There are plenty of reasons you may need a personal loan. Whether you are looking to make a large purchase, consolidate debt, cover unexpected expenses, or fund a new business, there are lots of people who need access to additional capital.
But securing a loan from a financial institution isn’t exactly a walk in the park—especially if you don’t have good credit or a strong financial history. Banks, credit unions, and other traditional lenders often require potential borrowers to have near-perfect credentials in order to be approved for a loan.
The good news is that personal loans for bad credit are available. While they may come with higher interest rates than traditional loans, they can help you get the funds you need when other options are unavailable.
In this comprehensive guide, we’ll give you everything you need to know about personal loans for bad credit, including what they are, how to apply, and what your options are.
What is a Bad Credit Personal Loan?
Typically, when someone wants to apply for a loan, they go to the bank and fill out an application. The bank will then assess the applicant’s credit report and financial history in order to determine their eligibility.
For those whose credit history is less than perfect, traditional lenders may not be a viable option. That is where bad credit personal loans come in: they are designed to help those with lower credit scores access funds when other options are unavailable.
Bad credit personal loans are characterized by:
- High interest rates: As with any loan, the higher the risk to the lender, the higher the rate they charge. Bad credit personal loans typically come with high interest rates, as lenders are taking on a greater risk by lending to someone who has lower credit scores or bad financial history.
- Limited amounts: Because of increased risk, lenders are usually only willing to lend smaller amounts.
- Limited loan terms: Bad credit personal loans often come with shorter repayment periods, meaning you will have to pay off the loan quicker than you would with a traditional loan.
And since personal loans are usually unsecured, meaning the borrower does not need to provide collateral to secure the loan, lenders must be extra cautious when assessing applicants.
What is a Personal Loan?
A personal loan is a type of unsecured loan usually used to cover large expenses, such as home repairs, medical bills, or debt consolidation.
Unlike secured loans, such as mortgages or car loans, that require collateral (an asset owned by the borrower), personal loans are unsecured and do not require any assets to secure the loan funds.
Personal loans, also known as installment loans, are typically available in amounts ranging from $1,000 to $50,000, with repayment periods usually ranging from 12 months to 60 months. In rarer cases, personal loans of more than $50,000 may be available.
The interest rate on personal loans depends heavily on the borrower’s creditworthiness and financial history. This is because when a lender loans money to someone with a history of missed or late payments, issues with debt, or a low credit score, they are taking on more risk than someone with a strong payment history and perfect credit. This higher risk warrants a higher potential payout on their end, and the provider increases the borrower’s personal loan rates to make it worth their while.
What is Considered a Bad Credit Score?
Your credit score is a number, generally ranging from 300 to 850, that reflects your financial and credit history. Each of the three major credit bureaus may have a slightly different number based on their scoring criteria, so it’s important to review the reports regularly. The higher your score is, the more likely you are to be approved for a loan.
Credit scores are as follows:
- Very Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Excellent: 800+
In terms of applying for personal loans, “very poor” or “fair” credit scores are considered bad credit (or subprime). These borrowers will have a harder time securing loans from traditional lenders due to their riskier financial profile.
According to lenders surveyed by NerdWallet, the typical credit score to qualify is between 560 and 660, and anything below the qualifying figure is considered subprime.
Types of Personal Loans for Bad Credit
Bad credit doesn’t mean that you’re barred from taking out a personal loan. There are several loan options for borrowers who want to apply for personal loans with bad credit.
Secured Personal Loans
Secured personal loans are loans that require the borrower to provide collateral—typically in the form of a personal asset like a savings account, car, or property—in order to obtain the loan. The collateral provides an added layer of reassurance for the lender, which usually results in lower interest rates and better repayment terms.
With secured personal loans, the lender has the right to seize the collateral if the borrower is unable to make the agreed-upon payments.
Secured personal loans include
- Home Equity Loans: Also called a home equity line of credit (HELOC), this type of loan uses the equity in your home as collateral. Borrowers typically only use this option if they need to borrow a significant amount of money.
- Auto Loans: These loans use a car title, or the value of a vehicle, as collateral for the loan. Using a service like 5 Star Car Title Loans, borrowers can use their car title as collateral to receive a loan quickly.
- Bank Loans: These are personal loans from traditional banks and credit unions that use an asset—such as a savings account, property, or other items—as collateral.
The main benefit of secured personal loans is that lenders see them as less risky than other loan types. Since the borrower already owns an asset they can use as collateral, the lender is more confident that they can recoup their money if the borrower fails to make payments.
For borrowers, this means that they can potentially apply for larger loan amounts and get lower interest rates with longer repayment periods.
Of course, if secured debt is not repaid by a certain time, the lender can seize the borrower’s collateral. In more extreme cases, they may also sue the borrower for outstanding debt, send negative credit information to the credit bureaus, or report them to debt collection agencies.
Taking all of these factors into account, secured personal loans are the best personal loans for bad credit if you are financially responsible enough to only borrow what you need and pay them back in a timely manner.
Unsecured Personal Loans
Unsecured personal loans don’t require collateral, but they are usually more difficult to qualify for due to their higher risk. These loans typically have higher interest rates and shorter repayment periods than secured personal loans.
