Bad Credit Loans - What You Need to Know Before You Get One

It happens to all of us: situations occur where we need extra cash — whether it’s for a car repair or unexpected medical bill.

Maybe you need $500 or $2,000 to cover a certain expense. Whatever the reason, you may be considering a bad credit loan as an avenue to get you the money you need quickly.

You’re not alone, either. Many people end up in situations where they have bad credit and limited options for covering unexpected situations. In fact, a recent survey revealed that 29 percent of American households have less than $1,000 in savings.

“With minimal savings, it’s tough to pay for unplanned bills or cover living expenses if you lose a job.”

However, before you make the decision to apply for a bad credit loan, make sure you understand the risks and other options available. Some bad credit loans offer better terms than others, too. Our guide walks you through everything you need to know about bad credit loans and potential lenders.

What are bad credit loans?

Bad credit loans are personal loans offered to individuals with weak, poor or non-existent credit. The loans can be used for anything from medical bills and home repair to the purchase of a used car. A range of financial institutions provide bad credit loans — such as online lenders, credit unions and banks.

In general, bad credit loans tend to have higher interest rates and fees, along with less than desirable terms for the borrower. When you have a low credit score, lenders interpret this to mean you’re a high credit risk and more likely to default on a loan than someone with a good credit score. To offset this risk, lenders charge much higher interest rates. If you — or anyone else — declares bankruptcy or otherwise defaults on a loan, the lender has that additional money from the high interest rates to cover the loss.

Therefore, borrowers with good credit tend to be approved for loans with better interest rates and terms. Each lender has its own cutoff credit scores and criteria for loan approval and fees. Your credit score is an important measure of your financial health.

What is considered a bad credit score?

A bad credit score is generally considered anything below 560 on the FICO® scoring system. A low score might mean that you’ve failed to make payments on-time, maxed out your credit cards or have a negative incident like a foreclosure. Credit scores also consider public records such as bankruptcies and any state or federal tax liens.

To see where your credit score ranks, check out the FICO® ranges below. These ranges are estimates, as each credit bureau and financial institution has a slightly different definition of good and bad credit.

FICO® Score Ranges for Loans with Bad Credit

• Bad or Poor Credit: 559 and lower

• Fair Credit: 560–669

• Good Credit: 670–739

• Very Good Credit: 740–799

• Exceptional Credit: 800+

If you have a credit score in the 500s, for example, qualifying for some loans might be difficult or costly. Sometimes you can still be approved — even with a low score — because it depends on individual lender criteria.

Unsure of your credit score? You may be able to get a copy of your score through your bank or credit card — or a free online service. You can also purchase a credit score check from any of the three main credit bureaus: Experian, Equifax or TransUnion.

How can I get a loan with bad credit?

Having bad credit doesn’t mean you’ll always be turned down for a loan, but it can make it harder to be accepted by a lender. If you don’t have a stellar credit record, you might still get approved for a loan if you have a steady job, enough income or have collateral — like a car or motorcycle — for a secured loan.

While a bad credit loan might be a way for you to get the cash you need, bad credit loans often make your financial life more difficult — not better. Borrowers with bad credit pay extra fees and interest to make up for the fact that they’re less likely to pay off an entire loan. The extra fees are often very steep.

As an example, in the chart below, you can see the potential difference in fees based on credit status. For a 30-year mortgage of $250,000, someone with bad credit could end up paying $132,574 more in interest than someone with good credit.