A great credit score can seem like an all-access pass when it comes to borrowing money. Rarely will a bank or online lender turn down someone with a stellar history of managing their credit. But for borrowers with bad credit, the process can be trickier and the outcome less certain. Lenders associate a lower credit score with heightened risk, so they’re more likely to reject the application, or impose an exorbitant interest rate as a result.
The good news is that there are definitely options for borrowers of all stripes, including those with bad credit — what we’ll define as a score below 580 on the FICO scale from 300 to 850.
Here’s a closer look at four of those options.
Credit Card Cash Advance
Some credit cards allow you to withdraw cash against your line of credit at a bank or ATM. The amount you can borrow in the form of an advance is usually limited at a few hundred dollars, but the terms vary by card.
The main pros of credit card advances are speed and convenience. Rather than having to get approved formally for a loan, you can use a tool you already have. But the disadvantages are numerous, like the fact that you’ll face a fee each time you use this feature that’s either a small percentage of the amount borrowed or a flat fee. Credit cards also carry high average interest rates, and the rate for cash advances are even higher than the rate on regular purchases.
Unsecured Personal Loan
Many borrowers need more than a couple hundred dollars. If that’s the case, getting a personal loan from a bank, credit union or online lending company may be an option.
This is how some borrowers approach debt consolidation with bad credit — they take out a loan and use it to pay off their collection of other, usually higher interest, debts. This allows them instead to focus on paying back that one installment loan over time rather than trying to keep up with multiple credit cards.
An unsecured loan is not backed with any collateral. Your word — and your credit score — are what you’re offering lenders. Besides your credit score, lenders will look at your debt-to-income ratio (DTI). If you do get approved for a loan, expect higher interest rates than a borrower with good interest would have to pay.
Assets such as a home, a car, a retirement fund or a bank account back secured loans. Lenders have the power to take these assets if the borrower does not hold up their end of the bargain.
Since there’s less risk involved for lenders, applicants may find it easier to get approved for a secured loan — and may be able to get more favorable interest rates to boot. It’s very important to make sure you can commit to paying back the loan according to its terms, though, or you’ll risk losing the assets you put up as collateral.
If you think personal loans have high interest rates, wait until you hear about payday loans. According to the St. Louis Fed, the average interest rate on payday loans is 391 percent. Compare that to 17.8 percent on credit cards and 10.63 on personal loans and you can imagine just how expensive payday loans can become.
The premise is borrowing money now that you agree to pay back by your next paycheck. This creates a cycle in which it’s very easy to become trapped, as you keep borrowing money against that next paycheck, tacking on more interest charges along the way.
There are loan options for borrowers with bad credit, but it’s important to know the risks and pitfalls before applying. A little bit of research can help you figure out the least expensive, least risky way to get the funds you need.