6 Types of Bad-Credit Loans

If you have bad credit, you may find it difficult to get a loan. Approval for most loans hinges on two things — your credit and income. If either is lower than average, it can result in denials or undesirable annual percentage rates (APRs) and terms. However, there are a variety of loan types designed for people who have bad credit.

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Bad-credit personal loans

A bad-credit personal loan refers to an installment loan that’s available to borrowers with bad credit. They tend to be unsecured, but some lenders allow applicants to pledge collateral to strengthen their applications. Upon approval, you receive a lump sum amount and repay it over a set term (often a year or more).

There are three types of bad-credit personal loans:

• Unsecured loans don’t require collateral to secure the loan, which could make it difficult to qualify or get a low APR.
• Secured loans require collateral, like your car or house, to secure the loan. As a result, you may be able to qualify for the loan or get a lower APR. But If you fail to make payments, the lender can seize your asset. These loans come with less risk for the lender, but more risk for you.
• Cosigned loans: If you don’t want to risk your house or car, you can also get a cosigner to help you qualify or get approved for a lower APR. Typically someone with good credit, a cosigner assumes equal responsibility for the loan. In other words, if you default on your monthly payments, they're obligated to make them. This could strain your relationship with your chosen cosigner and damage their credit if you miss or make late payment. So make sure you can afford the payments.

Lenders charge interest on bad-credit loans and may charge origination fees up to 12% of your loan amount, which is typically deducted from the loan funds you receive. The average interest rate for a 24-month personal loan was 12.49% in February 2024, according to the Federal Reserve. Nineteen states and Washignton, D.C., cap the APRs licensed non-bank lenders can charge on high-cost installment loans at 36%. However, 13 states allow APRs between 36% and 60%, three only restrict APRs that are considered “unconscionable,” and two have no caps. You can check your state’s APR caps with the National Consumer Law Center.

While personal loan amounts often range from $600 to $100,000 or more, and terms can extend up to 7 years or longer, bad-credit loans typically come with smaller loan amounts and shorter terms.

Payday loans

Payday loans are small loans of around $500 that you can borrow until your next paycheck. The typical cost for a two-week payday loan is $15 per every $100 borrowed, which equates to an APR of about 400%. Due to their high costs and short repayment periods, several states have deemed payday loans predatory and prohibited or restricted them. You can check out the National Conference of State Legislatures for more info on the status of payday loans in your state.

Additionally, while these loans are designed to be paid off by your next paycheck, some states permit payday lenders to roll over or renew these loans for a fee to extend the due date. It becomes very easy to get trapped in a cycle of debt this way.

Where legal, they can be found from both online and brick-and-mortar lenders. A soft credit check is usually required when applying online, but may not be required in-store. In either case, you’ll need to provide proof of income.

Check Out: Payday Loan Consolidation: What You Need To Know

Payday alternative loans (PALs)

The National Credit Union Administration allows federal credit unions to offer payday alternative loans, which are designed to be an affordable alternative to traditional payday loans.

There are two types of PALs:

• PALs I have a minimum loan term between 1 month and 6 months, with loan amounts between $200 and $1,000. For these loans, you need to be a member of a credit union for at least a month.
• PALs II offer loan terms from 1 month up to a maximum of 12. There is no minimum to borrow, but the maximum you can take out is $2,000. As soon as you become a member of a credit union, these loans are immediately available.

Credit card cash advances

Cash advances are a feature on credit cards that allow you to pull a percentage of your credit line out of an ATM in cash. Credit card issuers assign each cardholder a cash advance limit, fee amount, and APR. You can find them on a card’s rates and terms sheet.

Cash advance fees tend to be in the ballpark of 3% to 5% of the advance amount, and cash advance APRs are often a few percentage points higher than a card’s purchase APR. For reference, the average credit card APR currently sits at 21.59%, according to the Federal Reserve.

See Also: 6 Ways To Consolidate Credit Card Debt

Cash advance apps

A new type of cash advance is also available for bad-credit borrowers, and it’s gaining popularity. Cash advances of about $500 to $750 are now offered through various cash advance apps like Dave, EarnIn, and MoneyLion. Many of these apps don’t require credit checks. Instead, they review your bank account activity to determine the amount they'll advance.

As for the costs, most cash advance apps offer free advances if you’re willing to wait a few business days for the standard processing time. However, if you need the money faster, you’ll have to pay an expedited transfer fee. Expedited transfer fees increase with the amount advanced and can translate to triple-digit APRs (like payday loans), in some cases. 

Repayment is based on when your next paycheck is coming, which is typically within two weeks. Cash apps also sometimes request tips, which are optional and can quickly increase your cost of borrowing.

Car title loans

Car title loans are short-term, high-cost loans that require you to pledge a vehicle title as collateral. In most cases, you have to own the vehicle free and clear, but some lenders allow vehicles that are almost paid off.

Once you pledge an eligible title, you can borrow a percentage of your vehicle’s value — often 25% to 50%. You then repay the loan, plus interest and fees, over a set term. Common car title loan terms range from 15 to 30 days, while common finance fees are 25% of the loan amount. For example, if your car is worth $10,000, a lender may offer a $2,500, 30-day loan and charge you a $625 finance fee.

Once the loan is paid off, you get your vehicle title back. However, if you default, the company can take ownership of your vehicle and sell it to recover the amount you owe. In fact, in 2016 the Consumer Financial Protection Bureau found that 1 in 5 borrowers had their cars repossessed after taking out a title loan.

Bad credit alternatives

What if the above bad-credit loans don’t work for you? You can also try the following:

• Ask a friend or family member: Consider asking a friend or family member if you can borrow the amount you need. Communicate when you’ll be able to pay it back and follow through to preserve the relationship.
• Crowdfund: Crowdfunding platforms like GoFundMe let you create a campaign page and ask others to help you reach a financial goal. This route can work well if you need funds for a specific purpose, like medical treatment, a funeral, or a veterinarian bill.
• Sell your belongings: Take inventory of items you own that you don’t need, such as clothing, electronics, kitchen appliances, and outdoor gear. Consider selling them offline by holding a yard sale or online through sites like Craigslist, Facebook Marketplace, eBay, and Poshmark.
• Pawn items: You can also take items of value to a pawn shop. The store may offer you an amount of money in exchange for your item. If you repay the amount by the given deadline, you can get your item back. However, a personal loan may be a better option, as pawn shop loans generally have high costs and fees, with some pawn shops charging over 200% APR.
• Pick up side work: Look for ways to earn a bit of quick cash on the side from gigs like babysitting, delivering groceries or takeout, or offering to help people in your community with everyday tasks.

Bad-credit loans FAQ

How can I improve my credit score?

To improve your credit score, make all of your payments on time and keep your revolving credit balances low. It also helps to have a mix of installment and revolving credit account types, keep accounts open, and limit new credit applications that require hard inquiries. If you have negative marks hurting your score, they’ll hold less weight over time and usually drop off after seven years.

What credit cards are good for bad credit?

A secured credit card can be helpful if you have bad credit because it can help you get back on the credit horse. While you’ll have to put down a cash deposit to gain access to a credit line, if you make on-time payments and the card issuer reports to the credit bureaus, you can build a positive credit record. If you miss any payments or default, the credit card issuer can use your deposit for reimbursement. For the best results, pay off your balance in full each month before the end of your billing cycle.

What type of loan is easiest to get with bad credit?

The easiest types of loans to get with bad credit are personal loans, cash advances, and PALs. All are accessible to people with less-than-perfect credit who need cash fast. In many cases, you can request funds online and have them in your account as soon as the same day.

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