What is a Bad Credit Loan?

Bad credit loans are a relief option for consumers whose low credit scores limit their borrowing options.

Put another way: A bad credit loan, which is really just another name for a personal loan,can bail you out of a financial emergency, even if your credit score (something under 650) is a lot lower than you or most banks would like.

So if you suddenly need money to buy or repair a car; make payments on a medical bill or consolidate credit card debt, but don’t have a high enough credit score to get a loan from one of the big banks, don’t give up. There is help available.

Bad credit loans are treated the same as personal loans. They are money you borrow and pay back in fixed monthly installments. The loan could come from a bank, but if you’re looking for an affordable interest rate and flexible qualifying requirements, the better choices probably would be:

  • Credit unions. A great option. Maximum allowable interest rate is 18%.
  • Family or friends. Easier to qualify and hopefully lower interest rates.
  • Find a co-signer. Use someone else’s high credit score to get a lower interest rate.
  • Tap home equity. Credit score not a factor. If you have equity, you can get a loan.
  • Online or P2P. Huge market of lenders who can be very flexible with terms.

You could add more options like payroll advances, loans from retirement accounts or borrowing against life insurance to the list, but those are last-ditch choices best left untouched unless everything else fails.

What Is a Bad Credit Score?

Credit scores are an attempt to gauge the likelihood you will repay a loan. They range from 300-850. The higher your number, the more likely you will repay.

Bad credit scores start at 650 and go down from there. People in this category are considered a high risk and pay the highest interest rates. They are prime candidates for bad credit loans.

The definition of a “good” and “bad” credit score does vary from lender to lender. Some won’t touch anyone with a credit score under 650, some actually market to consumers with a sub-650 score.

So it’s hard to say what makes you “good” or “bad” on the credit scoreboard, but the accepted range looks something like this:

  • 760-850 – Excellent
  • 700-759 – Very good
  • 660-699 – Fair
  • 620-659 – Poor
  • Scores under 620 – Extremely poor

How Bad Credit Scores Affect Borrowing

Consumers in the good-to-excellent credit score category receive the lowest interest rates and best loan terms. Consumers in the poor and extremely poor categories are burdened with high rates and may not be approved for a loan at all.

Many consumers get that message and that is why the average credit score for U.S. consumers in 2018 is 700, an 11-point jump over the last decade. However, the real numbers worth paying attention to are the combination of score and age, which say a lot about how our economy operates.

According to FICO, people ages 60-and-above have an average credit score of 743, while those in the 18-29-year-old bracket average just 652. It’s one of the few places in life where being old pays off.

Still, that’s a 91-point difference, which is very costly when you are shopping for home and auto loans as the graphic below demonstrates.

How Your Credit Score Effects a 30-year, $200,000 Home Loan
Score Interest Rate Monthly Payment Total interest paid
760-850 4.263% $985 $154,744
700-759 4.485% $1,012 $164,172
660-699 4.876% $1,059 $181,074
620-659 5.306% $1,111 $200,087
619-and lower 5.582% $1,146 $212,520
How Your Credit Score Effects a 6-year, $25,000 Auto Loan
Score Interest Rate Monthly Payment Total interest paid
700-850 3.71% $387.83 $2,924
660-699 5.07% $403.44 $4,047
620-659 9.88% $461.63 $8,238
619-and lower 15.29% $532.57 $13,345

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