When you need access to cash today, personal loans can be a quick, convenient option. But what about people with a low credit score? Is it possible to get a personal loan when you have bad credit?
The answer is yes, but borrowers should proceed with caution to make sure the loan doesn’t cost them more than they can afford in the long run.
How Do Bad Credit Personal Loans Work?
Loans for people with bad credit work much the same as they do for everyone else: you apply for a loan through a lender and then, if approved, you pay it back – with interest. However, it’s important to first understand how to evaluate different loan options to choose the best one for you now. This includes:
- Annual percentage rate (APR). The APR dictates the amount of interest you’ll be charged while repaying the loan. The lower the APR, the less you’ll pay in interest. People with bad credit can expect to pay a higher APR.
- Monthly payment. This is the amount you will be expected to pay each month on the loan. It is determined by how much you borrow, the interest and loan term.
- Loan term. This is the amount of time you have to repay the loan. It is normally a fixed monthly amount that you pay for a set period, such as three years. Try to avoid the temptation to choose a longer repayment period to reduce monthly payments, since it will cost you more in interest.
Now that you know how to evaluate the terms of a loan, it’s time to find a lender.
Personal Loan Options for People with Bad Credit
People with bad credit scores may find it a challenge to get approved by a traditional lender, like a bank. However, there are other lenders willing to take a chance on borrowers of all credit types, including:
Credit unions. As a nonprofit financed by its members, credit unions are often more willing to lend to people with lower credit scores. Some offer programs specifically designed for people with poor credit, but they may not approve all types of borrowers.
Online lenders. Many online lenders will work with consumers who have a low credit score. However, in some cases they may issue loans with higher interest rates.
Payday loans. Designed specifically for people with bad credit, some payday loans can be challenging to pay off due to high interest rates, which can average 390 to 780% for a two-week loan. Make sure you are confident you can pay it back, plus the interest, in a timely manner.
Before applying for any type of loan, make sure to do your research to ensure you’re getting the best terms possible and will be able to pay it back on time. By doing this not only do you avoid additional interest and potential financial penalties, you’re also building up your credit score, which can help you qualify for more favorable loan terms in the future.
Disclaimer: This is not legal or financial advice. Please consult a legal or financial advisor for your specific situation.