How bad credit loans work?

• Check your credit score and credit report.
• Understand the costs of getting a loan with bad credit.
• Shop around for personal loans.
• Consider a cosigner.
• Check out secured loans.
• Get prequalified for a loan.

Bad credit loans work the same way as personal loans. Individuals borrow money from these lenders and typically pay the loan back in fixed monthly installments.

You can get a traditional personal loan from a bank, credit union, or online lender. However, banks and credit unions often have stringent credit score standards in place for borrowers. These entities will review your credit history to determine if you qualify for a loan and the cost of the loan.

Many financial institutions will require a good or excellent credit score (a FICO score of 670 or higher) to qualify for a personal loan and will offer lower interest rates to these borrowers. Borrower requirements will vary depending on the lender and your creditworthiness.

Because bad credit loans are for people with a poor or limited credit history, they may come with restrictions, such as rigorous monthly payment terms, long waits for loan approvals, higher interest rates, and other additional fees and penalties.

After running a credit check to learn your credit score, you’ll have a starting point to find a lender that will be a potential match for your credit history.

Compare loan terms online and find the best personal loan lender for you. Lenders sometimes prequalify borrowers to give them an idea of whether they qualify for a loan and the terms available to them. Prequalifying for a loan won’t typically impact your credit score.

Most lenders will require the following if you apply for a loan: your annual income, the name of your employer and the length of time you’ve worked there, your Social Security number, your debt-to-income ratio, a summary of your household expenses, and if you rent or own your home.

After you’ve identified the loan that seems like the best fit for you, it’s time to apply -- but start with just one loan application. It’s a best practice to apply for one loan at a time. Applying for many loans at once in a short period of time can lower your credit score, which will decrease your chances of receiving approval for the loan and increase your interest rates.

Experian, Equifax, and TransUnion are the major U.S. credit bureaus and agencies that give consumers a credit report, which is a detailed document of their credit history. Your credit report will itemize your payment history on any debts or loans you have accrued over the years, including any debts you’ve failed to pay. Using this information, the credit bureaus will summarize your credit history to assign you a numeric ranking for your credit, known as a credit score.

The major U.S. credit bureaus typically assign what is known as a FICO score. A FICO score is a credit score assigned by the Fair Isaac Corp. -- also known as FICO -- that gives a synopsis of your credit report. To create your credit score, it compiles:

Lenders often use FICO scores to determine how likely you are to repay a loan for credit cards, auto loans, home mortgages, and more. The score can impact how much you can borrow, the repayment period (the amount of time you have to pay it back), the interest rate for the loan, or even if you qualify for the loan at all. If you have a bad credit score, it will negatively impact the terms of your loan or if you can qualify.

Bad credit can impact your loan eligibility. When consumers have bad credit, they have fewer loan options, have difficulty being approved for credit cards, and pay higher interest rates.

Credit scores are used to inform lenders of your creditworthiness. People with FICO credit scores of less than 580 are viewed by financial institutions as risky borrowers. The lower your credit score, the higher the risk and the less likely creditors will lend to you.

Bad credit loans are installment loans paid over time with a specific number of regularly scheduled payments. An installment loan is similar to an auto loan or a fixed-rate mortgage.

To receive a secured loan, people will give a lender collateral, such as a home, car, or other valuables. If you fail to make payments, the lender can repossess the asset you put up for collateral. Secured loans can be large, as the lender is required to match the value of the collateral the borrower offers. A mortgage is one example of a secured loan.

Secured loans are easier for consumers with bad credit to obtain. Since collateral is a requirement for obtaining a secured loan, they are less risky to lenders.

If the lender reports payments to a credit bureau, a borrower who makes on-time payments could see an improvement in their score. However, not all secured loans boost a borrower’s credit.

Some personal loans don’t require collateral, making them unsecured loans.

Because there is no collateral requirement for these loans, lenders will usually charge higher interest rates, making them more expensive than secured loans. The amount you can borrow with an unsecured personal loan is also limited.

If a borrower defaults on an unsecured loan, the lender can take the borrower to court or sell their debt to a collections agency.

The time it takes to receive your funds from an unsecured loan will depend on the lender. Some lenders may deposit funds into your bank account the next business day.

