Bad Credit Personal Loans Explained: Tips to Find The Best Lender

With many Americans experiencing record-high personal debt obligations, one way emergency expenses have been addressed is through bad credit personal loans. Bad credit personal loans can provide a vital lifeline, providing bad credit borrowers with non-predatory rates and terms your local cash advance place is famous for.

Think 35.99% APRs and repayment terms as long as five years versus the minuscule $1,000 loans with short two to four-week repayment terms promoted by unscrupulous payday lending companies.

If you're on the hook for an emergency expense with nowhere to turn, this guide is for you. Keep reading to learn more about bad credit personal loans, including their benefits/downsides, why finding the best lender matters, and best practices for finding the right lender to work with.

What Are Bad Credit Loans?

One of the most common ways of seeking emergency cash to address financial difficulties is through bad credit loans. Bad credit loans are designed to meet the needs of those with limited to no credit history and subprime credit scores not topping 580.

The more popular sources of bad credit loans are non-traditional or online lenders. The most common types of bad credit loans are payday, auto title, pawn shop, installment, and personal loans.

However, not all payday loans are equal. We recommend avoiding local cash advance places with unfair 400% APRs in favor of personal loans from online marketplaces. These intermediaries connect borrowers with a legitimate network of qualified direct lenders offering better rates and terms.

Here are the benefits and downsides of bad credit loans:

Benefits

Accessibility and Flexibility. Arguably, the number one benefit of bad credit loans is their accessibility and flexibility. They are an alternative route to traditional lenders, who base your eligibility more on your ability to repay through income and DTI than an actual three-digit number ordained by FICO.

Likewise, there are many different types of bad credit loans, including but not limited to payday, personal, and installment loans. Shorter-term payday loans often are intended to cover immediate expenses, whereas longer term, higher dollar installment loans work towards lower monthly payments.

Quick Approval. Unlike traditional loans, expect same-day approval and funding to your checking or savings account as early as the next business day. However, some direct lenders may request additional supporting documentation, adding a day or two to the total processing time.

Rebuilding Credit. If your bad credit direct lender reports regular on-time payments to Experian, Equifax, and/or TransUnion, it'll help boost your credit score quickly. Remember that the higher your credit score, the lower the interest rate you qualify for, regardless of loan type. This also applies to specialty loans like mortgages and home equity.

Downsides

High Interest Rates and Limited Loan Amounts. To soften the risk of lending to bad credit borrowers, bad credit lending companies will often charge higher than average interest rates of up to 35.99%. In contrast, those with excellent to very good credit can expect to pay anywhere from 8% to 15 % APRs. One can also expect limited loan amounts, generally $10,000, even if the advertised maximum borrowing limit on many lending goes north of $15,000 and $40,000.

Penalties and Fees. Bad credit loans charge high payment fees (as much as $39) if you do not meet the minimum monthly payment. Additionally, you may be assessed third-party fees like overdraft or insufficient funds fees if your account balance is close to $0 before an authorized withdrawal from your bad credit direct lender.

It's another reason we highly recommend boosting your credit score before applying for a bad credit loan.

Debt Cycle. With inefficient money management habits, you can expect to be trapped in a debt cycle. This may mean borrowing and paying excessive extension or rollover fees to cover existing loans. Remember to have your debt-to-income ratio top of mind before any loan, preferably under 40% (regardless of loan amount).

One of the best ways to do this is by plugging the numbers into an APR calculator. Some of the better APR calculators will give you estimated monthly payments, total interest, and the total cost of borrowing for a more accurate picture of your lending obligation.

Understanding Bad Credit Personal Loans

With today's rising inflation and economic uncertainty, more people are turning towards bad credit personal loans to meet emergency expenses. Whether it's a $4,500 urgent care bill, a $150 fender bender repair, or a $900 utility bill, those with less-than-perfect credit histories need a viable way to address these challenges.

In the article for cash advances, TimesUnion recommends that all cash advances should be changed to personal loans. So, getting payday advance alternatives for bad credit from personal lenders is much better. Personal lenders offer up to $100,000 on ARP 35.99% to those with bad credit.

One way is by taking out bad credit personal loans.

However, whether or not a bad credit personal loan will work for you depends on your ability to find the best lender.

Why Finding the Best Lender Matters

During your long research process, take your time to receive at least three competitive loan offers to research and evaluate. At this stage, even a single mess-up could result in hundreds of dollars lost over the life of a loan.

Whether it's erroneously not checking for hidden fees or agreeing to exorbitant interest rates, pitfalls and debt traps await with a lack of planning and understanding.

