The economic downturn took a toll on many people’s credit scores, making it exorbitantly expensive to take out a loan to pay for unexpected emergencies or urgent home improvements. Lenders will always charge higher interest rates to borrowers they consider to be risky. But there are options other than high-interest payday loans — like subprime personal loans — that may have the added benefit of improving your credit score. Read on to learn more about personal loans for bad credit.
Those with less than stellar credit are often referred to by lenders as “subprime” borrowers. Lenders who serve subprime borrowers charge higher interest rates than those catering to “prime” borrowers, but may offer better terms than payday lenders.
Interest rates for subprime personal loans are higher than for prime loans, but regulations typically cap just how high they can go. Most loan fees can be included within the loan itself. Regular, on-time payments are also reported back to credit agencies and can help to improve your credit score.
Borrowers should get a copy of their credit report before applying for any financing. If there is inaccurate information on the report, having it corrected or removed can provide a boost to your credit score before you apply for financing. This can help you to obtain a better interest rate.
Be aware that lenders who offer installment loans to subprime borrowers charge rates that are similar to those on payday loans — they are much higher than loans made to borrowers with good credit. The key to making the best use of these loans is to pay them off quickly.
Paying a loan off early can reduce the amount of your total interest payments. Look for lenders who will accept prepayment without charging you a penalty. Even if you do have to pay a penalty, you may find the amount of the penalty is less than what you would have paid in additional interest.
Also remember that personal loans are meant to be part of a financial plan and budget. Before applying for a loan, be sure to define a comfortable monthly payment based on your budget.
RISE is an online lender that offers installment loans to borrowers with flawed credit. The company encourages borrowers to pay loans off early, which will not generate a prepayment penalty or additional fees. Borrowers who are able to follow that guidance can reduce the amount of interest paid on their loan.
If you don’t pay off your RISE loan early, expect to pay high interest charges. According to the company’s website, the annual percentage rate (APR) for RISE loans “ranges from 36 percent to 365 percent, depending on the customer’s state of residence and approval rate.”
The “most common RISE loan in the state of California is $2,600 with 32 bi-weekly payments of $241.44 … and an APR of 224.36 percent.” In other words, it will cost you $7,726 to pay off that $2,600 loan.
The main difference between RISE and payday lenders is that borrowers must typically repay or renew a payday loan within two weeks, opening up the door to additional fees that can push the effective APR above 400 percent.
RISE rewards those who make on-time payments with better interest rates on future loans. If a borrower has a history of 24 months of on-time payments, then their next loan will see the interest rate reduced by up to 50 percent. According to the company’s website, it may take two or more loans for customers who start out paying 75 percent or more to qualify for a loan with an rate of 36 percent.
RISE offers borrowers a copy of their credit report and access to credit counseling, and reports on-time payments to credit bureaus, so your credit score also receives a boost. Other lenders also offer the option of prepayment without a penalty or additional fees.
Prosper is an online service that connects borrowers with credit scores as low as 640 to investors who provide funds. According to the company’s website, all loans are made by WebBank, which is FDIC insured and based out of Utah.
Interest rates on Prosper loans are based on a number of data points about you, that are used to create a “Prosper Rating.” Lower Prosper Ratings can often equal a higher interest rate — up to 36 percent. Borrowers must complete a three-stage verification process as part of their application. Not all borrowers will qualify for a loan through this company.
If you have poor credit, Prosper encourages you to work on improving it before applying for a loan. Prosper refers some borrowers with credit scores below 640 to partner AmOne, an online service that matches loan requests to lenders willing to underwrite subprime loans.
Do your homework
While personal loans can be helpful for consolidating debt or to assist in paying for emergencies, they can put you even farther behind the eight ball if you’re not familiar with their potential pitfalls. Do your homework regarding the costs of the loan and shop around before signing on the dotted line.
Credible is a multi-lender marketplace where lenders including Avant, LendingClub, PAVE, Prosper and Upstart compete for your business. You can compare personalized offers from multiple lenders on Credible.com without sharing your personal information with lenders or affecting your credit score. Tracy Sherwood-Knepple is a business and finance writer. She holds a degree in mass communications from Indiana University.