Interest rates on unsecured personal loans can vary widely depending on the lender, the borrower’s credit score, and other factors. Borrowers with very poor credit can expect interest rates to be higher than those with fair credit.
Unsecured personal loans include:
- Credit Card Loans: Credit card companies offer personal loan products for borrowers with bad credit, but these usually have very high interest rates and short repayment terms.
- Peer-to-Peer Loans: P2P loans allow borrowers to borrow money directly from lenders in a marketplace. These loans typically have lower interest rates than credit card loans, but they might still require a good credit score.
- Payday Loans: Payday loans are very short-term, high-interest loan products that should generally be avoided due to their excessive fees and low repayment amounts.
The main benefit of unsecured personal loans is that the borrower won’t have to risk their assets. However, paying back the interest on these loans can become expensive. It is important to read the fine print and look for lenders who offer flexible repayment options and evaluate whether or not a personal loan is needed.
Debt Consolidation Loans
Debt consolidation is a financial strategy that combines multiple debts into one loan with a lower interest rate. This helps to reduce the amount of money owed to creditors and make payments more manageable.
It involves taking out one large loan, usually from a bank or credit union, and then paying off all other outstanding loans or debts in full. The new loan typically has lower monthly payments than the individual loans combined.
Debt consolidation can also help borrowers improve their credit scores by eliminating numerous smaller accounts from their records and consolidating them into one single payment. This makes it a solid option for borrowers with bad credit who want to improve their financial situation.
However, debt consolidation loans can be expensive in the long run. Since they are still loans, they come with interest and fees that can add up quickly if not paid off in a timely manner.
Co-Signed and Joint Loans
Co-signed and joint loans are another option for people with poor credit scores, or those who prequalify but want a better interest rate. With these types of loans, two or more people agree to take on a loan together, sharing both the responsibility and benefits associated with it.
The borrower with a good or excellent credit rating (the co-signer) is responsible for making payments if the primary borrower is unable to do so. The co-signer’s credit score will be affected if the loan is not repaid in full and on time. Joint loans also require two or more borrowers to be responsible for repayment.
These types of loans are common in cases of young adults who are just starting out in life and need help getting a loan. For example, renting a college apartment or house for the first time can be challenging for an eighteen-year-old young adult. But if a parent or guardian co-signs the loan, it can be much easier to get a loan approval – and potentially get a better rate – than a traditional student loan.
As far as loans for people with bad credit go, co-signed loans are among the best. Since they bring someone with good credit and financial stability into the equation, lenders are much more likely to approve the loan application.
The caveat, of course, is that the co-signer can be held responsible for the loan if the primary borrower fails to make payments. The borrower will need to find someone who is willing to take that liability on in place of the primary borrower.
If you need personal loans for poor credit, a fixed-rate loan might be a good option. Fixed-rate loans are typically offered by banks or credit unions, and they have a fixed interest rate that does not change over time.
With a poor credit history, it is unlikely that a borrower will receive a favorable rate for a fixed-rate loan. Because the rate will be determined based on their current financial standing rather than future potential, the interest rate will definitely be higher than those offered to borrowers with good credit.
However, if a borrower has a history of on-time payments and manages their debt responsibly, they may qualify for a lower interest rate. Plus, the interest rate stays constant for the entire loan period, making it easier to budget and manage payments.
Another benefit to this loan is that it may only be seen as unfavorable in the short term. Interest rates fluctuate, and if future rates skyrocket, your loan can remain at the same rate. This could potentially mean huge savings for borrowers over time.
This option is particularly beneficial for people looking to borrow money to pay off high-interest debts or consolidate multiple loans. Since the rate is fixed, borrowers can plan out their repayment strategy and (hopefully) negotiate favorable interest rates compared to their outstanding debts.
Variable-rate loans are the opposite of fixed-rate loans in that the interest rate can change over time. The rate is determined partly by the borrower’s credit score, but it is also based on factors such as market conditions and economic trends.
For people with bad credit, these types of loans may be difficult to qualify for. But they also offer the opportunity to save money if the rates drop throughout the life of the loan.
Variable-rate loans are generally used for short-term financial needs or when borrowers expect to pay off their debt quickly. Since there is no guarantee that interest rates will stay low, it could result in even higher payments that favor the lender over time.
Home Equity Loans
A home equity loan is a type of loan in which the borrower uses the value of their home as collateral. It allows homeowners to borrow money by using their home’s equity as security, typically at lower interest rates than unsecured loans.
This type of loan should be used if:
- You need a lump sum of cash for one-time expenses or projects that require financing and that you can pay off in a fixed amount of time.
- You want to take advantage of a lower interest rate than what is available with unsecured loans.
- You want the flexibility to make interest-only payments for a certain period of time.
Home equity loans are also ideal when trying to consolidate higher-interest debt or making large purchases such as major appliances or vehicles.
You should not take out a home equity line of credit if:
- You plan to use the money for an investment (e.g., real estate, stocks, bonds), as you may be putting your home at risk.
- You will have difficulty making regular payments or don’t have a plan to pay off the loan within a certain time frame.