Here are four reasons why finding the best lender matters:

Interest Rates and Loan Terms. When comparing multiple lenders, even a 4-point APR difference could mean hundreds of dollars in potential losses. Aim to look for lenders that provide flexible loan terms with wide ranges, e.g., from 90 days up to five years, allowing you to choose one that allows you to make lower monthly payments.

However, remember that the longer the loan term, the more interest you pay (especially if you only make the minimum monthly payment). As always, try to pay off the entire outstanding balance every month so that you do not pay any interest.

Transparency. Not all lenders offer the same transparency. One may have better written disclaimers than others regarding terms, fees, implications of non-payment, licensing, and other essential information.

Another essential thing to look out for is advertiser and privacy disclosures. Unlike direct lenders like Wells Fargo and Bank of America, lending networks act as intermediaries, connecting borrowers with hundreds of direct lenders that each have their own policies.

Given their status as a middleman, almost all share your information with third-party partners advertising their products and services. However, do not expect any severe breach as sensitive data like banking information is not shared, such as your profile and contact information.

Thirdly, we're big fans of bad credit lending companies that are members of trade organizations, advocating for consumer best practices and responsible lending practices.

Six highly reputable credit organizations include the most popular Online Lenders Alliance (OLA), followed by the American Financial Services Association (AFSA), National Installment Lenders Association (NILA), Consumer Data Industry Association (CDIA), Financial Services Centers of America (FiSCA), and the Online Lending Policy Institute (OLPI).

Lastly, take into account the importance of security protocols. Reputable bad credit lending companies apply a combination of 256-bit SSL encryption (for form security) and secured https, a level of anticipation that uses an SSL/TLS (Secure Sockets Layer/Transport Layer Security) certificate to verify a website's identity. Simply, it lets users know that you have not landed on a scam/phishing website designed to steal all of your information.

Customer Service. Aim for bad credit lending companies that offer exceptional customer service. At a minimum, there should be two communication methods on the site (email and phone number) with optional hardship or forbearance programs.

Do not expect all bad credit lending companies to offer these programs.

Impact on Credit Score. You might be surprised that only some bad credit loan companies report on-time payments to credit bureaus. If you have had difficulty with missed payments, this may be a blessing in disguise. However, we advocate that you adhere to responsible lending practices and pay your monthly bills on time, every time.

With 35% of your FICO score going towards payment history, it's the number one thing you can do to maintain your credit score.

Whether it's interest rates/terms, transparency, customer service, or potential impact on your credit score, finding the best lender will go a long way toward improving your financial situation.

Interesting Random Stats About Debt

To better understand why bad credit loans are being taken out in record numbers, it's important to adjust all the stats around debt.

Here are some surprising statistics to consider:

• According to the Federal Reserve Bank of New York, the total household debt went up to $17.06 trillion (Q2 2023). Of this balance, a large percentage accounts for credit card debt, which rose to a record high of $1.03 trillion

• According to the same source, credit card balances Rose 4.6% quarter-over-quarter to $45 billion, an upward trend dating back over a decade. Of these debts, a large portion belongs to retail credit cards.

• According to debt.org, inflation hit 8% in the Summer of 2022, a 40-year high that has devastated budgets nationwide.

• According to the same source, the maximum DTI to qualify for a mortgage is roughly 43% ( making it all the more important to manage your bad credit loans smartly!)

Tips to Get Bad Credit Loans

Here are five of our favorite tips on how to better manage bad credit loans:

Create a Monthly Budget. Our first recommendation to better manage my credit is creating a monthly budget. We highly advise subscribing to sites like mint.com, which allows you to link your accounts (e.g., bank and mortgage) to view your spending habits in one place. It also includes additional tools like automated bill reminders and negotiation tools to help you stay on point.

Prioritize Loan Payments. Be sure to allocate a portion of your income towards loan repayment. One of the best ways to do this is by taking advantage of budgeting platforms like Mint, which can help you set automatic reminders on or before the due date.

Remember, 35% of your FICO score accounts for a positive payment history, so even a single missed payment could have devastating consequences.

Manage Your Credit. It does not hurt to check your credit score every couple of months. Be sure to report from each credit bureau: Equifax, Experian, and Common TransUnion. You may also sign up for credit monitoring services like Credit Karma or Mint.

If you observe any errors on your credit report, dispute them immediately. Each of the three credit bureaus has dedicated dispute pages where you can submit a note with proof via email, online form, or regular mail.

Contribute to an Emergency Fund. One of the best ways to stay on top of your finances is to set up an emergency fund. Aim for at least six months' worth of living expenses to help you avoid taking out bad credit loans.

One of the best ways to build an emergency fund is to allocate a portion of your income towards it with automated transfers to a dedicated account from each paycheck.