The amount you can borrow will depend on your financial situation, credit history, and lender. Try not to borrow more money than you need so you can pay less interest and fees.

The total cost of your loan will depend on how much money you borrow, the repayment terms, and other factors, such as the annual percentage rate -- also referred to as APR.

Most loans have an APR, which is the cost you pay to borrow money for one year. An APR is based on the loan amount, monthly interest rate, fees, and length of time it takes you to pay back what you borrowed. Typically, bad credit loans have higher APRs.

Making your loan payment on time is important to avoid late fees and other costly penalties that can arise from missing payment deadlines.

If you decide to obtain a bad credit loan, make sure you trust the loan company or lender.

Below are protocols you can take to educate yourself about lenders before making a credit inquiry.

Some lenders charge origination fees and other costs. If you’re considering a loan from such a lender, you’ll want all fees to be prominently displayed and explained. Always be willing to ask questions about what you don’t understand.

Lenders who are legitimate never guarantee you will receive a loan before you apply. The following warning signs can help you determine untrustworthy lenders.

A payday loan is a short-term loan. They are also known as cash advance loans. Borrowers will pay a fee to borrow money for a short period of time, such as a week.

To receive a payday loan, individuals will write a check for the loan amount they want to borrow plus an additional lender fee. In exchange, the borrower will receive the loan amount in cash or as an electronic deposit. The payday lender holds onto the postdated check until your next payday, which is usually when the loan amount and fee are due.

If the borrower can’t pay within the due date, the debt will continue to build up until they can pay it off. Annual interest rates for payday loans can go up to 400% of the original loan amount.

These types of loans are typically very expensive. Payday loans should be seen as a last resort for consumers who don’t have any other ways to borrow money.

To receive a payday alternative loan, you must be part of a credit union. These loans are offered to federal credit unions that are a part of the National Credit Union Administration.

PALs are typically less expensive than traditional payday loans and allow borrowers to repay the loan over a couple of months instead of in a single pay period. PALs have an interest rate cap of 28%.

Auto title loans are small loans for a short amount of time. To receive this type of loan, you’ll give the title for your car, truck, or motorcycle as collateral to your lender and pay a fee.

Most auto title loan terms will require you to repay the loan in 30 days. If you fail to pay, the lender can repossess your vehicle. The lender can also choose to extend the terms of your loan for another 30 days, also known as rolling over the loan. Typically, you will pay an additional fee to roll over the loan.

Auto title loan lenders can charge a hefty fee, even up to 25% of the amount you’re borrowing.

If you want to be seen as a less risky borrower to lenders and have better terms to your loan offer, the best way to start is to improve your credit score. Find out your FICO score to start this process and to better understand how to tackle a credit-building plan.

Below are four tips to help improve your credit so you can receive better loan terms.

Bad credit loans can be used to improve your credit history--especially if you don’t have an extensive amount of credit history. Select a loan that is affordable and use a lender that reports payments to the major credit bureaus.

Why we like it: If you’re approved for a personal loan with Avant, your funds may be deposited into your bank account as soon as the next business day.

Overview: Avant has higher interest rates than some lenders, but you may receive your loan faster than their competitors. This online lender also allows borrowers to change their loan due date up to the day before the deadline. Plus, Avant offers secured loans for those who don’t qualify for an unsecured loan. Getting a secured loan may also help you to get lower rates, though you stand to risk losing any collateral you put down, so be sure you’re able to repay your loan. Minimum loan amounts may vary by state.

Credit scores range from 300 to 850. Generally, anything under 670 is considered “bad.” If you have a low credit score, this could be due to several factors, such as having a short credit history, a history of late payments, lots of debt relative to your income or any combination of these.

Knowing what to expect when you apply for a personal loan will help you prepare for the process. If you’re in the market for a personal loan and you have imperfect credit, following these steps could improve your chances of approval.

Before you apply for a personal loan, take a close look at your credit report and credit score.

Federal law entitles you to a free copy of your credit report every 12 months from the major credit-reporting bureaus: Equifax, Experian and TransUnion. Visit AnnualCreditReport.com to request your free credit reports. It won’t display your credit scores, but you can visit Equifax and Experian’s websites to view them for free, or for a nominal fee from TransUnion.

