Who Are Bad Credit Loans For?

Bad credit loans are offered for individuals who do not have good credit. This could be due to: making late bill payments, having a lot of debt, or just starting out on building credit. Although a credit score is an indicator of how well a lender thinks you will repay their loan, it does not tell them everything. So, in addition to your credit score, a lender will assess your income level and bank account to determine whether you would be able to make regular loan payments.

Bad credit loans are intended to be a last resort for those who find it difficult to obtain traditional financing, not an alternative to the usual way of paying for everyday purchases.

Common situations where they make sense

Life is full of unexpected events and emergencies. When an immediate financial need arises, most consumers require factual information, not unrealistic marketing claims. However, bad credit loans could provide a viable solution for specific needs when a consumer’s budget allows for the regular monthly payments, and the overall costs associated with the loan are reasonable.

Consider bad credit loans in much the same light as a spare tire. The purpose of a spare tire is to allow you to travel to the nearest service station (i.e., your next stop), but you should never attempt to travel long distances on a spare tire.

Therefore, you may want to consider a bad credit loan if a relatively small amount of money is needed to prevent more significant problems from arising. Some examples of such expenses include:

• A car repair to maintain employment
• Medical bills that cannot be postponed
• Utility bills are essential to maintaining your home

In each case, the goal of obtaining a bad credit loan is to resolve a legitimate issue and not create a larger problem.

Who might qualify

A low credit score does not exclude you from qualifying for a loan as long as your income and documentation (bank statements, etc.) support your application. Lenders who cater to borrowers with low scores typically rely on steady income, recent money in the bank, and what’s left over in your budget after regular expenses. You will still need to provide the basic documentation of identity and residency. You will also need to have an account that allows for electronic payments.

None of these steps removes the cost of borrowing; however, they do allow access to funding when a traditional lender has denied your loan application.

If you meet these basics, see our bad credit loans page for terms and next steps.

When it may be a fit

Before you submit an application, use this quick checklist to help you determine whether the loan may be a good fit for you:

• The cost of the purchase is required now; waiting will result in greater costs later.
• Your monthly payments can be paid in full each month with some money left over for other expenses (rent, food, gas).
• The APR and fees are better than your alternative options.
• The term of the loan is long enough that you do not feel overwhelmed by the monthly payments, but are also not paying for longer than needed.
• You have developed a clear plan to make timely payments and to avoid late fees.

Examples that keep it real

Think about a worn-out brake pad you need to replace right now. Instead of losing time at work due to an accident, you take out a small loan, pay back that loan in a few payments, and are able to keep your job because you can drive safely. Although you will pay a higher price than someone with good credit, it is less expensive than potentially losing income from missing days at work or paying for a much larger repair down the road.

A medical copay paid before a doctor’s visit is another example of a short-term debt need. You determine the lowest interest rate with no prepayment penalty and set up reminders to make sure you are paying on time. You don’t take out more than you need; you cover your doctor’s visit, then focus on a fast payoff.

Another example is when there is only a brief period between two bills due and a paycheck after a move. You map your budget, confirm that the payment will fit in your budget, and use the loan for a specific reason, like a utility deposit. You do not stack new debt, and if permitted, you pay off early.

Who should be careful

When the payment to pay off debt puts additional pressure on your income, that raises the risk. When you borrow money to go shopping, eat out at restaurants, and buy things you want as opposed to things you need, it adds to your stress. The interest rate, in comparison to other options, if it is higher, may simply not be worth it.

Adding a new debt when you are managing several existing ones can add to your difficulty in paying all of them as they come due. It may be better to reduce your spending, see if you can work with your lender to set up a payment plan, or seek out local financial assistance programs.

Bottom line

Bad credit loans are meant to help in crisis situations. They should only be used when the payments are reasonable and you have compared the overall costs with alternative solutions. Use bad credit loans to fix an actual financial issue that will help you save money or get you through the situation; do not use them to overspend.

Compare interest rates carefully, but also compare the fees to make sure you understand all of the terms of the loan and to make sure you can afford the monthly payments. If the numbers do not make financial sense, you may want to revisit your options and consider cheaper alternatives.