4 types of bad credit loans to avoid

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Even if you have a low credit score, you should always try to avoid these 4 types of loans for bad credit if you need to borrow money. (Shutterstock)

Getting a personal loan can be difficult if you have a limited credit history or bad credit. Some lenders that target borrowers with bad credit promise no credit checks and fast financing. But these loans often come with expensive fees that can trap you in a cycle of debt.

If you struggle to choose the right personal loan – or find it completely impossible – you may start to feel discouraged. Before you settle for an expensive loan product, however, here are some bad credit loans that you should avoid – whether you just need a few hundred dollars, want a $10,000 loanor something in between.

Credible makes it easy to see your pre-qualified personal loan prices from various lenders, all in one place.

1. Payday loans

A payday loan is a small, short-term loan designed to give you an advance for your next salary. In-store payday lenders usually offer these loans, but you can also find them online. Depending on your state, there may also be a maximum loan limit, often $500 or less. Lenders typically require borrowers to repay these loans within two to four weeks, in one lump sum, plus fees.

If you’re struggling to make ends meet before your paycheck arrives, this may seem like a tempting loan option, especially if you need same day funds.

Why you should avoid them: Most payday loan lenders do not have strict credit or income-based qualifications, so they often lend money to people who may struggling to repay the debt. In addition, these loans are notoriously expensive. While most states limit the interest that can be charged per $100 borrowed, this is usually in the range of $10 to $30.

While that may not sound like much, when you consider the length of the loan term and the low loan limits, these fees add up to an astronomical APR. For example, a $100 payday loan with a two-week repayment period and a $15 fee equates to an APR of nearly 400%, according to the Consumer Financial Protection Bureau (CFPB).

Compare that to the average interest rate on a 24-month personal loan — 8.73% in May 2022, according to the Federal Reserve — and it’s easy to see what a “deal” payday loan really works out to be.

2. Cash advance loans

A cash advance loan is similar to a payday loan in that you can use its short-term funds to help you cover immediate or unexpected expenses. These loans can even be funded as quickly as the same day, depending on the lender.

Cash advance loans differ from payday loans in a few important ways. First, you can usually borrow much more with a cash advance loan, with some lenders offering as much as $5,000. You don’t always have to pay back an advance loan in just a few weeks, either; you may be able to take out a cash advance that you can pay back in monthly installments.

Why you should avoid them: Cash loans are still significantly more expensive than traditional personal loans, or even credit cards. Depending on the lender, your cash advance loan may have an APR of 299% or more.

3. Car title loan

If you have bad credit and need to borrow money, one option may be to use the vehicle as collateral to get a car loan. But car loans are not a good choice for most borrowers.

Title loans often have repayment terms as short as 30 days, although you can find installment options as long as 24 months. The amount you can borrow depends on where you are located, as well as the value of your vehicle – as long as you own the vehicle free and clear.

Why you should avoid them: The downside? You have probably already guessed it: You pay significantly more in interest with a title loan than with a traditional private loan. It is not unusual for car loans to be in three figures.

More than that, but you secure the loan with one of your most important assets: your car. If you default on your title loan, the lender can take ownership of your vehicle.

4. Pawn shop loans

A pawnshop loan is a short-term loan that is secured by something you own, such as jewelry or other valuables. These loans usually allow you to access money quickly, depending on how much your valuables are worth.

Mortgage lenders don’t usually run a credit check, so these loans can seem like a good option for borrowers with bad credit or those looking for a loan without credit check. The pawnshop will usually offer a percentage of the value of the pawned object in loan form. You must repay the loan by an agreed date, otherwise the store will keep the item.

Why you should avoid them: If you repay the loan as agreed, you can get your valuables back. But your mortgage will have accrued interest in the meantime, which you will also have to pay. These loans also tend to have a variety of fees, such as storage, setup, and even appraisal fees. For this reason, a lower interest rate can be misleading, as the loan will actually cost you significantly more in the end.

Try a personal loan instead

If you need funds for an unexpected expense, a large purchase, or even to refinance high-interest debt, a traditional personal loan is often the best option – even if you have bad credit. Here are some things you can do to increase your chances of qualifying for one:

  • Apply with a cosigner. Adding a cosigner with good credit to your personal loan application could be the answer to getting approved or getting better interest rates. Just be aware that your co-signer will be responsible for making the loan payments if you default and the debt will be reported on credit.
  • Check your credit reports. If your low credit score is preventing you from getting a personal loan, it’s important to understand why. Check your credit reports to see what kind of negative items are lowering your score. In some cases, you may find errors that you can dispute, which will help improve your score quickly if corrected.
  • Consider a secured personal loan. A secured loan uses one or more of your assets as security for the debt. Because of this added protection, lenders often have lower credit score requirements for secured loans and may even approve borrowers with poor credit scores. Some financial institutions may not require a minimum credit score at all, as long as you secure the loan with an asset. But remember that if you fall behind on your loan payments, the lender can take your collateral.

If you’re ready to apply for a personal loan, visit Credible for quick and easy access Compare personal loan rates.

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