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March 11, 2020
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Having bad credit can be stressful, especially when you need to take out a new loan. But there’s still hope, with many lenders willing to take a chance on someone with a less-than-desirable credit score. But they’re not in it just to give you a second chance. Many of them still charge high fees, and in some instances can prey on people in unfavorable financial circumstances at the cost of their credit. We’ve sorted through the myriad of online lenders to find those that offer the most favorable terms to people who have bad credit, as judged by their APR ranges, loan amounts, term lengths, payoff features, and minimum credit score requirements. By making timely payments, you can use a personal loan to improve your credit score.

Important Things To Know About Bad Credit Loans

  • You will typically be offered higher interest rates, up to 36% APR, but they should be far lower than those of payday loans (also known as guaranteed loans, with APRs which can go up to 400%)
  • Getting approved for a bad credit loan is a good opportunity to improve your credit score through timely payments
  • Lenders use soft credit pulls to see if you prequalify for a loan—which won’t impact your score
  • If you have bad credit you’ll be targeted by predatory lenders, meaning loans with absurdly high APRs and no credit check. Try to avoid car title and payday loans — also known as cash advances — at all costs. These are the most popular types of predatory loans targeting consumers with subpar credit.
  • Consider how taking out a new loan can further impact your credit. Before you go through with your decision to borrow, expend all other options like borrowing from friends and family or, if you’re an entrepreneur, an interest-free loan from a platform like Kiva.org. If you do go through with taking out a loan with compromised credit, your greatest concern should be making payments on time so you don’t aggravate your credit situation.

Glossary:

  • Car title loans: small, short term loan with higher than average rates which uses the title of your car as collateral. They range from $100-$5,550, according to the FTC.
  • Payday (cash advance, guaranteed) loans: short term, high interest loans with no credit check for immediate cash. Advertised in the radio, television, and even the mall as “GET CASH FAST.”
  • Soft credit pull: also called a soft inquiry, looks into your credit history without impacting your credit score. Creditors will initially use this to check you are eligible for their loans and grant pre-approval.
  • Hard credit pull: a credit inquiry that will deduct points from your credit score. This is done when the bank is running an official approval for a loan.

What Is Bad Credit Exactly?

Think of your FICO credit score as a numeric representation— in the range of 300 to 850— of your ability to pay your bills on time. Based on the FICO scale, a very bad credit score is in the 300-579 range and a fair credit score is in the 580-669 range. According to Bruce McClary from the National Foundation for Credit Counseling, options for people with low credit scores can be limited, but starter loans can be a feasible option if you’re looking to rebuild your credit.

“Everybody has to start somewhere so there is a time, a place and a set of circumstances where using a lender who offers starter loans can be helpful to start the process of building a credit score,” he says. “This will then make more affordable lines of credit and loans possible for somebody in that situation as their credit score increases.”

And according to Experian, rehabilitating your score is achieved through concerted steps such as paying your bills on time, checking what your actual credit score is, getting a secured credit card, applying for a short term loan or a credit-building loan (where you make payments to yourself while building credit.)

Bad Credit Loan Reviews

When deciding which lender and loan product to go for, make sure you understand the overall cost of the loan you’re being offered to ensure you can comfortably afford it. Pay close attention to rates, terms, and fees, and use a personal loan calculator to estimate your monthly payments before you make a decision.

OneMain Financial Review

Rates: 18.00%-35.99% APR

  • Term lengths: 24, 36, 48, or 60 months
  • Loan amounts: $1,500-$20,000

OneMain Financial differentiates itself from other online lenders by taking into account other factors besides your credit score as criteria to approve your loan application. Your income, expenses, and assets are equally important for this lender. If you have a poor credit score or low income, you might not be eligible for loans from most banks, but OneMain financial offers prospective borrowers another option: secured loans.

Secured loans are backed by your own assets, which serve as collateral for the bank. That means you pledge a car, motorcycle, camper, RV, savings account, or a certificate of deposit in order to get a lower rate. In the case that you default on the loan, the lender will repossess the latter to counter for the loss.

