Bad credit loans provide access to financing for borrowers who may have a low credit score or limited credit history that prevents them from qualifying for traditional loans. Also known as subprime loans, bad credit loans come with higher interest rates and fees to offset the increased risk for lenders.

In this comprehensive guide, we will explain what constitutes a bad credit loan, eligibility requirements, how interest rates are determined, and pros and cons of using these types of loans. We will also suggest alternative options to avoid bad credit loans if possible and ways to potentially improve your credit standing over time.

What Is Considered a Bad Credit Loan?

A bad credit loan is generally defined as any type of installment loan or line of credit issued to an applicant with a current credit score below 640. This credit score range is usually seen as “non-prime” or subprime.

Specific types of bad credit loans include:

  • Bad Credit Personal Loans – Unsecured loans from $1,000 to $10,000 with repayment terms from 9 to 36 months. No collateral is required.
  • Bad Credit Auto Loans – Subprime financing for purchasing a used vehicle. The vehicle serves as collateral if payments are not made.
  • Bad Credit Mortgages – Subprime home loans requiring very high down payments. Only specialized lenders offer these.
  • Payday Loans – Small short-term loans of a few hundred dollars requiring full payoff by the next paycheck. High fees result in triple-digit APRs.
  • Title Loans – Secured loans using the title of a paid-off vehicle as collateral. Provides 25%-50% of the vehicle’s value with complete repossession if unpaid.

While traditional banks tend to avoid lending to subprime borrowers, many online lenders now cater to bad credit applicants. Loans of up to $10,000 can be obtained if minimum eligibility criteria are met.

Typical Eligibility Criteria for Bad Credit Loans

Borrowers need to meet certain requirements to be approved for a bad credit loan:

Credit Score – Most lenders will consider scores as low as 500, though interest rates are highest for applicants with scores under 600. Many aim for a minimum of 575.

Income – Proof of regular income, usually from employment or benefits like Social Security. Gross monthly income often needs to exceed $1,500 or $2,000.

Employment – Stable work history of at least 6 months with current employer. Self-employed may need 1+ years of consistent income.

Debt-to-Income Ratio – Monthly debt payments should not exceed 50% of total gross monthly income to qualify.

Age and Residency – Borrowers must be U.S. residents over age 18 with a valid ID and checking account.

Meeting the above criteria provides the best approval odds for bad credit borrowers. Pre-qualification tools online can give an initial eligibility assessment without affecting your credit score.

How Do Lenders Determine Interest Rates and Fees?

Since bad credit loans involve higher default risk, lenders charge proportionately higher interest rates and fees compared to prime borrowers with scores above 660.

Your specific credit score is a primary factor in the rate you will be offered. The better your credit score, the lower the rate. Additional factors include income, requested loan amount, and employment history.

Here are examples of approximate APR ranges you could expect based on credit scores:

  • 500-579: 22-26% APR
  • 580-619: 18-22% APR
  • 620-639: 13-18% APR

Origination fees range from 1%-6% of the loan amount to cover processing costs. Late fees are around $15-$30 per missed payment. Paying off the loan early may also incur prepayment penalties.

Be sure to compare offers from multiple online lenders as rates for the same applicant can vary significantly. Fees should be clearly disclosed before accepting a loan.

Pros of Bad Credit Loans

  • Provide fast access to cash for urgent needs before improving credit.
  • Can be an alternative to costlier payday loans or title loans.
  • Help rebuild credit through on-time repayments over the loan term.
  • Offer a path to approval when no other affordable options are available.
  • Interest rates are capped in many states (e.g. no more than 35% APR).

Cons of Bad Credit Loans

  • Very high interest rates significantly increase cost vs prime loans.
  • Missing payments results in high fees plus damage to your credit.
  • Shorter terms give less time to repay than prime personal loans.
  • Lenders may not report payments to credit bureaus so credit score impact is limited.
  • Predatory lenders may trap borrowers in cycles of repeat high-interest borrowing.

Bad credit loans are certainly more expensive sources of financing and come with risks if not repaid responsibly. But they can provide a credit lifeline when approached carefully.

Alternatives to High-Interest Bad Credit Loans

For borrowers with credit challenges who want to avoid the downsides of subprime loans, here are some potential options to consider:

Secured Loans – Asset-backed installment loans using collateral like a vehicle or savings account to guarantee repayment. Secured cards are also an option.

Credit Union Loans – Membership-based nonprofits offer personalized lending decisions and lower rates. Building a relationship over time increases approval chances.

Credit Builder Loans – A secured installment loan where the proceeds are held in a savings account. Small fixed payments are reported to credit bureaus.

