Best Bad Credit Loans of 2021 | U.S. News

Borrowing money when you have bad credit can be stressful and limit your loan options, especially as lenders tighten approval requirements in the COVID-19 economy. But a bad credit rating isn’t a dead end. Loans for bad credit may be the best choice when you can’t qualify for traditional loans.

The consequence of bad credit is that you could have to make trade-offs and compromises. Personal loans for bad credit can offer access to funds, but that access might come with a high interest rate and other restrictions that don’t apply to borrowers with a good credit score.

This guide will help you understand how bad credit loans work, how to apply for and get a loan, and how to choose the best bad credit lender. What you’ll learn:

Even if you have bad credit, you can save by shopping around for the best interest rate on a personal loan. Compare bad credit personal loan offers with national average trends for personal loans to know whether you’ve found a good deal.

*Rate as of May. 21, 2021

Select your desired loan amount and loan purpose, your credit score range, and your state to see estimated annual percentage rates and loan terms.

Loans for bad credit may be available for people with bad credit scores or no credit who need money for many of the same reasons as people with good credit. Borrowers may use personal loans for bad credit for credit card debt consolidation or to pay for home improvements, car repairs and unexpected expenses.

Bad credit is a FICO credit score in the fair or very poor credit range, generally a score of 580 or lower. Lenders typically require a minimum credit score in the fair range to qualify for a bad credit loan.

The weaker the credit score, the greater the risk to the lender, which is why bad credit loans can be costly. Generally, you’ll pay higher interest rates and receive shorter repayment terms than people with good credit scores.

Standard bad credit loan terms are two to five years, and lenders could charge APRs of up to about 36%.

Here is one example for comparison. If you took out a $10,000 bad credit loan at an APR of 25% and repaid it over three years, you would pay $398 monthly and about $4,300 in total interest.

If you have good credit, though, you could qualify for an 11% APR on a three-year $10,000 personal loan and pay $327 monthly and less than $1,800 in total interest. Using good credit to qualify for a lower interest rate saves more than $2,500 in this instance.

Even with bad credit, you can choose from many types of loans. Some present more risk to borrowers than others.

Generally, personal loans for bad credit are the safest option compared with online payday loans for bad credit, auto title loans or installment loans. But be sure to scrutinize the terms, no matter what type of loan you’re considering.

If you have bad credit, you may want to compare these loans:

Personal loans for bad credit

Personal loans for bad credit have fixed rates as high as about 36%, and you repay loans in set amounts over a few years. You can find small personal loans and large ones, so check the lender’s minimum loan amount to make sure it meets your needs.

Generally, this type of loan is an unsecured loan, which means you don’t have to put down collateral. That is a valuable asset, such as your car or savings account, the lender will require if you can’t qualify for an unsecured loan.

Collateral may help you may get approval for a secured loan because if you default, the lender can claim your asset to pay off the loan.

Personal loans for bad credit can be put to any use, including as a debt consolidation loan for credit card refinancing. Some lenders will pay your credit card company directly, or you can do your own card consolidation payments with the loan proceeds.

A payday loan is a small, short-term loan intended to cover expenses until your next payday, when you can pay it back. It’s the easiest loan to get with bad credit because it typically uses your paycheck or bank account, not credit history, to approve your loan.

Loan amounts, at about $500, are typically much smaller than personal loans, and they usually have to be paid back in weeks, not years. Interest rates and other fees can be very high, often reaching triple-digit APRs. If you can’t repay the loan in full by the end of the term, you may extend your loan with financing charges added to the balance.

Some payday loans ultimately cost more in interest charges and fees than the original loan amount. Unfortunately, payday loans have a reputation as predatory, targeting consumers with poor credit scores and few options, who need quick access to cash.

Alternative installment loans

Alternative installment loans may look a lot like personal loans for bad credit, but they resemble payday loans because of their high interest rates and potentially predatory fees. Installment loans for bad credit, also known as payday alternative loans, are often fast to obtain and have slightly better terms than traditional payday loans.

Generally, they have fixed monthly payments and longer repayment terms, giving you more time to pay than the typical payday loan. But you should expect a mountain of fees and steep interest rates similar to payday loans when you turn to alternative installment loans.

U.S. News surveyed consumers in August about financial literacy, or their ability to manage money: in this case, loans. Even with good credit, qualifying for a loan can be tricky, thanks to the economic crisis caused by the pandemic.

The survey revealed that, whether people have bad credit or good credit, they may not know how to shop around for loans or avoid hiccups such as missing payments. Notable among the results:

Consumers identified making a major purchase as the top purpose for getting a personal loan. Other reasons included paying down debts and making home repairs.

The best ways to borrow money to make ends meet during the COVID-19 crisis are 0% APR credit cards, personal loans and home equity loans, survey respondents said. But 62% said they don’t need to borrow money.

More than half of consumers surveyed said they don’t know what happens when you don’t pay a deferred interest loan during the promotional 0% interest period. About 16% said they think interest applies only to the unpaid balance, and 4% said the interest rate stays at 0%.

A little less than 25% of people said they know that backdated interest applies when you don’t pay off a deferred interest loan during the promotional period.

Most consumers said they didn’t realize that missing just one loan payment could hurt your credit score if you aren’t enrolled in a hardship program.

About 1 in 5 consumers said they’ve taken out a loan to pay off debt.

About half of consumers don’t know whether you can get a loan if you don’t have a job. Getting approved for a loan when you are unemployed is possible, but many lenders will require a creditworthy co-signer.

Few consumers said they think payday loans are a good idea.

You can qualify for a personal loan with bad credit, but you’ll get the best deal if you do some homework. Start by checking your credit report, budgeting for your loan payment and shopping around for the best terms.

