5 types of bad loans


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If you have bad credit, it is still possible to qualify for a loan. Learn about the types of bad credit loans and which ones you should avoid. (Shutterstock)

Emergencies don’t just happen when your credit is in great shape. If you have bad credit and need to borrow money for an unexpected expense, it is possible to get loan approval.

If you have bad credit, you’ll need to research lender options to avoid predatory lending, but it’s possible to find the financing you need. Here are five types of bad credit loans you should know about.

Unsecured Personal Loans

An unsecured personal loan is funding that you receive in a lump sum and then make fixed monthly payments over a set period of time. Since they don’t require collateral, you don’t have to put your personal assets at risk when you take out an unsecured loan.

You can use the funds from an unsecured loan for many purposes, including debt consolidationhome improvement projects or other major expenses.

Unsecured loans can be a little harder to get if you have a poor credit history, but many lenders work specifically with bad borrowers. Keep in mind that unsecured loans often have higher interest rates than secured loans, especially if you have a lower credit score.

Visit Credible for view your prequalified personal loan rates from various lenders, all in one place.

Secured Personal Loans

A secured personal loan requires you to provide an asset as collateral for the loan, such as a car, house, or savings account. If you can’t repay the loan, the lender keeps the property to pay off the debt.

Since secure personal loans are backed by collateral, they usually have lower interest rates because they pose less risk to the lender.

Home Equity Loans or HELOCs

If you own a home, you can use the equity in your home to take out a home equity loan or a home equity line of credit (HELOC).

A home equity loan works like a personal loan, except the lender uses equity (the difference between the value of the property and what you owe on a mortgage) to determine how much you can borrow. You usually can’t borrow more than 80% of your home’s equity, and your home serves as collateral for the loan. You will need to make payments on your home equity loan in addition to your regular mortgage payments. If you fail to repay the loan, you risk foreclosure.

A home equity line of credit also uses your home as collateral, but it works a bit more like a credit card. The lender uses the equity in your home to determine a spending limit. You have repeated access to this line of credit during the payment period, also known as the drawdown period. You can borrow against the available credit as often as you want as long as you repay it. During the repayment period, you cannot borrow from the line of credit.


Car title loans

A car title loan is like a secured loan, but the interest rates and fees are usually much higher. When you take out a title loan, you give the title to your car to the lender. If you are unable to repay the loan, the lender can repossess your vehicle.

Car title loans are generally much more expensive than traditional loans and come with a higher risk of default. Car title loans have a shorter repayment period, usually 30 days, which makes repayment more difficult. The lender will charge a fee if you extend the loan over another repayment period, which can make paying off the loan even more difficult.

You should avoid car title loans because they have high interest rates and often create a cycle of debt that is hard to escape. Plus, a car title loan won’t show up on your credit reports, so any one-time payments you make won’t benefit your score.

Payday loans

Payday loans get their name from the way they work. Payday lenders offer small loans, usually $500 or less, that must be paid off by your next payday (including fees).

Payday loans have extremely high fees and interest rates that equate to an annual percentage rate (APR) of over 400%, according to the Consumer Financial Protection Bureau (CFPB). While payday lenders often allow you to defer your loan to a new repayment cycle, the lender usually charges an additional fee for this. If you don’t repay that loan quickly, you may find yourself on the spot, unable to pay off the debt faster than it accumulates.

Like car title loans, payday loans won’t show up on your credit report (unless you pay off your loan), so making payments on time won’t benefit your credit score.


How to get a loan for bad credit

If you need money and your credit is poor, follow these three steps to find a Personal loan that meets your needs:

  1. Check your credit report. Equifax recently reported an error that potentially lowered the credit scores of thousands of borrowers between March and April. If your credit score seems low, be sure to check your report to determine if there are any errors.
  2. Compare rates from multiple lenders. Use an online tool, like Credible, to compare personal loan rates and terms from multiple lenders in one place. You can find pre-approved rates without affecting your credit score. Review the loan amounts, repayment terms, interest rates, fees, and financing terms of each lender.
  3. Complete the application. Once you have decided on the lender that best suits your needs, you will complete an application. You will need to provide information including your social security number, address, and proof of income. If you are approved for the loan, your lender will have you sign an agreement to accept the loan before depositing the funds into your bank account.

If you’re having trouble finding a lender, here are a few things you can focus on to improve your credit score (and your chances of loan approval):

  • Pay off your credit card balances to reduce your credit usage.
  • Catch up on late payments and make all future payments on time.
  • Increase your income by accepting a part-time job or starting a side business.
  • Find a co-signer with good credit to help you land a lower interest rate.

If you’re ready to apply for a personal loan, Credible makes it quick and easy compare personal loan rates to find the right one for your financial situation.


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