When it comes to managing high-interest debt or unexpected expenses, bad-credit personal loans can be a valuable resource. These loans allow you to break down large costs into manageable monthly payments. However, it’s essential to be aware that bad-credit personal loans often come with high interest rates and extended repayment periods.
Before deciding to borrow, carefully consider the advantages and disadvantages of bad-credit loans and compare them to other options available.
Overview of personal loans for bad credit
Bad-credit personal loans are typically offered to individuals with credit scores below 630. While some lenders may accept scores as low as 550, those with scores below 500 are unlikely to qualify.
These loans are unsecured, meaning that the lender determines your APR and loan terms based on your credit score and income, without requiring collateral.
While online lenders cater to borrowers with poor credit, local banks and credit unions may also offer bad-credit personal loans.
Summary: Pros and cons of bad-credit personal loans
Potentially lower rates than other loans and credit cards.
Check your rate with no hard credit pull.
On-time payments build credit.
High rates for bad credit.
Missed payments hurt credit.
Pros of personal loans for bad credit
Potentially lower rates than other loans and credit cards
Reputable bad-credit personal loan companies cap APRs at 36%, which is the highest rate a loan can have and still be considered affordable, according to most consumer advocates.
In 2024, the average personal loan rate for bad-credit borrowers is 19% to 28%, much lower than the triple-digit APRs charged by payday, pawn, and car title lenders.
Credit card APRs typically max out at 30%, meaning a bad-credit borrower may get a lower rate on a personal loan than a credit card.
Fast funding
You may receive funds from a personal loan within a day or two of applying, depending on the lender. Some lenders can approve an application instantly and fund a loan the same day you apply.
A lender may take more time to review a bad-credit borrower’s application and could request additional documentation, which may extend the approval timeline.
One week is usually the maximum amount of time it takes to get a bad-credit personal loan, which is faster than home equity financing and some credit cards.
Check your rate with no hard credit pull
Most lenders let you pre-qualify for a personal loan to preview your potential offer without undergoing a hard credit pull.
The soft credit pull, which doesn’t affect your credit score, means bad-credit borrowers can check their rate with multiple lenders for the best offer.
No collateral required
Because personal loans are unsecured, you don’t have to pledge collateral to qualify.
On-time payments build credit
Most personal loan lenders report on-time payments to the three major credit bureaus, which means your personal loan repayment behavior becomes part of your credit report.
Cons of personal loans for bad credit
High rates for bad credit
The biggest drawback with bad-credit personal loans is their high rates.
To find the best offer, compare bad-credit loans with low- and no-interest alternatives.
Origination fees
Most bad-credit online lenders charge an origination fee, which is a percentage of the loan the lender takes to cover processing costs.
If you get a $3,000 personal loan with a 5% origination fee, you’d only receive $2,850.
Long repayment terms
The minimum repayment term on most personal loans is one to three years, which may not be practical for all expenses.
High interest rates paid over long loan terms equate to high total interest costs.
One-time financing
Personal loans come in a one-time lump sum and are repaid in equal monthly installments.
Missed payments hurt credit
A missed personal loan payment can cause a significant drop in your credit score.