6 types of bad credit loans and their uses

urbazon/ Getty Images; Illustration by Austin Courregé/Bankrate

If you’ve been turned down for a loan due to bad credit, you’re not completely out of luck. Multiple types of bad credit loans serve borrowers with low credit scores who can’t get approved for funding elsewhere.

Most are convenient as they come with fast funding timelines and may not require a credit check. Still, bad credit loans come with their fair share of drawbacks. You will likely pay higher borrowing costs and may need to use your assets as security.

Bad credit personal loans

If your credit score is anywhere between 300 and 579, consider a bad credit personal loan. Like any other personal loan, the money can be used for many purposes. You could pay off other high-interest debt or cover car repairs or medical expenses.

Bad credit loans’ biggest drawback is that you’re likely to be charged a far higher APR than a good-credit applicant would. Your repayment timeline may be shorter than that of other personal loans, though still measured in months or years instead of weeks.

Pros

• Much lower interest rates than most bad-credit options.
• Funds can be used for a variety of needs.
• Repayment term typically lasts at least 1 year.

Cons

• APR of up to 36 percent.
• Potentially shorter repayment timeline compared to good-credit personal loans.
• Higher origination fees than good-credit personal loans.

Cash advances

A cash advance lets you pull funds from your credit card’s available balance. The amount you borrow is rolled into the outstanding balance on your credit card. You’ll likely pay a higher interest rate than on regular credit card purchases, but there are ways to limit the total cost.

We recommend saving cash advances for emergencies. Although they offer a rapid solution if you’re experiencing financial hardship, they can be costly and can keep you in credit card debt for an extended period.

Pros

• No application — funds are available instantly.
• No credit check required.
• Less predatory than payday or no-credit-check loans.

Cons

• APR typically up to 30 percent — higher than on regular purchases.
• No grace period.
• Must have a credit card with an available balance.

Bank agreements

Some banks offer short-term loans for smaller amounts to account holders with positive banking history. Qualification criteria differ between banks, so reach out to yours to learn more.

Credit unions also offer short-term loans with interest rates capped at 18 percent. You will need to be a member of the credit union to qualify, but they often have less strict criteria than banks and other lenders.

Pros

• Lower interest rates than other bad credit options.
• Funds available quickly.

Cons

• Much more difficult to qualify for.
• Must have an open checking account.

HELOCs or home equity loans

Home equity lines of credit (HELOCs) and home equity loans are popular secured loan options for borrowers with less-than-perfect credit. These loans are second mortgages and allow you to convert a percentage of the equity you’ve built up in your home to cash. Even better, there are very few limits on using your funds.

The downside is they’re secured by your home. You risk foreclosure if you default on the loan. Still, they could work if you haven’t found better options elsewhere and don’t foresee any issues paying on time.

Before you apply, research lenders to see if you meet the minimum eligibility criteria. It can be challenging to find a lender if your credit score isn’t at least in the mid-600s. However, some lenders may do business with you if you have an acceptable debt-to-income (DTI) ratio and meet other guidelines.

Pros

• Potential to qualify for a higher loan amount.
• Typically, better APR than bad credit personal loans.

Cons

• Risk of foreclosure.
• Funding may take longer, usually 30 to 45 days.
• HELOCs may have prepayment penalties and variable interest.

Car title loans

Car title loans let you borrow between 25 and 50 percent of your vehicle’s value. But there’s a catch — you must own your car outright and hand over the title until the loan is paid in full. Most car title loans come with short repayment periods between 15 and 30 days, and loan amounts generally start at $100.

Qualifying depends on your car’s value, not your credit score. But the easy access comes at a price. Interest rates are very high, and if you are unable to pay back your loan within the short repayment term, your car can be repossessed.

Pros

• May not require a credit check.
• Rapid approvals and funding timelines.

Cons

• Exorbitant interest rates.
• Risk of repossession if you default on the loan.
• Banned in 25 states.

Payday loans

Payday loans are an expensive, short-term solution for borrowers who can’t qualify for other forms of funding. These loans should only be used when all other options have been exhausted and only for critical needs like food or shelter. Their predatory structure can keep you stuck in a debt cycle if you cannot repay the balance in full, plus fees, when it’s due.

Many borrowers go for these loans because lenders don’t complete a credit check. Most offer loans up to $500. Some lenders may offer as much as $1,000. They also have quick funding turnarounds — typically same or next day.

But these loans are expensive. Most payday loans have APRs of well over 300 percent. Plus, the repayment timeline is often much shorter than other types of funding. You’ll often have to repay the entire balance by your next payday. Otherwise, you’ll face hefty fees and may have to roll what’s due into another payday loan.

Pros

• Same- or next-day turnaround.
• No credit check required.

Cons

• Extremely short repayment period.
• High APRs — often 300 percent to 650 percent.
• Borrowers frequently need to take out a new loan to pay off the old one. Rolling over your debt often starts a deepening debt spiral.

Alternatives to bad credit loans

Although bad credit loans are designed to help consumers who have trouble accessing funding, they can be costly and predatory. If you’re facing a financial hardship or unexpected expense, there may be some viable alternatives outside of bad credit or emergency loans.

• Consider a charity. Local charities organizations, churches and nonprofits frequently offer help to members of their communities. You can join forums like Reddit and find local Facebook groups to see what options may be available to you.
• Ask a relative or friend for money. To avoid problems later on, draft a repayment plan that works for both parties.
• Use a credit card. If you have available credit on a credit card, the cost of swiping it is probably much lower than you’ll pay if you take out a payday loan. See if your credit card issuer offers hardship plans with lower minimum payments.
• Take out a 401(k) loan. 401(k) loans provide easy access to funds without a credit check but can delay your retirement and incur tax penalties.
• Inquire about a hardship loan. Some employers offer hardship loans to provide financial support to employees facing unexpected expenses or other financial challenges.

Most importantly, work towards building your emergency fund and improving your credit. This way, you can qualify for loan options with better terms, higher amounts and more competitive interest rates in the future.