5 types of bad credit loans

Qualifying for a loan when you have bad credit can be difficult, but you do have options

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If you have bad credit, it’s still possible to qualify for a loan. Learn about the types of bad credit loans and which ones you should avoid. (Shutterstock)

Emergencies don’t just strike when your credit is in top shape. If you have bad credit and need to borrow money for an unexpected expense, it’s possible to get approved for a loan. 

If you have bad credit, you’ll need to research lender options to avoid predatory lending, but it’s possible to find the funding you need. Here are five types of bad credit loans you should know about.

Unsecured personal loans

An unsecured personal loan is funding that you receive in one lump sum and then make fixed monthly payments on over a set period of time. Since they don’t require collateral, you don’t have to put personal property at risk when you take out an unsecured loan.

You can use the funds from an unsecured loan for many purposes, including debt consolidation, home improvement projects, or other large expenses.

Unsecured loans may be a bit more challenging to obtain if you have a shaky credit history, but many lenders work specifically with bad credit borrowers. Keep in mind that unsecured loans often have higher interest rates than secured loans, particularly if you have a lower credit score. 

Visit Credible to see your prequalified personal loan rates from various lenders, all in one place.

Secured personal loans

A secured personal loan requires you to provide an asset as collateral for the loan, such as a car, house, or savings account. If you can’t repay the loan, the lender keeps the property to repay the debt. 

Since secured personal loans are backed by collateral, they typically have lower interest rates because they’re less risky to the lender. 

Home equity loans or HELOCs

If you own a house, you could use the equity in your home to take out a home equity loan or a home equity line of credit (HELOC). 

A home equity loan operates like a personal loan, except the lender uses the equity (the difference between the property value and what you owe on a mortgage) to determine how much money you can borrow. You typically can’t borrow more than 80% of the equity in your home, and your home serves as collateral for the loan. You’ll need to make payments on your home equity loan in addition to your regular mortgage payments. If you default on the loan, you could risk foreclosure. 

A home equity line of credit also uses your home as collateral, but it works a bit more like a credit card. The lender uses the equity in your home to determine a spending limit. You have repeated access to that credit line during the payout period, also known as the draw period. You can borrow from the available credit as often as you want so long as you repay it. During the repayment period, you can’t borrow from the credit line.


Car title loans

A car title loan is like a secured loan, but the interest rates and fees are typically much higher. When you take out a title loan, you give your car title to the lender. If you fail to repay the loan, the lender can repossess your vehicle. 

Car title loans are typically much more expensive than traditional loans and have a higher risk of default. Car title loans have a shorter repayment period, usually 30 days, making it more challenging to repay. The lender will charge fees if you roll the loan into another repayment period, which can make repaying the loan even more difficult. 

You should avoid car title loans since they have high interest rates and often create a cycle of debt that’s difficult to escape. Further, a car title loan won’t appear on your credit reports, so any on-time payments you make won’t benefit your score. 

Payday loans

Payday loans get their names from the way they function. Payday loan lenders offer small loans, typically $500 or less, that must be repaid by your next payday (including fees). 

Payday loans have exceedingly high fees and interest rates that equate to an annual percentage rate (APR) of more than 400%, according to the Consumer Financial Protection Bureau (CFPB). While payday lenders often allow you to roll over your loan to a new repayment cycle, the lender typically charges additional fees for this. If you don’t repay this loan quickly, you can find yourself treading water, unable to repay the debt faster than it builds. 

Like car title loans, payday loans won’t show up on your credit report (unless you default on your loan), so making on-time payments won’t benefit your credit score. 


How to take out a bad credit loan

If you need cash and have poor credit, follow these three steps to find a personal loan that meets your needs: 

  1. Check your credit report. Equifax recently reported an error that potentially lowered credit scores for thousands of borrowers between March and April. If your credit score seems low, make sure you check your report to determine if there are any errors.
  2. Compare rates from multiple lenders. Use an online tool, like Credible, to compare rates and personal loan terms from multiple lenders in one place. You can find preapproved rates without affecting your credit score. Look at each lender’s loan amounts, repayment terms, interest rates, fees, and funding times.
  3. Fill out the application. Once you decide which lender best meets your needs, you’ll complete an application. You’ll need to provide information, including your Social Security number, address, and proof of income. If you’re approved for the loan, your lender will have you sign an agreement to accept the loan before depositing the funds into your bank account.

If you’re struggling to find a lender, here are some things you can focus on to improve your credit score (and chances of loan approval):

  • Pay down balances on credit cards to reduce your credit utilization.
  • Catch up on late payments and make all future payments on time.
  • Increase your income by taking on a part-time job or starting a side hustle.
  • Find a cosigner with good credit to help you snag a lower interest rate.

If you’re ready to apply for a personal loan, Credible lets you quickly and easily compare personal loan rates to find one that works for your financial situation.