If you’re on the hunt for financing, but your credit profile is less than ideal, then you will need to consider using a specialist bad credit lender. Although such lenders will consider your application even if your credit is damaged, you will be penalized for this in the form of a high APR rate.
A bad credit personal loan allows you to spread your repayments over a number of months or years. As monthly payments will always be at the same figure, you can budget accordingly.
In this article, we cover the ins and outs of bad credit personal loans, such as how they work, who is eligible, how much you can borrow, and what sort of interest you should expect to pay.
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What is a Bad Credit Personal Loan?
A bad credit personal loan operates much the same as any other personal loan in the market, where you will borrow funds over a number of months or years. Otherwise referred to as an installment loan, personal loans usually come with a fixed APR rate, meaning that your monthly repayments will always be the same.
The lender will commonly take the repayments directly from your US checking account on the same day of each month. Not only does this ensure that you never miss a payment, but you always know when the funds are going to be debited from your account.
In terms of how much you can borrow, this will not only depend on the lender in question, but also the state that you live in. This is because some states impose strict laws on personal loans, meaning that you will not be able to borrow more than the limit allows. This is also the case for the amount of interest that lenders can charge you.
For example, while in Ohio this is capped to just 28% APR annually, in California it’s as high as 460% APR. With that said, not all states impose an interest rate limit, so you’re best advised to explore this before proceeding. It is important to remember that bad credit personal loans won’t be for everyone. By this, we mean that you will still need to meet a range of eligibility requirements, such as a regular source of income, and a debt-to-income ratio that’s no higher than 50%.
Pros and Cons of Bad Credit Personal Loans
How do Bad Credit Personal Loans Work?
Personal loans are one of the most popular financing options in the US. Not only do they allow you to borrow a larger amount than payday loans permit, but interest rates are usually much more favorable. Personal loans are also popular because you can typically complete the end-to-end application process in just 5-10 minutes.
With that said, if you’ve never applied for a bad credit personal loan before, it’s probably a good idea to read the step-by-step guidelines that we’ve listed below.
Step 1: Find a Bad Credit Person Loan Provider
Your first move will be to find a bad credit personal loan provider. You will likely have hundreds of bad credit lenders to choose from, which can make it difficult to know which provider to go with. Your decision should cover a range of important factors, such as how much interest the lender charges, what eligibility requirements it has in place, and the size and terms of its personal loans.
To help you along the way, we’ve outlined five handy tips to consider when choosing a bad credit personal loan provider, which you’ll find further down on this page.
Step 2: Visit Lender’s Website and Choose Loan Terms
Now that you’ve selected a bad credit personal loan lender that meets your financing needs, you’ll need to head over to the provider’s website. In doing so, you’ll then get to enter the amount that you wish to borrow, alongside your preferred loan term. You will then be prompted to start the online application process.
Step 3: Complete an Online Application
You will now need to fill out an online application form with the lender. The application will require some personal information from you, as well as information on your employment status and current debt obligations. Don’t worry, the application rarely takes more than 5-10 minutes to complete, and you should get an instant decision once you submit it.
The bad credit lender will likely ask for the following personal information:
- First and Last Name
- Date of Birth
- Home Address
- Social Security Number
- Driver’s License Number
- State ID Number
- Contact Details
In terms of the information required on your financial standing, this will include:
- Name of Your Employer
- How Long You Have Worked There
- How Much you Earn Each Month
- What Debts you Currently Have Outstanding
Step 4: Review Pre-Approval Offer
When you submit your online application for a bad credit personal loan, the lender will then attempt to verify the data with external sources. This will likely include a credit reference agency meaning that the application might be posted to your credit file.
The only exception to this is if the lender performs a soft credit check, which means the application won’t harm your credit score. If the lender does approve your loan application on the spot, you will now have the chance to review your pre-approval rates.
This will include the amount of money that the lender is willing to offer you, and for how long. Most importantly, you’ll get to view your interest rates and the origination fee. If at this point in the bad credit personal loan application you feel the lending terms are too high, you should close the application down.
Step 5: Enter Your Bank Account Details
If you do proceed with the rates that have been offered to you, the bad credit personal loan provider will now ask for your US checking account details. This is for two reasons; firstly, the loan funds will be deposited into your bank account within 1-2 days of being approved Secondly, the lender will ask you to set up an electronic debit agreement. This allows the lender to take your monthly repayments from your bank account automatically.
Step 6: Sign a Digital Loan Agreement
The final stage of the bad credit personal loan application process requires you to sign a digital loan agreement. It is important that you read through the agreement with a fine-tooth comb before signing it. Pay particular attention to the fees, interest rates, and late payment policy of the loan to avoid surprises further down the line. If everything looks in order, sign the digital loan agreement to complete the application.