Debt Management Programs – Work with a nonprofit credit counseling agency to consolidate debts into a single monthly payment and negotiate lower interest rates.

Pay Off High Interest Debt – Focus on paying down credit card, retail card, and payday loan balances first before taking on lower-rate installment debt.

Add a Qualified Cosigner – Adding a cosigner with good credit can significantly increase the odds of approval and lower the rate. But cosigners are also fully responsible for repaying the debt.

Borrow From Family or Friends – For smaller borrowing needs, a personal loan from family or friends may be possible at lower cost. But be sure to formalize the terms and repayment schedule.

How to Improve Your Credit and Qualify for Better Loan Rates

The most effective way for subprime borrowers to access lower rate financing over time is to diligently build up your credit profile. Here are key tips for improving credit standing:

  • Make at least the minimum payment on all debts and bills on time each month. Payment history is the biggest scoring factor.
  • Keep credit card balances low. High utilization relative to limits hurts scores.
  • Limit applications for new credit. Too many hard inquiries can lower scores temporarily.
  • Have outdated negative marks removed. Successfully dispute any inaccuracies on your credit reports.
  • Enroll in free credit monitoring to review all 3 bureau reports and catch issues early.
  • Consider contacting original creditors to ask them to forgive old debts that may still show as unpaid.
  • Sign up for Experian Boost or UltraFICO to have positive utility and banking history added to your reports.
  • Open a new credit card or installment loan and make on-time payments religiously. Adding new positive accounts helps.

With a diligent effort to build positive payment history and keep debts low, credit scores can improve substantially in 6 to 12 months. Higher scores open the door to major credit card issuers and lenders offering prime rates.

Conclusion and Summary Tips

  • Bad credit loans fill a need but come at a significantly higher cost than prime financing. Weigh alternatives carefully.
  • Read all loan terms closely and borrow only what is truly affordable based on a realistic budget. Avoid predatory lenders.
  • Make payments on time and pay off balances early to limit interest costs if possible.
  • Rebuilding credit takes time but is the most effective long-term strategy to gain access to cheaper prime loan rates.
  • Be cautious of quick-fix credit schemes that promise instant score improvements for a fee. There are no shortcuts to raising scores.
  • Set a goal to reach a minimum of 620 credit score within 6-12 months through responsible habits. Higher scores open up many more options.

With prudent use of bad credit loan financing as a temporary bridge along with diligently building your credit history over time, improved credit access and savings on interest costs will follow. Monitor your progress regularly and don’t get discouraged. Good credit is achievable with focus and discipline.


What is the easiest bad credit loan to get approved for?

Bad credit personal loans up to $1,000 are often the easiest to qualify for, especially if you meet income and employment requirements. Start small to establish positive repayment history.

How quickly can I rebuild my credit score?

Most borrowers can realistically increase scores by 50-100 points within 6 to 12 months of responsible habits. Excellent scores above 750 may take several years to reach from a very low starting point.

Are there bad credit business loans?

Yes, some alternative and online lenders offer bad credit small business financing including short-term loans, merchant cash advances, and factoring. Rates are very high but canShould I take out a loan with 400 credit score?

It is very difficult to qualify for reasonable loan terms if your credit score is 400 or below. You will pay exorbitant interest rates upwards of 30%. It is better to focus on credit repair first before taking on new loans.

What happens if you default on a loan?

Defaulting on any loan has severe consequences. Your credit score will plummet, making future borrowing very expensive. The account will be sent to collections, you may be sued for the debt, your wages may be garnished, and federal payments can be withheld. Avoid default at all costs.

Can you go to jail for not paying a loan?

In most cases, not repaying a personal or auto loan is a civil matter, not criminal. You cannot be jailed for contractual default. However, fraud, bounced checks, or failure to appear in court could potentially result in jail time in extreme cases.

How can I buy a house with bad credit?

Those with credit scores below 620 will struggle to get a traditional mortgage. Options include an FHA loan requiring just a 580 score, though at least 10% down is required. Or you can improve your credit first and then apply with a co-signer when your score reaches the mid 600s.

What is a payday alternative loan?

To help avoid predatory payday lending, credit unions now offer PALs – affordable small loans up to $2,000 due over 1 to 12 months. Interest is capped at 28% APR and an application fee of no more than $20 is allowed. These provide payday loan relief.

Can you get a business loan with bad credit?

Getting small business financing is difficult but not impossible with bad credit. Online alternative lenders provide options like merchant cash advances, equipment financing, or short-term working capital loans. Rates and fees are high, so solid revenue and cash flow is key.