credit card’s available balance. 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.

We recommend saving 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

• No application — funds are available instantly.
• No credit check required.
• Less predatory than payday or no-credit-check loans.

Cons

• APR typically up to 30 percent — higher than on regular purchases.
• No grace period.
• Must have a credit card with an available balance.

Bank agreements

Some banks offer short-term loans for smaller amounts to account holders with positive banking history. Qualification criteria differ between banks, so reach out to yours to learn more.

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.

HELOCs or home equity loans

Home equity lines of credit (HELOCs) and home equity loans are popular secured loan options for borrowers with less-than-perfect credit. These loans are 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 using 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 lenders to see if you meet the minimum eligibility criteria. It can be challenging to find a lender if your credit score isn’t at least in the mid-600s. However, some lenders may 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.
• Typically, better APR than bad credit personal loans.

Cons

• Risk of foreclosure.
• Funding may take longer, usually 30 to 45 days.
• HELOCs may have prepayment penalties and variable interest.

Payday loans

Payday loans are an expensive, short-term solution for borrowers who can’t qualify for other forms of funding. These loans should only be used when all other options have been exhausted and only for critical needs like food or shelter. Their predatory structure can keep you stuck in a debt cycle if you cannot repay the balance in full, plus fees, when it’s due.

Many borrowers choose these loans because lenders don’t complete a credit check. Lenders offer between $500 and $1,000 and promise quick funding turnarounds — typically same or next day.

But these loans are expensive. Most payday loans have APRs of well over 300 percent. Plus, the repayment timeline is often much shorter than other types of funding. You’ll often have to repay the entire balance by your next payday. Otherwise, you’ll face hefty fees and may have to roll what’s due into another payday loan.

Pros

• Same- or next-day turnaround.
• No credit check required.

Cons

• Extremely short repayment period.
• High APRs — often 300 percent to 650 percent.
• Borrowers frequently need to take out a new loan to pay off the old one. Rolling over your debt often starts a deepening debt spiral.

Pawn and car title loans

Both pawn and car title loans require you to use a valuable item to secure an instant loan. The upside is that your collateral’s value, not your credit, determines your borrowing power.

You can get a pawn loan at a pawn shop. 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 losan amounts generally start at $100.

Easy 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 personal item can be seized or your car can be repossessed.

Pros

• May not require a credit check.
• Rapid approvals and funding timelines.

Cons

• Exorbitant interest rates.
• Both require collateral for approval.
• Risk of seizure or repossession if you default on the loan.

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 hardship or unexpected expense, there may be some viable alternatives outside of bad credit or emergency loans.

• 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. To avoid problems later on, draft a repayment plan that works for both parties.
• 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 payday loan. See if your credit card issuer offers hardship plans with lower minimum payments.
• Take out a 401(k) loan. 401(k) loans provide easy access to funds without a credit check but can delay your retirement and incur tax penalties.
• 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 qualify for loan options with better terms, higher amounts and more competitive interest rates in the future.

Bottom line

Bad credit doesn’t mean you’re out of options — but it does mean you need to proceed with caution. From personal loans to payday loans, there are a variety of financing choices available, each with its own set of risks and costs. Before taking out a bad credit loan, compare lenders, understand the terms and consider alternatives. The right loan for you will offer short-term relief, and with smart planning, can be a step toward rebuilding your credit. 

FAQs about bad credit loan types

• What is the easiest loan to get with bad credit?
  

  Payday loans, pawn loans, cash advances and car title loans are easy to access as they generally don’t require a credit check. However, all these options are risky and expensive. We recommend exploring lower-cost options first.

• Can I get a loan with extremely bad credit?
  

  Yes, there are loan options for poor-credit borrowers. Some bad-credit personal loan lenders use factors other than credit score — like your income — to determine your eligibility. No-credit-check loans exist but typically come with high costs and risks. Or if you have a vehicle or valuable asset you don’t mind putting up for collateral, you could try a secured loan. For the latter, proceed with caution as you could lose your asset if you cannot repay what you borrow.