You will need to purchase extra insurance to cover the collateral against damage, such as collision and comprehensive insurance on a vehicle (if you don’t already have it), and you’ll have to visit a local bank branch to provide the necessary documentation to corroborate your identity.

Other lenders offering secured loans include Wells Fargo, PNC Bank, TD Bank, Fifth Third Bank, and BMO Harris.

Avant Review

Rates: 9.95%-35.99% APR

  • Term lengths: 24-60 months
  • Loan amounts: $2,000-$35,000

 

Avant bills itself as an alternative to payday lenders for average Americans; the average customer has a credit score between 580 and 700.

Although Avant does offer loans for as low as 9.95% APR, with bad credit you’ll probably qualify for a higher APR; up to 35.99% with an added 4.75% administration fee. Their loans are fixed-rate, meaning the amount owed each month won’t change. Also, they have customer service representatives available seven days a week by phone, email, and chat.

One thing to note, however, is that Avant doesn’t serve people living in Colorado, Iowa, Vermont, or West Virginia.

If you’re approved for a loan, you could receive the money in your bank account as soon as the day after you apply, depending on your bank’s ACH transfer policies.

LendingTree Review

Rates: 5.32%-36% APR

  • Term lengths: 24-60 months
  • Loan amounts: $1,000-$50,000

LendingTree is a bit different from the other names on our list. It’s not a lender in itself, but rather an online lending marketplace to be used as a comparison tool. This means it doesn’t actually issue loans but instead connects you with partners that do. By simply providing your personal details, you can see the rates potential lenders would be willing to offer.

Marketplace lending could be a convenient option for people that aren’t sure what they’re looking for and want to shop around for options. You can get quotes from different lenders by completing a single form, and browse relevant articles and useful tools to help you make better-informed decisions.

LendingTree partners with companies like OnDeck, Prosper, Marcus by Goldman Sachs, and all of the lenders on this list, so it can be a good option if you’re not sure which company is offering the best rates and terms for your situation. Additionally, LendingTree offers debt relief programs and online resources to help you rebuild your credit history and score.

LendingPoint Review

Rates: 10%-35.99% APR

  • Term lengths: 2-5 years
  • Loan amounts: $2,000-$25,000

LendingPoint is an alternative online lender offering personal loans for up to $25,000 with lower interest payments that can be conveniently used to consolidate existing high-interest debt. Debt consolidation happens when you roll all your high-interest debt into one lower interest payment.

These loans can be used to pay off existing debt due to its refinancing option. Afterwards, you pay off the fixed-rate installment loan in a period of 24 to 48 months.

With the refinancing option—borrowers that have made six or more timely payments— qualify for personal loan refinancing. This means lower rates, more capital, and a lower monthly payment.

To qualify for a personal installment loan you must have a minimum credit score of 585 and a minimum $25,000 yearly salary. What sets LendingPoint apart from other fintech lenders is they consider alternative applicant data to review your loan request. They take into account your debt to income ratio, credit history and credit card debt, verifiable income, current delinquencies and bankruptcies, open tax liens, employment status and length of time worked at your current employment. And if you’re approved you could qualify for same-day funding. They also offer prepayment flexibility by allowing you to pay off your monthly balance up to 5 days in advance.

LendingPoint is not available for West Virginia residents.

Upgrade Review

  • Rates: 6.98%-35.89% APR with a 1.5% to 6% origination fee, which is deducted from the loan proceeds
  • Term lengths: 3-5 years
  • Loan amounts: $1,000-$50,000

Upgrade offers unsecured loans, meaning they’re not backed by any collateral. Instead they’re based on your creditworthiness.

If you’re looking for tools to rebuild your credit, you might want to consider this lender. They take into consideration applicants with bad credit, evaluating their free cash flow and current debt to income ratio. While you may not have a perfect credit score, having a strong cash flow is a significant plus when applying.

Upgrade features an initial soft credit pull which won’t impact your credit score. If you decide to apply, Upgrade uses the FICO 9 credit score to evaluate potential borrowers.

