When life throws you financial curveballs, it can be tough to keep your head above water — especially when you have bad credit. But people with bad credit have access to many types of loans that provide much-needed financial support. From secured loans to payday loans, read on to learn more about eight types of loans that may be available to people with bad credit.
What are small loans for bad credit?
A small loan is considered to be $3,000 or less. These loans tend to be personal loans for paying bills, fixing vehicles, making household repairs, or using them as credit builders. A small loan for bad credit can be an alternative to traditional personal loans from a bank.
8 types of small loans for bad credit
Below are eight options for you to consider when picking out a small loan.
1. Credit-builder loans
Credit-builder loans are designed to help people build their credit scores and establish a positive credit history. These types of loans typically have small amounts borrowed, a low interest rate, and a fixed repayment schedule. Borrowers can use the money to pay off bills or buy necessary items while paying it back over time. It is important to ensure that the payments are made on time in order to improve credit ratings.
MoneyLion can help! Credit Builder Plus is our powerful credit-building membership, and it’s designed to help our members build or repair their credit, save, establish financial literacy and track their financial health. CB+ can help you build or improve your credit with access to a Credit Builder Plus loan. A Credit Builder Plus loan is a small loan that is held in a secure account while you make monthly payments.
As you make payments, CB+ reports them to the major credit bureaus, which can help boost your credit score with on time payments. Plus, you get access to some of the loan funds as soon as they are approved, so you can use them for whatever you need. CB+ is a smart way to help improve your credit while paying off your debt. By improving your credit score, you can qualify for lower interest rates on future loans or refinancing options. And by paying off your Credit Builder Plus loan on time, you can reduce your debt-to-income ratio, which could also improve your credit score.
2. Payday loans
Payday loans are short-term loans that provide you with quick access to cash, typically a few hundred dollars. These loans come at a hefty price because they have some of the highest interest rates of any loan. High interest rates make it difficult to keep up with payments and can often lead borrowers to get caught in an endless cycle of debt. Borrowers must repay the loan on their next payday, which may put pressure on their finances and leave them unable to cover other necessary expenses.
3. Cash advances
Cash advances are short-term financial solutions for those who need quick cash for unexpected expenses or emergency situations. Cash advances involve borrowing money from lenders at high interest rates, often without having to provide any collateral security such as a property or vehicle title.
Cash advances typically range from $100 to $500 and act as a bridge loan to hold you over.
You can take out a credit card cash advance by using your credit card at an ATM. The interest starts accruing immediately, and there are sometimes additional fees.
4. Title loans
Title loans are short-term loans secured by personal property, like a car or a boat. The borrower is given funds by the lender in exchange for temporary ownership of the title to the collateral. Title loans come with high interest rates and can be difficult to pay back without a significant source of income. If you can’t pay it back, you may lose your collateral.
5. Credit cards
Credit cards are another form of loan that can be used to finance purchases or cover expenses in an emergency. Credit cards enable users to borrow money up to their credit limit and repay it with interest. They can also provide rewards such as cash back or travel points. But if not managed responsibly, credit cards can lead to mounting debt and hefty fees.
MoneyLion offers a free service that will not affect your credit score, where you can get matched with personalized credit card offers from one of our trusted partners.
6. Installment loans
Installment loans are used for larger purchases such as cars, furniture, or home improvement projects. The interest rate is typically higher than with a credit-builder loan, but the amount borrowed can be much larger. These types of loans have fixed due dates with each month’s payment being an equal amount until the loan is paid off in full.
7. Personal lines of credit
Bad credit personal loans are financial solutions designed specifically for individuals with a poor credit history. These loans provide access to pre-approved amounts of money for a specified period, offering a lifeline to those facing credit challenges. Unlike traditional loans, bad credit personal loans allow borrowers to make multiple withdrawals from their approved amount, catering to their immediate financial needs. However, it’s crucial to exercise caution when utilizing these loans to avoid accumulating excessive debt, as timely repayment is essential for restoring creditworthiness.
MoneyLion offers a service to help you find personal loan offers based on the info you provide, you can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you. You can also use the loan funds to pay off other existing debts.
MoneyLion is here to help.
8. Peer-to-peer loans
Peer-to-peer (P2P) loans are online loans made between individuals rather than banks or other traditional lenders. Borrowers apply for P2P loans on websites like LendingClub, Prosper and Upstart, where investors may choose the terms of the loan and offer their own rates based on the creditworthiness of the borrower. Although P2P loans come with lower interest rates than those offered by traditional lenders, they still carry risks for both parties involved in the transaction.
For the borrower, the risk lies in defaulting on the loan and damaging their credit score. Investors risk losing their money if the borrower defaults on the loan.
