Bad-credit personal loans can be a helpful tool for consolidating high-interest debt or breaking up a large expense like an emergency home repair into smaller monthly payments. However, these loans can have high interest costs and may take years to repay.
Consider the pros and cons before you borrow, and weigh bad-credit loans against alternatives.
Overview of personal loans for bad credit
A bad-credit personal loan is generally offered to consumers with credit scores below 630. Some lenders’ minimum credit scores start as low as 550, but applicants with scores under 500 are unlikely to qualify.
These loans are unsecured, meaning a lender bases your annual percentage rate (APR) and loan terms on your credit score and income, rather than requiring collateral.
Online lenders offer personal loans to borrowers with poor or thin credit, but you may also get a bad-credit personal loan at a local bank or credit union.
» MORE:How to get a personal loan with bad credit
Summary: Pros and cons of bad-credit personal loans
Potentially lower rates than other loans and credit cards.
Fast funding.
Check your rate with no hard credit pull.
No collateral required.
On-time payments build credit.
High rates for bad credit.
Origination fees.
Long repayment terms.
One-time financing.
Missed payments hurt credit.
Pros of personal loans for bad credit
Potentially lower rates than other loans and credit cards
Reputable bad-credit personal loan companies cap APRs at 36%, which is the highest rate a loan can have and still be considered affordable, according to most consumer advocates.
In 2024, the average personal loan rate for bad-credit borrowers is 19% to 28%, much lower than the triple-digit APRs charged by payday, pawn and car title lenders.
Credit card APRs typically max out at 30%, meaning a bad-credit borrower may get a lower rate on a personal loan than a credit card.
Fast funding
You may receive funds from a personal loan within a day or two of applying, depending on the lender. Some lenders can approve an application instantly and fund a loan the same day you apply, but most say they can send funds one to two business days after approval.
A lender may take more time to review a bad-credit borrower’s application and could request additional documentation, which may extend the approval timeline. Once approved, your credit score doesn’t affect funding time.
One week is usually the maximum amount of time it takes to get a bad-credit personal loan, which is faster than home equity financing and some credit cards that are sent in the mail.
Check your rate with no hard credit pull
Most lenders let you pre-qualify for a personal loan to preview your potential offer without undergoing a hard credit pull. Pre-qualification requires you to enter information like your address, employment, income, Social Security number, as well as your requested loan amount and reason for borrowing. The lender then does a soft credit pull to assign your loan amount, rate and repayment term.
The soft credit pull, which doesn’t affect your credit score, means bad-credit borrowers can check their rate with multiple lenders for the best offer.
No collateral required
Because personal loans are unsecured, you don’t have to pledge collateral to qualify. Examples of collateral include a home on a mortgage or a vehicle on an auto loan — something the lender can take if the borrower fails to make payments. If you fail to repay a personal loan, your credit will suffer but the lender won’t take your assets.
On-time payments build credit
Most personal loan lenders report on-time payments to the three major credit bureaus, which means your personal loan repayment behavior becomes part of your credit report.
While it’s not advisable to get a personal loan solely to build credit, getting one when you have bad credit allows you to build your score through on-time payments.
» LEARN MORE:What is a credit-builder loan?
Cons of personal loans for bad credit
High rates for bad credit
The biggest drawback with bad-credit personal loans is their high rates. Though other types of financing can have higher rates, a personal loan with an APR of 20% or 30% is still an expensive option.
» MORE: Compare other types of bad-credit loans
To find the best offer, compare bad-credit loans with low- and no-interest alternatives (more on those below).
Origination fees
Most bad-credit online lenders charge an origination fee, which is a percentage of the loan the lender takes to cover processing costs. This fee can be 1% to 10% depending on your credit and income — lower scores and incomes generally mean a higher fee.
The fee is commonly taken before the lender sends loan funds, reducing the actual loan amount. If you get a $3,000 personal loan with a 5% origination fee, you’d only receive $2,850. However, some lenders add the fee to the loan amount and you pay it as part of your monthly installment.
Long repayment terms
The minimum repayment term on most personal loans is one to three years, which may not be practical for all expenses. For example, if you borrow a bad-credit personal loan to cover a $2,500 household emergency, it could take a year or longer to pay it off.
High interest rates paid over long loan terms equate to high total interest costs. That $2,500 loan with a 20% APR and a one-year repayment term would cost $279 in total interest — more than 10% of the original amount borrowed. The same loan with a two-year repayment term would cost $554.
One-time financing
Unlike credit cards that allow you to borrow and repay as needed, personal loans come in a one-time lump sum and are repaid in equal monthly installments. If you need more money before your loan is paid off, you’ll need to apply for another loan.
Missed payments hurt credit
A missed personal loan payment can cause a significant drop in your credit score — even if it’s already in the “poor credit” range. Payment history is one of the most important factors in credit score calculations, according to credit scoring company FICO. If you have bad credit, missed personal loan payments will hurt your ability to qualify for credit in the future.
Alternatives to personal loans for bad credit
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Co-signed or joint loan: You may qualify for a personal loan more easily by adding a co-applicant with better credit and higher income. The co-borrower is responsible for loan payments if you stop making them.
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Secured personal loan: Though one of the perks of personal loans is that they don’t require collateral, some lenders offer both unsecured and secured personal loans. Bad-credit borrowers may get a lower rate on a personal loan that’s secured by their vehicle or bank account, but weigh the prospect of a better rate against the risk of losing your collateral.
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Home equity financing: The minimum credit score required to qualify for a home equity loan or credit line is usually 620, lower than some personal loan lenders. This type of financing has lower rates and longer repayment terms than personal loans, but the lender can take your home if you fail to repay.
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Family loan: If a trusted friend or relative is willing to loan you funds, that would likely be your most affordable option. Family loans don’t require a credit check and may be interest-free. Your relationship with the lender is collateral for this type of loan, so approach this option cautiously.
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Buy now, pay later: “Buy now, pay later” loans let you split a large purchase into smaller payments. With these loans, the first payment (usually 25% of the purchase price) is due at checkout, and the other three are due in bi-weekly payments.
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Cash advance app: Apps like EarnIn or Dave and Brigit can front you a couple hundred dollars for relatively low fees. Like payday loans, these advances are due on your next payday, so make a plan to repay an advance and cover regular expenses to avoid repeat borrowing.