- You’re paying off credit card debt.
A key benefit to using this type of loan – instead of unsecured lines of credit – is that since your home secures it, you may qualify for some of the lowest rates available on the market. But, your home may be automatically taken if you fail to make payments on the loan—a much more serious implication than most other personal loans for bad credit.
Additionally, since these types of loans are based on how much equity you have in your home, not everyone will qualify due to a lack of available funds from their homes’ appraised values.
Personal Line of Credit
A personal line of credit is a revolving loan, meaning you can borrow money up to your approved limit and then pay it back. The amount that you are approved for will be based on your credit score, income, debts, and other factors.
The primary benefit of this type of loan is that the interest rate may be lower than what is available with other types of loans, such as credit cards. This allows you to keep monthly payments low while still having access to funds whenever needed.
Also, since it is a revolving loan, there is usually no set repayment term—you can borrow money up to the limit and make payments at any time without penalty or fees.
However, this type of loan should only be used for short-term needs, as the interest rate can increase over time. If you are looking for a long-term solution to your financial situation, this may not be the best option.
Payday loans are short-term loans that don’t require a credit check but typically come with very high interest rates. These types of loans should be used only as a last resort, due to the risk of becoming trapped in a debt cycle.
The money is usually made available quickly—sometimes within 24 hours. This makes it appealing for those who need cash right away and can’t get it from other sources.
However, since the interest rates are so high, you may end up paying several times more than you borrowed in the long run. And if you can’t pay back the loans on time, they can damage your credit score even further.
For these reasons, it is best to look for other options if you need fast cash.
Cash Advance Loans
Cash advance loans are short-term, unsecured loans. Like payday loans, they typically come with higher interest rates than traditional loan types. They are designed to help you cover unexpected expenses (e.g., medical bills or car repairs) that you would not be able to cover with your current income.
The main advantage of this type of loan is that the funds can often be made available quickly—sometimes within just a few hours. When borrowers don’t have access to any other kind of financing or need money urgently, this loan can be appealing.
But the convenience comes at a cost—they usually come with high interest rates and fees that can quickly add up.
For these reasons, it is important to carefully consider the options before taking out a cash advance loan—making sure you understand all of the terms and conditions of the loan offer.
4 Benefits of a Bad Credit Personal Loan
Let’s take a look at four of the most essential reasons to take out a personal loan, even with bad credit.
- Consolidate your debt
As we mentioned earlier, a personal loan can be a great way to consolidate your debt. You can use the funds to pay off all of your existing debts and then focus on making one monthly payment towards the loan.
This is often easier than dealing with multiple creditors and trying to keep track of different due dates and interest rates.
- Cover emergency expenses
Sometimes unexpected expenses arise that you can’t afford with your current income or savings. Whether you find yourself in a fender bender or rushing to the hospital with a broken bone, a personal loan can help you cover these unexpected costs.
A Bankrate survey found that 60% of Americans weren’t financially prepared for a $1,000 emergency expense, which means personal loans could be essential for many households.
- Finance your large purchases
Most people don’t have the funds to buy a car, purchase a house, or fund an entire business outright. Taking out a loan makes it possible to access things that would otherwise be nearly impossible for most people to own.
- Quick access to cash
If you need fast loans for bad credit, you can usually get a personal loan relatively quickly. Depending on the lender, you might be able to receive your funds by the next business day—allowing you to take care of whatever needs you may have without waiting weeks or months for funds.
Applying for a Bad Credit Personal Loan With 5 Star Car Title Loans
Online personal loans for bad credit have never been easier to access—thanks to 5 Star Car Title Loans. The application process is simple. All you need to do is fill out and submit the online application, then visit one of our locations where we will give you everything you need to know for your loan.
We offer fast funding and loan amounts up to $50,000 and only require your vehicle title as collateral. Plus there are no prepayment penalties and no hidden fees.
Once you’re set up, all you have to do is pay it off!
What Can I Use a Bad Credit Personal Loan For?
There are numerous things personal bad credit loans can be used for:
A personal loan can help you pay off your high-interest debt quickly, so you don’t have to worry about multiple payments and potential late fees due to missed payments.
Unexpected medical costs can quickly add up and drain your savings, even if you have insurance. A personal loan can help you cover any shortfalls with ease.
Leaks, plumbing issues, HVAC repairs, and other home improvement issues can happen anytime. A personal loan can help you pay for these much-needed fixes without breaking the bank.
If you’re moving across the country for a lower cost of living, a new job, or another reason, you may need additional funds. Personal loans help you offset the cost of moving, making the transition a little smoother.
If you have bad credit, a car loan with a favorable rate might be difficult to come by. Taking out a personal loan can help you get the car of your dreams and avoid high interest rates.
A bad credit personal loan is a great option if you have been turned down for traditional loans because of your low credit score. But the best bad credit loans will depend on your specific circumstances, including your annual income, debt-to-income ratio, and how much you need to borrow.
Be sure to research your lender before making a commitment and always read the fine print when signing a loan agreement. With the right knowledge and preparation, you can use personal loans for bad credit to get back on track financially.
Apply now for a personal title loan – it’s fast and easy.