With your report in hand, you’ll know exactly what your credit score is, and you’ll be able to identify any negative marks on your record. If you find that errors or old debt are dragging your score, make sure you request corrections before applying for a personal loan.

If you have bad credit, the last thing you want to do is take out a loan you can’t afford. This will only make your credit score worse. As you shop for loans, ensure you know the monthly payments and when they will be due. Use a personal loan calculator to estimate monthly payments and review your budget to make a repayment plan.

If you decide that payments are unaffordable, consider other options for getting cash, such as asking a relative or a friend for a loan.

While a bad credit score will not qualify you for the best rates and terms, don’t assume that only the worst rates and terms will be available. You may get a better deal at your bank or credit union.

It can be advantageous if you have a relationship with a community bank or credit union. If the bank knows you and your spending habits, your low credit score can be mitigated by your history of paying on time and keeping a balance in your accounts.

There are also reputable online lenders that offer loans to consumers with poor to average credit scores. Some of these lenders use alternative criteria other than just your credit score to evaluate your application.

Prequalifying allows you to find out the loan amount, rates and terms you may qualify for with a specific lender, without hurting your credit. This is different from submitting a full application, and usually only involves a soft credit check.

Typically, a lending institution will do a hard credit check when you apply for a loan. A hard credit check can lower your credit score temporarily. This may be frustrating if you apply for a loan, get a hard credit check and are denied the loan.

Talk to potential lenders to see if you can prequalify for a personal loan. Then, you can evaluate several loan options without multiple hard credit inquiries. Some lenders may even allow you to complete this process online in just a few minutes.

Consider the interest rates and loan terms offered when comparing your loan options. It’s equally important to assess any fees, like origination fees and prepayment penalties, the lender may charge. In some instances, a loan with a lower interest rate may not be the best deal if the fees the lender charges are on the higher end.

A secured loan is a loan backed by assets such as a home or a car. Because secured loans use collateral to back your loan, they typically have better rates than unsecured loans. If you have collateral to back your loan, this may be your best option with bad credit

Consider shopping around with lenders offering secured loans if you decide it’s a suitable option. Keep in mind that secured loans risk losing your asset, so they should only be considered if you can afford to make timely loan payments.

A co-signer is someone who agrees to sign on to the loan with you. They are agreeing to pay back the loan if you can’t. If you are having trouble qualifying for a loan, a co-signer can help you qualify if they have a better credit score and credit history. But you want to confirm with the lender that co-signers are permitted as they’re not always allowed.

Taking out a loan with a co-signer can make personal relationships go bad if you have trouble paying off the loan. Make sure you both know what you are signing up for if you decide to take out a loan with a co-signer.

When you apply for any loan, the lender will request several financial documents to complete your application. Gather these documents and pieces of information before you start applying for loans, as you may need some or all of them to complete your application:

Your lender can always request additional documents, so be prepared to provide any extra requests quickly.

When you are ready to officially apply for a personal loan, know that the lender will likely perform a hard credit check, also called a hard pull. In the short term, a hard pull will lower your credit score. Too many hard credit checks in a short time can make it look like you are applying for loans that you can’t afford.

Be careful with how many loans you apply for, and be prepared to see your credit score drop temporarily with a loan application. As you make timely payments on your loan, you should be able to get your credit score back up in a few months.

Some lenders don’t have credit score requirements. Working with one that doesn’t have a credit score requirement is an easy way to find a personal loan, regardless of how low your credit score is.

Keep in mind that no-credit-check lenders are ones specializing in high-risk loans. They’ll charge a very high interest rate to help cover their risk, so make sure whatever you’re taking out a personal loan for is worth the significant extra cost you’ll be paying in interest.

Several types of loans may be good for people with bad credit. A personal loan is not your only option. Consider these loan options as you shop around:

While weighing the various costs and risks associated with a personal loan, there are a few additional things to remember for bad credit loans.

The unfortunate reality of applying for a loan with a less-than-ideal credit score is that you will be paying more than someone with a higher credit score. Lenders look at your credit score to determine your creditworthiness and the likelihood of you repaying the loan. If you look riskier, you’ll pay a higher interest rate.