Remember Retirement. We highly recommend you make retirement contributions through your employer via 401(k). This strategy is especially fruitful if your employer matches contributions. 401(k)s are among the most common retirement accounts, allowing you to enjoy compound interest over time. The younger you start, the more you will earn.

Responsible Borrowing Practices and Potential Risks

Before taking out any bad credit loan, performing due diligence is crucial. For example, a thorough assessment of one's financial situation and exploring lower-cost alternatives are necessary.

Here are five responsible borrowing practices to adhere to, regardless of loan type and amount:

Digest Your Finances. Before taking out any bad credit loan, the first step is to digest your finances. Are you in an excellent position to take out a large dollar loan? Try to nail down your income, expenses, and outstanding debts to know how much you can borrow without issue.

For example, if you have a 63% debt-to-income ratio, taking out a $10,000 loan with $450 monthly payments makes no sense.

One of the best ways to view your finances in one place is to subscribe to a service like Mint. Mint is one of the more popular personal finance platforms, providing a comprehensive overview of your finances, including bank accounts, credit cards, investments, and utility bills.

By reviewing all of your financial status in one place, it makes it much easier to manage your income and expenses.

Additionally, we love Mint for its bill payment reminders and alerts. In avoiding late payments, you keep your credit score high, making you eligible for lower interest rates and more flexible repayment terms across all different types of loans.

Lastly, remember its powerful budgeting and expense-tracking features. One of our favorite Mint.com features is the ability to set budgets by spending categories. For example, you can set budgets for discretionary expenses (e.g., monthly subscriptions) and fixed expenses like mortgages, student loans, and utility bills.

Memorize the Fine Print. The bread and butter of any bad credit loan is the fine print. Refer to your loan terms and conditions, which can provide deeper insight into interest rates, fees, repayment terms, and the consequences of making payments late.

If you are taking out a secured bad credit loan, additional information, such as collateral (e.g., vehicle or property), is outlined.

By reading the fine print two or three times, you'll better understand the actual cost of borrowing and do a better job of avoiding unexpected fees, preventing missed payments, and preventing any financial surprises down the road.

Plan Repayment. Understand the importance of establishing a repayment plan for budgeting and financial control. We recommend automatic monthly reminders or withdrawals to remit payments well above the minimum.

Suppose you only make the minimum payment on a bad credit loan every month. In that case, you will see a prolonged repayment period with higher total interest costs, potentially negatively impacting your credit score. In addition, you risk debt accumulation and loan default if you drop your credit score by 100 points or more.

Comparing Lenders. You should compare shops with at least three lenders to evaluate cost savings and review transparency/hidden fees. Try to find the loan that better connects with your financial needs.

For example, one bad credit lender may specialize more in customizable repayment options while others provide a lower-than-average APR relative to similar providers. Others specialize in short-term loans, whereas others focus on long-term installment plans.

Most of all, we highly advocate for typing each bad credit lender's name into Google and performing author reviews on all third-party feedback, including positive and negative reviews from legit sites like Trustpilot and the Better Business Bureau. Remember to verify physical addresses (stated within the disclaimer) and use an APR calculator to determine the total cost of borrowing based on hypothetical scenarios.

Borrowing Only What You Need. With bad credit loans, it is essential only to borrow what you need. Stay within your debt-to-income ratio, preferably keeping it under 30%. Reasons to borrow no more than necessary include cost control, greater financial flexibility, and a reduced debt burden.

Additionally, ensuring a low utilization ratio will keep your credit score stable. Your credit utilization ratio accounts for 30% of your FICO score (second to payment history's 35%), so every dollar borrowed on necessarily will only affect the bottom line.

By adhering to these five responsible lending practices, you'll be on your way to expertly managing your next loan, regardless of type and amount.

A Word On < 40% Debt-to-Income Ratios

As a baseline rule, we recommend that users try maintaining a health debt-to-income ratio at or under 40%. Lenders want to see that only a little of your income goes towards debt repayment. Other expenses like mortgages and student loans should have enough income set aside to pay them comfortably.

Benefits of a lower DTI include reduced financial stress, improved creditworthiness, reduced risk of default, and savings and investment opportunities. For example, if you have a DTI under 20%, you can contribute more towards your mid to long-term retirement plans via 401k and stock options.

Additionally, a lower DTI allows you to be better prepared for unexpected expenses. You never know — a $7,500 urgent care bill may be down the corner.

Conclusion

In short, bad credit personal loans can be an excellent opportunity to stay on top of your expenses. However, it is important to note that they come with higher than average interest rates and shorter repayment terms. Still, if you plan on playing them off quickly, then it could level the playing field. In finding the best lender, stick to tried and true strategies while managing your debt responsibly for the best chances of success.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes