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Bad Credit Loans: Online Guide on How to Handle Them Right

A bad credit loan is a personal loan for people whose FICO score is generally 630 or lower. It can be used to catch up on your bills, pay off medical expenses or cover unexpected emergencies. If it is secured, it requires collateral like a car, house, or other real property. If it is unsecured, there is no collateral requirement.

Is a Bad Credit Loan Different From a Payday Loan?

Payday loans are typically low-dollar, short-term, and high-interest loans. They are usually tied to a specific paycheck and payday schedule and can come due as soon as two weeks. High interest and fees can make it hard to repay the loan in full by next payday, and a cycle of debt is created.

Bad credit loans are typically of larger amounts and have better terms and more reasonable, longer-term payment schedules.

Impact of Different Factors on the Bad Credit Score

How do I Find a Reputable Lender?

There are several crucial and easily quantifiable differences between lenders’ profiles in the bad credit loan arena; or said another way, there are “Good, Bad and Ugly” bad credit lenders.

The “Good” Lender The “Bad or Ugly” Lender
  • Requires basic, industry-wide credit information like a check and income verification
  • Seeks to understand and help you within the limitations of your unique financial situation
  • Offers reasonable and longer terms and repayment plans
  • States your loan agreement and your terms and conditions in plain English
  • Makes clear the APR for each potential loan
  • Has a responsive support staff if you should need help with any part of the application or payment process
  • Requires “application fees” or “loan acceptance fees” to process your application whether you get the loan or not
  • Makes unrealistic guarantees about your loan acceptance or your finances
  • Does not require basic credit information like a credit check or income verification
  • Does not state the APR for a potential loan clearly, or uses a different ratio, term or a simple interest rate
  • Only offers concise loan terms (two weeks to a month)
  • Uses any high-pressure tactics, like overly pushy sales techniques, fear-based or dire language
  • What are the Risks of Bad Credit Loans?

    Taking out a bad credit loan is not necessarily a bad thing — it’s all in how you manage it. That said, the real culprit is found in the “guts” of the loan: the terms of the loan, and specifically, the repayment schedule. Bad credit loans are high-interest rate loans. You need to understand how getting one of these loans might play out for your particular money “style.”

    Assessing the Situation

    To assess the risk, the trick is to understand why your credit score is low. The best way to do this is to have a look at what makes up a credit score. Our graph below will help you understand how this works.

    What Makes Up a Credit Score

    Now ask yourself the following questions:

    • Do you have a history of being late on payments or forgetting to pay? Borrowers with poor to bad credit often have problems making on-time payments.
    • Is your income seasonal or is it hard to predict because it fluctuates a lot? An unpredictable or unstable income is a common cause behind bad credit scores.
    • Or maybe you do not have much of a credit history yet, or there’s that one late payment that is haunting you (and your credit).

    The Real Impact of Missed Payments

    According to Experian, a missed payment has the most significant and longest lasting impact on your credit score. The more recently the missed payment occurred, the higher the effect. And, of course, the more missed payments you have, the longer it will take to recover from them.

    As a matter of fact, a survey conducted by Citi shows that “59 percent of Americans have paid a bill late in their lifetime, and 88 percent of those have done so in the past 12 months.” That is huge, irrespective of the reasons that stay behind these facts.

    Statistics: Top reasons for being tardy on bill payments

    If you have missed payments in the past, especially the recent history, you are at risk for making the same mistake with a bad credit loan. And the consequences are genuine.

    CAUTION! If you can’t repay your loan in full for any reason, and you miss a payment or need to renew your loan, you could find yourself in a spiral of debt that you cannot repay.

    Impact on the Cost of the Loan

    Believe it or not, your credit score will be one of the most important factors in determining the APR on a loan. Generally speaking, the higher your credit score – the lower the rate will be. This can be seen in the table below, on the example of the APR for Personal Loans.

    Credit Score Average Personal Loan APRs
    Excellent (720 – 850) 10.3% – 12.5%
    Good (680 – 719) 13.5% – 15.5%
    Average (640 – 679) 17.8% – 19.9%
    Poor (300 – 639) 28.5% – 32.00%

    Individuals with excellent credit can expect to find rates at about 10% to 12%, or even lower. On the other hand, individuals with average to poor credit, APRs on personal loans will generally be between 18% and 36%. And if you have a credit score of less than 580 or no credit history, you may have trouble qualifying for a conventional personal loan altogether. However, this doesn’t mean you should turn to payday loans, which can carry APRs in excess of 100%.

    What Are The Benefits of Bad Credit Loans?

    Of course, if you have bad to poor credit, a bad credit loan gives you access to the funds you need—and quickly. A bad credit loan in many situations is better than no loan at all.

    Some of the benefits of bad credit loans include:

    • Quick approval time
    • Easy approval process (bad credit loans have approximately 80-90% approval rate)
    • The opportunity to improve a borrower’s credit history if you make payments on time

    Bad Credit Loans Trends?

    Post-recession (2008), bad credit loan interest rates have been improving. As you can notice in the Table below, a slight dip occured around 2008/2010 recession. This situation could have been caused by the large number of people declaring bankruptcy or defaulting on their loans.

    Year US Average Credit Score
    2015 695
    2014 693
    2013 691
    2012 690
    2011 690
    2010 687
    2009 687
    2008 690
    2007 690
    2006 690
    2005 688

    MyFICO has a a wide range of financial calculators. Specifically for auto loans, they takes into account the FICO Score when figuring the potential payment for different types of loans, be it mortgages, credit cards, and student loans.

    Is a Secured Bad Credit Loan Better Than an Unsecured One?

    That depends. Secured bad credit loans usually offer lower interest rates than unsecured loans. They also provide better terms and may grant you access to more substantial fund amounts than unsecured ones. However, secured loans are precisely that—more “secure” for the lender, not necessarily for you, the borrower! When you get a secured loan, your collateral is very much at risk if you do not pay on time or miss a payment.

    TIP: If you don’t want to put any real property at risk, but want the lowest interest rate possible, look for loans that allow for security deposits instead of collateral.

    How Much Money Will I Receive?

    A good rule of thumb for bad credit loan funding is somewhere in the range of $500 to $5,000. Of course, lenders and loans vary widely, and you will need to research to find the right loan for the right amount for you.

    Here is a simplified guide to the kind of loans you’re likely to qualify for based on credit score and income.

    Credit Score Max DTI Ratio Monthly Payment Max Term Notes
    720 + N/A 30% of gross monthly income 60+ months Lenders will allow any reasonable payment based on disposable income
    640 – 720 Less than 50% 20% of gross monthly income 60+ months
    590 – 639 Less than 45% 17% of gross monthly income 48 months
    530 – 589 Less than 40% 15% of gross monthly income 36 months Many lenders will limit loans to a maximum of $6,000
    < 530 Less than 35% 15% of gross monthly income 24 months Many lenders will limit loans to a maximum of $5,000

    How Long Will it Take to Get my Funds?

    Many bad credit lenders need approximately 24-48 hours to do their underwriting and to get the approval notice to you. Always check the details for each loan if you need funds in a hurry or have a serious emergency on your hands.

    Will a Bad Credit Loan Improve my Credit?

    Yes, but only if you make on-time payments. Remember, a missed payment has the most negative and long-lasting impact on your credit score. And recently missed payments hurt the most.

    Always use good financial sense when considering any loan. Consider all the factors, including the APR, the terms and the repayment schedule, if the collateral is required, and any other information—before you sign.

    References and Sources

    1. The “Ask Experian” Team. Recent Late Payments Hurt Credit Scores the Most. Experian Information Solutions. Available at https://www.experian.com/blogs/ask-experian/recent-late-payments-hurt-credit-scores-the-most/

    2. Allie Johnson (2012). More Consumers With Bad Credit Scoring Car Loans. Fox News Network, LLC. Available at https://www.foxbusiness.com/features/more-consumers-with-bad-credit-scoring-car-loans

    3. Brittney Mayer (2018). 2017 Statistics Show Average Credit Card Debt Rising in American Households. BadCredit.Org. Available at https://www.badcredit.org/studies/average-credit-card/

    4. Arnest Thompson (2018). Pros and Cons of Bad Credit Loans. FirstCapitalPlus.Net. Available at https://www.firstcapitalplus.net/pros-and-cons-of-bad-credit-loans/

    5. Gregg Fidan. Loan Based on Income Credit. RealCarTips.Com. Available at http://www.realcartips.com/carloans/389-loan-based-on-income-credit.shtml

    by JT Watkins

    James has enjoyed the transition of working for large financial institutions to now working with a small, dedicated team at PayDayAllDay. At PayDayAllDay he is the ‘goto guru’ on all things to do with fast loan lending. His aim here is to genuinely help individuals obtain better visibility on the easy to manage loans, provide back up to the loan staff and senior management, and continue work on our financial guides to help people more easily understand the business of handling money.