Individuals with poor credit scores may also be targets of aggressive direct mail campaigns that market personal loans with low interest rates of around 6 percent or 8 percent.

However, these campaigns frequently advertise an introductory or “teaser” rate that will increase after the limited-time offer expires. If you don’t have a plan for a rapid payoff, the rates can skyrocket to the 20 percent to 30 percent range, which is likely much higher than the rate you can qualify for with a reputable lender.

Because those with bad credit scores are considered a higher risk, be sure you’re clear on exactly what you’ll be paying to get the loan. When applying for a bad-credit loan, read the loan agreement and fully understand how your interest will be charged and structured. Make sure that the interest loan advertised is the annual rate, not the monthly one.

In addition, beware of any add-on loan costs. Again, this goes back to reading the agreement closely and fully to ensure there aren’t any fees or add-on services your loan officer may have glossed over.

While it may be more challenging to get a loan when you have bad credit, it is indeed possible. Loans designed for those with bad credit are typically offered by online lenders, as well as a small number of banks and credit unions.

Some of the lenders that offer loans for those with bad credit include Upstart, OneMain Financial, Avant, LendingPoint and Upgrade. Credit score requirements for these lenders generally start at about 560, but the requirements vary by lender so it’s important to do your research and investigate all of your options.

In many cases, the loans made available to those with bad credit are secured, meaning they will have to be backed by collateral such as a car or home. But there are also unsecured loan options for individuals with subprime, which typically include higher interest rates.

As the name implies, these loans do not require a credit check. However, they come with steep interest rates to offset the risks they pose to the lender. This means you could get a monthly payment that doesn’t work for your budget and end up in a cycle of bad debt.

Some lenders will stretch out the loan term on these loan products to give you a lower, more appealing monthly payment. And while it can help make the loan more affordable month-to-month, you will pay more in interest over the life of the loan.

Common no-credit-check loans include payday loans, installment loans, auto title loans and cosigner loans.

While expensive, payday loans provide a short-term solution to borrowers who don’t qualify for anything else and who may not have a bank account. They can be quite predatory, so be careful if you need to borrow them.

Most payday lenders won’t check your credit and offer loans up to $500. Since brick-and-mortar lenders offer checks, you may be able to get your loan within a few hours.

Still, payday loans should only be used as a last resort because the cost is steep — often well over 300 percent. You will also have to repay what you borrow by the next payday or face hefty fees if you choose to extend the loan term.

A cash advance lets you pull funds from your credit card’s available balance up to the preset limit set by your credit card issuer. The amount you borrow is rolled into the outstanding balance on your credit card. You’ll likely pay a higher interest rate than on regular credit card purchases, but there are ways to limit the total cost.

If possible, only use cash advances for emergencies. Although they offer a rapid solution if you’re experiencing financial hardship, they can be costly and can keep you in credit card debt for an extended period.

Some banks offer short-term loans for smaller amounts to account holders with positive banking history. The qualification criteria differs between banks, so reach out to your bank to determine if this is a viable option.

Credit unions also offer short-term loans with interest rates capped at 18 percent. You will need to be a member of the credit union to qualify, but they often have less strict criteria than banks and other lenders.

Car title loans let you borrow between 25 and 50 percent of your vehicle’s value. But there’s a catch — you must own your car outright and hand over the title until the loan is paid in full. Most car title loans come with short repayment periods between 15 and 30 days, and loan amounts generally start at $100.

They are quick, but the ease of access comes at a price. Interest rates are very high, and if you are unable to pay back your loan within the short repayment term, your car can be repossessed.

Home equity lines of credit (HELOCs) and home equity loans are another popular secured loan option for borrowers with less-than-perfect credit. These loans act as second mortgages and allow you to convert a percentage of the equity you’ve built up in your home to cash. Even better, there are very few limits on how you can use your funds.

The downside is they’re secured by your home. You risk foreclosure if you default on the loan. Still, they could work if you haven’t found better options elsewhere and don’t foresee any issues paying on time.

Before you apply, research potential lenders to determine if you meet the minimum eligibility criteria. It can be challenging to find a suitable lender if your credit score isn’t at least in the mid-600s. However, some lenders may be willing to do business with you if you have an acceptable debt-to-income (DTI) ratio and meet other guidelines.