A bad credit loan involves borrowing money even if you have a low credit rating or no credit at all. It has been found that approximately 16% of Americans have very poor credit. So it is not surprising that bad credit loans can help those whose credit score is not high enough to receive funding from a traditional financial institution such as a bank. 

A bad credit loan can be extremely useful if a borrower faces an unexpected financial expense and needs a quick injection of cash before their next payday. However, there are many considerations to take into account before taking out a loan for bad credit, such as whether you can comfortably afford the repayments. With this in mind, this article will discuss the nature of bad credit loans and additional things to consider about this form of borrowing.  



What Is Bad Credit?


Bad credit involves having a weak financial history, whereby you may have debts or lots of unpaid bills. Credit ratings typically range from 300 to 850, with scores below 580 generally regarded as bad credit.

Your rating determines your creditworthiness and how reliable you are to lenders. The lower your credit score, the higher the risk you are and the less likely creditors will lend to you, which is why credit scores are important

Bad credit can therefore have an impact on your loan eligibility. Consumers with bad credit will ultimately have fewer loan options, may experience difficulty when trying to be approved for credit cards and typically pay higher interest rates.


How Do Bad Credit Loans Work?


Bad credit loans are a type of installment loan that are repaid back over an agreed timeframe through a number of scheduled repayments. They offer an opportunity for those with a more complex financial history to borrow the money that they need. Applicants can borrow bad credit loans online or in payday loan stores in the 37 US states where payday loans are legal.

It is important to note that having a poor score may limit the amount that you can borrow and the length of time you will be given to repay back your loan. The interest also tends to be higher for bad credit loans due to the larger level of risk involved for the lender. This is particularly the case with unsecured loans, when collateral is not required to secure the loan.

Alternatively, secured loans are much easier for consumers with bad credit to qualify for. This is when applicants will give the lender collateral such as their home or car as a guarantee. Whilst this enables a consumer to borrow more money with better terms since there is less risk involved for the lender, it does ultimately mean that if the borrower failed to repay the bad credit loan, the lender can repossess the asset put up for collateral. 


What Are Bad Credit Loans Used For?


Bad credit loans can be used to pay for any important expenses that cannot wait to be paid on your next upcoming payday. It is then intended that you will repay back the loan, plus interest when you receive your next paycheck.

Examples of what bad credit loans are used for include:

  • Medical bills
  • Dental fees
  • Pet costs
  • House repairs
  • Car fixes 
  • Rent
  • Funeral costs
  • Taxes

It is important to note that bad credit loans should not be used for frivolous spending such as shopping, parting or gambling. Likewise, they should not be used to pay off any outstanding loans as this could lead to a cycle of debt and further financial issues down the line.



What Should I Consider Before Getting A Bad Credit Loan?


Before getting a bad credit loan, you must make sure that you will be able to comfortably afford the repayments. Failure to pay back your loan on time could not only damage your credit score, but also lead to increased interest and late charges.

Furthermore, if a borrower defaults on an unsecured loan, the lender can take the borrower to court or report their debt to a collections agency. Likewise, if a borrower failed to pay back a secured bad credit loan then they could lose their asset secured to the loan.

You should also think carefully about the amount you wish to borrow. Try not to borrow more money than you need as not only will this make it easier for you to repay back, but you will also pay less interest and fees.


How Can I Improve My Credit Score?


There are many ways you can look to improve your credit score. Making regular payments on time for any bills you have will be a first good step in boosting your score and in turn give you access to more affordably priced credit. Getting a copy of your credit report to check there are no errors on it is also a sensible idea to make sure you are not being unfairly disqualified for something that is not your fault.

Credit bureaus eventually delete negative credit report entries as they cannot remain on your record for longer than approximately 7 years. Note that you will not have to wait as long as the 7 years for your credit score to start improving, as your credit score will naturally improve as your negative entries age (providing that you do not have new negative entries as this will tarnish your report too).

See the table below for examples of the maximum amount of time negative entries can stay on your credit report:

Entry Time on Credit Report
Soft Credit Inquiry 0 years
Hard Credit Inquiry 2 years
Delinquent Payment (30+ Days) 7 years
Defaulted Account 7 years
Bankruptcy Discharge 7 to 10 years


Can Bad Credit Loans Improve Your Credit Score?


Bad credit loans can be used to improve your credit rating, especially if you have a very limited financial history. If you select a loan that is affordable, pay it back on time and use a lender that reports payments to the major credit bureaus, then you may indeed see your score improve. However, it is important to note that not all secured loans will improve a borrower’s credit rating.