1. Check your credit report. Obtain your credit report to check for errors and identify areas of improvement. If you find errors, fixing them can improve a low credit score, allowing you to qualify for lower interest rates. You can get a free credit report from each of the three major credit bureaus at AnnualCreditReport.com.

“When you apply for a personal loan, the creditor will check your credit report to help them determine whether you will repay the debt,” says Rod Griffin, senior director of public education and advocacy for Experian, one of the three major credit bureaus. “Your credit history and credit scores help lenders predict the likelihood a person will repay a debt as agreed upon.”

Griffin recommends checking your credit report and score at least three months before applying for a loan. Correct errors as soon as possible – and before you apply – by disputing them with each credit bureau separately. Dispute resolution can take up to 30 days.

You can also identify areas to improve in your credit history, such as paying off a collection account or paying down a revolving credit line that exceeds 30% of its limit.

2. Budget your loan repayment. Figure out how much you need to borrow, and come up with a plan to make all of your payments on time. Your budget should include basic living expenses, savings goals and credit card debt payments, plus your loan payment.

When determining how much you can afford to pay each month, consider your loan amount and your repayment period. The longer you have to repay the loan, the more you will pay in interest but the lower your monthly payment will be.

Your monthly payment will also be affected by your loan’s APR and whether your loan has a fixed or variable interest rate. You should also account for any origination fee and late payment fees you may incur.

3. Shop around for the best interest rate. Getting a personal loan is a big decision, so take your time to shop around for the best rate. Most online lenders offer preapprovals.

Preapprovals are interest rate quotes provided using a soft credit inquiry, which doesn’t affect your credit score. Getting preapprovals is a good way to compare bad credit loan interest rates and terms before you apply and trigger a hard credit inquiry, which can affect your credit.

Ideally, you should get preapprovals with soft credit inquiries from multiple lenders, then apply for the best loan so you only have one hard credit inquiry.

4. Beware of scams. Try to spot bad credit loan scams before you apply. Identifying a scam among legitimate online lenders, though, can be difficult.

A few signs: Scammers often require upfront fees, ignore your payment history, initiate contact or contact you nonstop, ask you to pay with a prepaid card, or won’t be licensed in your state to make loans.

5. Repay the loan. Some lenders offer funding as soon as the next business day. After your loan funds are disbursed, you will become responsible for making payments.

Make on-time payments to avoid late fees and a negative effect on your credit history. Delaying payments will result in paying more interest and increase the cost of your loan.

“If you miss a payment or due date, credit profiles will suffer,” says Joseph Toms, president and chief investment officer of Freedom Financial Network, a financial asset management business. “That can reduce the consumer’s ability to get credit in the future. Before applying, be sure you can make the payment every month.”

The best personal loan for bad credit depends on many factors. When choosing an online lender for a bad credit loan, consider these key criteria:

Eligibility requirements, including credit history and employment

Lenders that offer bad credit loans typically require a minimum FICO score of 620. The maximum debt-to-income ratio, a measure of how much you owe each month compared with how much you earn, is usually 45%.

Typically, lenders recommend having a stable income to compensate for bad credit. Some lenders have minimum annual income requirements.

Others may not list a minimum annual income, but they will consider your employment and the income generated from it when calculating your ability to repay the loan.

Some lenders will consider aspects of your background beyond credit, Toms explains. “Traditional credit data does not necessarily account for your complete financial profile and ability to pay debts,” he says.

Independent lenders may use different criteria to evaluate how likely you are to repay a loan. For example, some lenders may look for evidence of financial responsibility, such as a savings account. Seeking a lender that does this can be particularly important for those with less-than-stellar credit.

If you can’t qualify for a loan with your own credit or income, some lenders allow you to add a co-signer. You can use a co-signer’s strong credit and income to qualify for better terms, including a lower interest rate, on your personal loan. If you default, the co-signer must make payments on your loan, which offers additional assurance for lenders.

But using a co-signer has drawbacks. You could damage your relationship with the co-signer, as well as his or her credit if you default, so you both must understand terms and consequences.

Because getting the most affordable loan is a priority, make sure you’re comparing interest rates when considering which loan is the best. The higher your credit score, the lower your interest rate will most likely be.

Most bad credit lenders offer fixed and not variable interest rates. With a fixed interest rate, your rate remains the same for the duration of your loan.

A variable-rate loan, on the other hand, has an interest rate that can fluctuate. The rate moves in tandem with an index rate.

When you’re preapproved for a bad credit loan, you’ll receive the terms of the loan, which include amount, APR, loan period and loan restrictions. Before accepting the loan terms, review these carefully.

Make sure you’re comfortable with the terms and can make on-time payments.

Origination, prepayment, late, returned check, insufficient funds and processing fees may apply.

Lenders charge origination fees for processing the loan. Some lenders have no origination fees, and others have fees ranging from 1% to 6% of the loan.

Other lenders offer to roll the origination fee into the loan. The origination fee may vary by state and by lender.

Some lenders charge a prepayment penalty fee, which may offset savings when you pay off a loan early. This fee is usually the interest charge for a certain number of months, or a percentage of the remaining balance.

If you are late with a payment, you usually have to pay a late fee. Lenders may allow a grace period of 10 or 15 days before they charge a late fee.

Typical late fees range from $15 to $30, with some lenders charging 5% of your monthly loan amount or $15, whichever is greater. Some personal loan lenders do not have late fees.

The fees for a returned payment can be up to $15.

For the borrower’s convenience, lenders usually offer multiple payment options, including online, check and automatic payments, which might get you a discount.

Some lenders also provide flexibility with your payment date, so you can change it to a date that works best for you.