Bad Credit Personal Loans: Loan Size and Terms
In terms of how much you can borrow, this will depend on a range of metrics. At the forefront of this is the state that you live in. As we covered earlier in our guide, some states have very strict lending laws, meaning that the maximum loan size is capped.
The amount you can borrow will also be determined by your overall creditworthiness. This will include metrics like your income, debt-to-income ratio, and historical relationship with debt.
Ultimately, while in some states you might not be able to take out a bad credit personal loan for more than a few thousand dollars, other states have no limits at all. When it comes to the term of your bad credit personal loan, this will vary from lender-to-lender.
With that said, in the vast majority of cases personal loans usually come with a minimum term of 1 year. Depending on the size of the loan, you might be able to borrow the funds for 5-15 years. Don’t forget, the longer that you borrow the money, the more that you will pay in the interest over the course of the loan.
How do I Repay my Bad Credit Personal Loan?
In most cases, bad credit lenders prefer you to set up an electronic debit agreement. As we noted earlier, this gives the lender the required authorization to take your monthly repayments directly from your bank account. We would suggest opting for this even if it’s not compulsory. This is because you will never miss a payment, as long as you have the required funds in your bank account.
If you don’t want to set up an electronic debit agreement or you want to make a manual payment for a larger amount, you might be offered one of the following options:
- Money Order
- Debit Card Payment
- Cash via the Lender’s Store (if applicable)
Fees and Interest on Bad Credit Personal Loans
You won’t know how much interest you are required to pay on your bad credit personal loan until you apply. With that said, you should still have a firm grasp of how fees typically work. On top of your APR rate, you also need to consider the origination fee.
The APR rate is expressed as a percentage, and it’s based on the amount of interest that you pay annually. The APR rate will always remain fixed, as will your monthly repayments.
For example, if the APR rate is 34%, and you borrow $10,000 over the course of three years, you would pay $446.72 each month. You would continue to do so until the loan is repaid 36 months later.
Most lenders charge an origination fee on personal loans. This is a fee charged to cover the costs of arranging the loan and averages 0.5-1% in the US. However, as you will be using a specialist bad credit lender, it’s possible that you’ll pay up to 5%.
The fee is calculated against the size of the loan and then subtracted from the amount that you receive. For example, if you borrowed $5,000 and the origination fee amounted to 5%, you would pay $250. This means that you would only receive $4,750 even though the loan is for $5,000.
Am I Eligible for a Bad Credit Auto Loan?
Although bad credit personal loans are tailored to those with a less than ideal credit profile, not everyone will be eligible. This is especially the case in states that have strict lending laws, as loan providers are unable to charge higher APR rates to offset the risk of default.
As such, we would suggest reading through the minimum eligibility requirements that you will likely need to meet when applying for a bad credit personal loan.
Regular Source of Income
Even if you’re using a specialist bad credit lender, it’s all-but-certain that you will need to have an income of some sort. This will certainly be the case if you’re borrowing a larger amount of money. Most lenders will ask that you are employed full-time, although this isn’t always a minimum stipulation. Some lenders will approve your application if your income comes from other means such as a pension or benefits.
The debt-to-income ratio is a tool commonly used by lenders to determine your overall affordability. It looks at the difference between your income and the size of your debt obligations. For example, if you earn an annual salary of $60,000 and you have $15,000 worth of debt outstanding, your debt-to-income ratio would be 25%.
Anything higher than 50% is generally perceived to be high risk for lenders, as it indicates that you have a large amount of debt in relation to your income.
Historical Relationship With Debt
One of the most important metrics that will determine whether or not you qualify for a bad credit personal loan is your historical relationship with debt. If you have bad credit, then it’s likely that you have a history of missing payments.
You might have also defaulted on a loan previously. Either way, if you’ve got a long-standing track record of falling behind on your debt obligations, you might not qualify for a loan.
Age and Residency
You will need to be a US resident to get a bad credit personal loan. You will also need to be aged at least 18 years old. In some states, the minimum age is upped to 19. You need to check the laws surrounding personal loans in your state. This should include the maximum loan size, and whether an APR limit is in place.
How do I Choose a Bad Credit Personal Loan Lender?
If you think that you have the financial means to take out a personal loan, you now need to spend some time finding a lender that meets your individual needs. As such, we’ve listed five handy tips for you to consider below.
1. What Loan Size Does the Lender Offer?
First and foremost, you will need to visit the lender’s website to assess how much you can borrow. This is normally stipulated as a financing range such as $500-$10,000 or $2,500 to $15,000.