Bad credit and interest rates
Having a low credit score can make it difficult to obtain loans. Although minimum score requirements vary, you usually need at least a 640 credit score or better for a personal loan from a bank.
Even if you are approved for a loan with bad credit, you may be required to pay higher interest rates to compensate for the added risk of default. For instance, many credit card companies have specific requirements for credit scores, typically falling within the range of Good to Excellent, which translates to a minimum FICO score of 670 or a VantageScore of 700 and above.
Pros of small loans for bad credit
Advantages to small loans for bad credit include:
- Fast access to cash. Small loans for bad credit are often processed quickly, which means that borrowers can receive the funds they need to cover their expenses in a timely manner.
- No collateral needed. Small loans for bad credit are typically unsecured loans, which means that borrowers don’t have to put up any collateral to secure the loan. Some loans, like title loans, are specifically designed to use collateral.
- Can help build credit if repaid on time. If borrowers repay their small loans for bad credit on time, it can help to improve their credit scores and demonstrate creditworthiness to future lenders.
- Higher approval rates. Small loans for bad credit may have higher approval rates than traditional loans, making them more accessible to those with poor credit history.
Cons of small loans for bad credit
You’ll want to be aware of the cons for these loans to really make an informed decision.
Cons of small loans for bad credit include:
- High interest rates. Small loans for bad credit often come with high interest rates to offset the risk of lending to someone with poor credit.
- Short repayment terms. Small loans for bad credit commonly have short repayment terms, which means borrowers must repay the loan quickly or risk defaulting on the loan.
- Risk of falling into a debt trap. Borrowers who take out multiple small loans for bad credit may find themselves in a cycle of debt if they cannot keep up with the high interest rates and short repayment terms.
How to improve your credit score
A good credit score will help you get the best interest rates and terms for your loan. You can take steps to improve your credit score quickly.
One of the most important things you can do is make sure your payments are made on time. Late payments can have a significant negative impact on your credit score. If you have any past-due accounts, catch up on them as soon as possible.
You should also try to keep your credit utilization rate low. The amount of debt you owe should be less than 30% of your total available credit limit. Paying down revolving account balances can help with this.
It’s also important to limit applying for new accounts and avoid closing old accounts unless absolutely necessary.
Regularly review your credit reports so you can track your progress and identify errors or discrepancies that need to be corrected.
By following these tips, you can improve your credit score quickly and increase your chances of getting approved for a loan with favorable terms and interest rates.
Alternatives to small loans for bad credit
If you have bad credit and are considering taking out a loan, there are other options available.
1. Borrowing from friends and family
One alternative to small loans for bad credit is borrowing from friends and family. This is a great option for those who may not have access to other sources of financing because of their credit situation. This can be beneficial because the borrower doesn’t have to risk going into further debt and often has more flexibility with repayment terms, as they are usually working out an arrangement with someone they know and trust. There are no loan processing fees or interest rates associated with this type of loan because it’s not an official financial institution providing the financing.
2. Secured loans
A secured loan is another type of loan that can be useful for people with bad credit. These types of loans involve collateral — an asset such as a vehicle, piece of property, or valuable item that can be used as a form of security if the borrower defaults on their loan. They often come with lower interest rates than unsecured loans, though the borrower must cover any loss in value if the collateral is repossessed by the lender.
3. Government-funded programs
Some government-funded programs provide assistance in securing financing even when you have bad credit. Programs like Community Development Financial Institutions Fund (CDFIs) provide technical assistance and access to capital regardless of credit score so it’s easier for borrowers to get approved for loans at more reasonable terms than other lenders might offer them. Many local governments also offer grants or low-interest loans specifically designed to help individuals build up their credit while investing in projects that benefit their communities.
Always borrow responsibly
Loans for bad credit are often a viable option for those who need access to quick cash and don’t have good credit. While they come with their own set of pros and cons, it’s important to weigh these carefully and choose the option that’s best for your circumstances. Taking on debt is a serious decision, so it’s crucial to use these loans responsibly and pay them back on time.
How much can I borrow with a small loan for bad credit?
The amount that you can borrow with a small loan for bad credit depends on the lender and your circumstances. Generally, these types of loans range between $500 and $5,000. Depending on the lender, you may have access to larger loan amounts.
Can I apply for a small loan for bad credit online?
Yes, you can apply for a small loan for bad credit online. Many lenders offer this type of loan product and the process is typically much easier than applying in person or over the phone. The application process is usually secure and takes just a few minutes to complete.
What is the interest rate for a small loan for bad credit?
The interest rate for a small loan for bad credit will vary depending on the lender and your circumstances. These types of loans tend to have higher interest rates than traditional loans as they are considered higher risk because of your poor credit score. Shop around to find the most competitive rate available based on your financial situation.