Personal loans for individuals with poor credit can offer a lifeline by allowing them to spread out significant expenses over manageable monthly payments. Discover what a bad-credit personal loan entails and what to anticipate if you decide to pursue one.
Understanding Bad-Credit Personal Loans
A bad-credit personal loan is designed for individuals with credit scores below 630 and can be utilized to consolidate debt or cover large expenses. These loans are typically unsecured, meaning no collateral is necessary for approval. However, some lenders may offer both secured and unsecured options for borrowers with poor credit.
Online lenders are the primary source of bad-credit loans, although it’s possible to secure a personal loan with a low credit score from local banks or credit unions. Loan amounts typically range from $1,000 to $50,000, with repayment terms spanning from one to seven years and annual percentage rates falling between 6% and 36%. Generally, individuals with poor credit receive lower loan amounts and higher interest rates. Applicants with credit scores below 500 are unlikely to qualify for a personal loan.
Crucial Terms to Understand
Common Characteristics of Bad-Credit Personal Loans
Review these key features of bad-credit loans and consider the pros and cons before committing to one.
Elevated Annual Percentage Rates
Borrowers with poor credit are likely to secure loans at the upper range of a lender’s APR spectrum. In 2024, the average APR for personal loans among individuals with scores below 630 ranges from 18% to 26%, based on aggregated, anonymized data from BW users who pre-qualified for personal loans.
Limited Loan Amounts
Bad-credit loans are typically smaller compared to loans available to individuals with good or excellent credit scores (above 689). For instance, if a lender offers loans ranging from $1,000 to $50,000, a borrower with bad credit may not qualify for the maximum amount of $50,000.
Restricted Repayment Term Options
While personal loans for individuals with good or excellent credit may have repayment terms extending to seven years or more, bad-credit loan terms are typically five years or less. Even if a lender offers terms of six or seven years, borrowers with poor credit are likely to receive approval for a shorter term.
🤓Nerdy Tip
While your credit score plays a significant role in determining your personal loan options, it’s not the sole factor. Applicants with high incomes and minimal existing debt may qualify for better rates and terms than those with lower incomes or substantial debt. The simplest way to assess your eligibility for a personal loan and understand the terms is to pre-qualify, enabling you to preview loan offers without impacting your credit score.
Determining the Safety of a Bad-Credit Personal Loan
Individuals with poor credit who require financial assistance are often targeted by scammers and predatory lenders. Here are four indicators of a trustworthy bad-credit lender.
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Positive online reputation: Conduct an online search for the lender and review consumer feedback on platforms like Reddit, professional review sites such as BW, the Consumer Financial Protection Bureau’s complaint database, and the Better Business Bureau. Seek out lenders with favorable reviews, minimal CFPB complaints, and no regulatory actions from authorities like the FTC.
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Transparency in loan information: A bad-credit loan website should clearly display details such as APR ranges, repayment options, and loan amounts. This information is typically found on the loan product page or in the site’s footer.
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Mandatory credit check: While the idea of a credit check may concern individuals with bad credit, a hard credit inquiry indicates the lender’s commitment to ensuring loan repayment. Promises of approval without a credit check could signal a personal loan scam or a lender charging excessive interest rates.
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Clear loan agreement: Once you’ve selected a lender and applied for a loan, you’ll be asked to sign a loan agreement. This document should outline the loan’s APR and any applicable fees.