2. What Interest Rates Does the Lender Charge?
You then need to review how much the lender typically charges in interest. Don’t forget, this can’t be higher than what the lender’s respective state laws permit. The easiest way to gauge lending rates is to review the provider’s representative rate.
3. What Loan Terms Does the Lender Offer?
It is also wise to review what loan terms the lender offers. This is usually at least 12 months on bad credit personal loans, although it can be longer.
4. How Quickly Will Your Loan be Funded?
Bad credit personal loans are usually funded within 1-2 days. However, some lenders are known to process loans much quicker, so if you have an urgent need for the money, try to stick with same-day loan lenders.
5. Is the Lender Licensed by State Authorities?
You should check whether or not the lender is regulated by state authorities. If it isn’t, then you are potentially using a Tribal loan provider. Such lenders are not bound by state lending laws, so they can charge you as much interest as they like. On the contrary, if the bad credit personal loan lender is licensed, it needs to comply with state financing regulations.
If you’ve read this guide from start to finish, you should now have a firm understanding of how bad credit personal loans work, and whether or not they are suitable for your financing needs. You will be able to borrow a much larger amount when opting for a personal loan over a payday loan. You will also have the option to repay the money over a number of years, which will reduce the size of your monthly repayments.
However, the longer the term of the loan, the more interest you’ll end up paying in total. Ultimately, if you do proceed with a bad credit personal loan, make sure you do your homework on the lender. This should include key metrics like APR rates, licensing, loan amounts, repayments, and more.
Glossary of Loan Terms
A credit score shows your creditworthiness. It's primarily based on how much money you owe to loan or credit card companies, if you have ever missed payments or if you have ever defaulted on a loan.
Guaranteed Approval is when, no matter how bad, your credit score its, your loan application will not get declined.
A Cash Advance is a short-term loan that has steep interest rates and fees.
Collateral is when you put up an item against your loan such as your house or car. These can be reposessed if you miss payments.
A Credit Limit is the highest amont of credit a lender will lend to the borrower.
Your Credit Rating is how likely you are to fulfil your loan payments and how risky you are as a borrower.
If you default on your loan it means you are unable to keep up with your payments and no longer pay back your loan.
The Interest is a percentage based on the amount of your loan that you pay back to the lender for using their money.
Fixed Interest Rate is when the interest rate of your loan will not change over the period you are paying off you loan.
If you miss a payment the lender will charge you for being late, this is known as a late fee.
The Principle amount the borrower owes the lender, not including any interest or fees.
This is the Interest Rate used by banks for borrowers with good credit scores.
A Secured Loan is when you put collateral such as your house or car up against the amount you're borrowing.
An Unsecured Personal Loan is when you have a loan based soley on your creditworthliness without using collateral.
A Variable Rate is when the interest rate of you loan will change with inflation. Sometimes this will lower your interest rate, but other times it will increase.
Having an AAA Credit Rating is the highest rating you can have.
A Bridge Loan is a short term loand that can last from 2 weeks up to 3 years dependant on lender.
An Installment Loan is a loan that is paid back bi-weekly or monthly over the period in which the loan is borrowed for.
If you obtain a Federal Student Loan to pay your way through College ten you loan is held with the U.S. Department of Education.
Financial Aid is funding available to post-secondary education students in America.
A Guarantor co-signs on a loan stating the borrower is able to make the payments, but if they miss any or default the Guarantor will have to pay.
Home Equity Loans is where you borrow the equity from your property and pay it back with interest and fees over an agreed time period with the lender.
LIBOR is the London Inter-Bank Offered Rate which is the benchmarker for
Debt Consolidation is when you take out one loans to pay off all others. This leads to one monthyl payment, usually with a lower interest rate.
How much can I borrow from a bad credit personal loan?
This depends on a number of factors such as your overall creditworthiness, and your historical relationship with debt. It will also depend on where you live, as some states limit the amount that you can borrow.
What happens if I default on my bad credit personal loan?
If you default on your bad credit personal loan, the consequence can be severe. This includes further damage on your credit file, late payment fees, and potentially, legal action.
How quickly can I get a bad credit personal loan?
’Most lenders will transfer your loan funds within 1-2 days of being approved. However, you might get the funds even sooner if your application is approved on the spot.
Do I need to supply supporting documents when applying for a bad credit personal loan?
This depends on whether or not the lender is able to verify your personal and financial information electronically. If it can't, then it's likely that you'll be asked to upload some documents. This might be a government or state-issued ID to prove your identity, or a payslip to verify your income.