Although they don’t have a minimum annual income requirement, most applicants have annual salaries of $30,000 or more. As for free cash flow at the end of the month, their minimum requirement is $800 after all outstanding bills are paid. If your credit score is under their 600 minimum requirement, Upgrade accepts cosigners.

Upgrade is not available for service in Iowa, Maryland, Vermont, and West Virginia.

Things to Consider About Loans

The truth is bad credit is not a final destination. Consumers can strive to move out of a difficult financial situation through countless online resources available to help rebuild credit. These five companies were chosen out of 18 online lenders that specialize in lending to consumers with bad credit. Here’s what we looked for when putting this list together:

Loan Details and Odds of Approval

The first thing we looked at was whether you’re likely to qualify at all with bad credit. Not all lenders will be willing to work with you if you have credit under a score of 580. Of course, every lender is different and each one takes into account other considerations, such as your income, employment status and debt to income ratio. Many lenders have set risk thresholds for these other criteria, so it’s possible you could still be denied based on other factors, such as not having enough free cash flow at the end of the month.

We considered the loan amounts, the range of time to pay it off, and their APR ranges. This is an easy way to compare the total cost of loans because the APR incorporates both the interest rate and any fees that come with the loan. These are, most notably, origination fees. You likely won’t qualify for the best rates that lenders offer if you have bad credit, although they’re still much better than those a typical payday lender can offer.

Reporting to Credit Bureaus

The lenders on our list will report your payments to credit bureaus, as opposed to payday lenders. Of course, this can be a double-edged sword. If you make late payments you could harm your credit score. But as long as you make your payments on time (and even pay off your loan early), it’s likely you’ll see an increase in your credit score, making it easier to qualify for better loans at more favorable interest rates the next time you need cash.

Secured or Unsecured Loan?

With some lenders, such as OneMain Financial, you may get the option to choose either a secured or an unsecured loan. The difference between them is that with a secured loan, you pledge some sort of collateral in order to get lower interest rates. With personal loan lenders, collateral is usually a vehicle, although you may be able to use the balance of a savings account or CD as collateral if you get a loan from a bank or credit union.

The upshot to this is that you’ll qualify for lower rates, because the lender is taking on less risk. If you’re very confident that you’ll be able to pay back the loan, and if the loss of the collateral won’t be financially devastating, it can make a lot of sense to choose a secured loan.

The downside is that if you default on the loan, the lender can take back your collateral and sell it to pay off part of your outstanding balance. This can be disastrous for most people, especially if you used your car as collateral and rely on it to get to work. In that case, getting an unsecured loan may be the best option because, while it can still cause a lot of problems, at least you can still get to work if you default.

Soft Credit Check vs. Hard Credit Check

When you’re shopping around for a loan and checking your rates with lenders, it’s a good idea to double-check if they’re doing a soft credit pull. This means that it won’t be recorded on your credit report, which can cause your score to drop even more.

Your lender will do a hard credit check once you complete and submit your loan application. This credit pull will be reported on your credit report, causing your score to drop. If you’re shopping around for rates, those hard pulls can be consolidated into one pull as it’s assumed you’re comparing rates. These claims to consolidate credit check inquiries must be made within a 45 day period for FICO score. For the Vantage score, the window is shorter.

Use a Bad Credit Loan to Your Advantage

Although taking out a loan when you have bad credit isn’t ideal, it’s also true that it can be a good way to build your credit back up. That’s because a full 30% of your credit score is determined by your payment history.

Each month that you make a payment towards your loan — or, conversely, miss a payment — that information will be sent to the credit bureaus. The more on-time payments you have on your credit report, the better. By the time you pay off your loan, you may even see a significant boost in your credit score as long as you don’t miss any payments.

Build Up Your Savings

Always remember: the best loan is actually no loan at all. Loans are great for helping you afford things you need today when your income isn’t coming until later. Just about everyone will go through something like this at some time in their life.

But whatever it is you need — a car, home repairs, medical treatment — there’s a good chance you can save up for it in advance by making some tweaks to your budget. Yes, this means you will need to learn how to manage, put away, and even look for alternate sources of income — but the results are worth it.

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