The Good Brigade/GettyImages; Illustration by Hunter Newton/Bankrate
Key takeaways
- Bad credit loan companies lend money to credit-challenged borrowers who need cash — usually at a premium due to the perceived risk to the lender.
- An extended loan term could net you an affordable monthly payment, but you’ll spend far more in interest.
- Get prequalified with at least three lenders and compare your offers to find the best fit.
- Read the fine print to fully understand what you’re getting into with a bad credit loan.
A bad credit loan is a personal loan for people with a less-than-stellar credit score or limited credit history — especially those with a FICO score under 580 or a VantageScore under 600.
These loans typically have high interest rates because they may pose a risk for the lender, so it’s important to shop around to find the most competitive bad credit loan rates. There are a few options available, so compare offers and get prequalified before settling on a lender.
5 steps to choose the best bad credit loan company for you
Choosing a lender, regardless of your credit score, takes a couple of steps to complete. Be ready to research both your loan options and individual lenders thoroughly.
1. Determine what loan terms best fit your needs
Personal loans typically come with repayment terms from two to seven years, though some lenders offer shorter or longer. It can be tempting to opt for a loan with a long term to get a lower monthly payment, especially when faced with annual percentage rates (APRs). But stick with the shortest term you can reasonably afford to cut down on the total interest you pay.
For example, consider a bad credit loan of $5,000 with an APR of 29 percent. A longer term means a lower monthly payment, but the interest you pay could be thousands more.
| Loan term | Monthly payment | Total interest |
|---|---|---|
| 2 years | $277 | $1,647.92 |
| 3 years | $210 | $2,543.03 |
| 4 years | $177 | $3,502.41 |
| 5 years | $159 | $4,522.56 |
Use a loan calculator to calculate the difference in monthly payments and interest to better understand what fits in your budget.
2. Prequalify with three or more lenders
Once you know your desired loan amount, compare rates and terms from at least three lenders that allow you to prequalify online to preview rates and terms you could receive after submitting a formal application. The steps to prequalify are fairly simple, and doing so won’t hurt your credit score since it only requires a soft credit check.
To complete the prequalification process, you’ll likely be asked to provide your contact information, Social Security number, employer’s name and phone number and information about your income. Keep in mind that prequalifying doesn’t guarantee approval.
3. Look at customer experience and reviews
The lender should offer customer support by phone, online or both at times that work for your schedule. It is also vital that the application experience is seamless, and the lender allows you to manage your loan online.
You should also check online reviews to get a feel for the level of service each lender offers. It’s not abnormal to see a few negative reviews here and there but keep an eye out for trends in complaints and how the lender responds to them.
4. Identify useful perks
Beyond providing a seamless lending experience and rapid funding, some bad credit lenders offer other perks to help improve your overall financial health.
For example, you may receive free access to your credit score directly from the online dashboard. Some lenders also feature an assortment of financial tools, including calculators and educational articles, to provide the information needed to make sound financial decisions moving forward.
5. Consider lender reputation and fine print
Doing business with the right lender is vital to avoid headaches and protect your finances. Google, Trustpilot and the Better Business Bureau (BBB) are ideal places to start when you want to get a feel for the lender and gauge if it is reputable. Beyond customer reviews, check how long the company has operated, where it’s licensed and whether it has a headquarters.
It’s equally important to read the fine print and ask the lender any questions you may have before moving forward. Pay attention to the specifics of the loan agreement, including the interest rate, repayment schedule, applicable fees and penalties, and the total borrowing costs. That way, you’ll know what to expect if you decide to take out a loan.
What to do after you choose a lender
When you’re ready to apply, gather the financial documents the lender will need to make a decision on your loan application. This includes your personal contact information, proof of income and proof of address. Also, prepare for a hard credit check if the lender requires it to determine if you’re a good fit for a loan.
If approved, review the loan agreement and ask any questions you may have before signing the documents. The final step is to receive your loan proceeds, typically via electronic deposit, as soon as one business day, unless you opt for a paper check.
The bottom line
The best bad credit loan for you depends on your unique financial situation. Before you apply for a bad credit loan, compare rates, terms and fees from at least three lenders to find the option that best matches your needs and budget.
And, if you can, hold off until you boost your credit. Graduating to fair credit loan rates may net you a lower monthly and overall cost.
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