What Are Bad Credit Loans?
Bad credit loans are personal loans made available to consumers with less-than-perfect credit. A bad credit lender understands that the applicant has experienced late payments or has a very limited credit history; therefore, the lender will review your income, banking history, and credit score before deciding on a loan.
You can review current bad credit loans we make available online to see what you may qualify for.
Bad credit loans are often described simply as a “Plan B” for those whom their local banks have turned away. Although they are a good alternative, they are typically more expensive and should be used carefully.
How a bad credit loan works
A borrower will receive a specific dollar amount from a lender and repay it in a series of equal monthly installments. Each installment will consist of the repayment of a portion of the original amount borrowed, plus interest accrued during the term of the loan.
The majority of bad credit loans are unsecured, meaning no collateral is required. However, some lenders will allow you to pledge a vehicle (auto title) or even your savings account as security for the loan.
The process to obtain a bad credit loan is similar to obtaining a conventional loan; i.e., you will complete an application, the lender will review your credit information, the lender will make an offer to lend you money, and then you will begin repaying the loan according to a scheduled repayment plan.
This is much like utilizing public transportation to travel from one location to another when your automobile is in the repair shop. While it is not luxurious, the bus will still get you safely to your destination as long as you plan your trip properly.
What lenders look at besides credit score
Even though you may have a bad credit score, there are opportunities to qualify as long as your income is consistent and all of your bills fit into your budget. To determine this, lenders usually look at several things, including:
- Your regular income
- Recent bank deposits
- Typical withdrawals from your account
- Your total current debt(s)
- Your basic identification and residency documentation.
Types you might see
You will notice three typical types of loans; an installment loan with no collateral, which includes a set number of payments over a long period of time (typically a year), a secured loan that utilizes one of your assets as collateral, to create less risk for both parties, and a co-signed or joint loan in which a second party assumes some level of financial responsibility.
The paths above are all trade-offs of risk vs. cost. Unsecured loans are typically easy to obtain; however, they often carry higher interest rates than other options. A secured loan will likely lower your interest rate, but you will be putting one of your assets at risk should you fail to make payments on this type of loan. A co-signer or a second party on the loan may help improve your terms, but it also places them at a higher degree of risk.
Costs you should expect
Interest rates tend to be higher than loans for good credit. Some lenders have an origination fee. The APR shows the cost for the year and includes interest and certain fees, which makes it easier to compare offers.
A short term can reduce the total interest cost but raise the monthly payment. A long term will lower the monthly payment, but in many cases raise the total cost. Read the agreement for late fees and prepayment penalties so there are no surprises.
Simple examples
You need $600 to repair a water heater. You elect to take out a 6-month installment loan at an acceptable monthly payment. As a result, it is paid on time so as not to interfere with rent or utilities.
You need $2,500 with which to roll small debts. Your credit rating is poor, but your income is steady. By comparing available plans, you find the lowest APR that allows you to make a comfortable payment. You set up reminders so you don’t end up paying late.
You are interested in a secured loan with a car that is already paid off as collateral. The rate seems lower, but you need to depend on the work vehicle. You feel an unsecured loan will be more suited to your circumstances because it does not involve loss of transportation.
When a bad credit loan can make sense
While there may be times in which taking a loan for a particular need, such as repairing your automobile or paying for a medical bill, is acceptable, there are many additional ways in which the financial implications of borrowing can impact your budget.
When a loan is affordable and fits within your monthly budget, borrowing can be an option. Borrowing money can also be a good idea if the cost of borrowing (APR) is less than the alternatives that you are looking into.
On the other hand, if the loan is not an emergency or the monthly payments will put a strain on your finances, it is usually best to wait until you can accumulate enough funds to meet the financial obligation.
How to compare offers the smart way
You should also consider factors beyond the interest rate when evaluating a loan. The overall picture of the loan, including the APR, any extra fees/charges associated with the loan, the length of the loan (term), the monthly payment amount and due date, how you will receive the loan proceeds, and your options for making the monthly payments should all be evaluated.
You can create a very basic, one-page comparison chart using just two or three loan options to help organize and decide about which one is best for you.
Ways to help manage your money
Create a buffer in your checking account so you can avoid overdraft when autopay comes through. Set reminders a couple of days before your payment due dates. Call your lender if money gets tight to discuss alternative options; do this before you are too late. Don’t add a new loan until all previous loans have been paid off. These habits can reduce stress and will allow you to achieve a good outcome.
The bottom line
Bad Credit Loans are for real financial needs, and not just to enable overspending. Only borrow what you need and borrow what you know you can pay back. Find the best interest rate and fees (APRs) and then find the shortest term that fits your budget. Make the payment due each month. Create a simple plan and pay consistently, and you will be able to continue to manage your finances.
References
- Bankrate. (2025). What Is A Bad Credit Personal Loan? Here’s What To Know. https://www.bankrate.com/loans/personal-loans/what-is-a-bad-credit-personal-loan/