4 types of bad credit loans to avoid
Borrowing money can be difficult if you have bad credit. But even if you need quick cash, you should avoid certain types of bad credit loans.
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Stephanie Colestock has more than 11 years of experience in personal finances. Her work has been featured by MSN, CBS News, Credit Karma, and USA TODAY Blueprint.
Updated October 16, 2024, 2:44 AM EDT
Getting a personal loan can be difficult if you have a limited credit history or bad credit. Some lenders that target bad credit borrowers promise no credit check and fast funding. But these loans often come with expensive fees that can trap you in a cycle of debt.
If you’re struggling to choose the right personal loan — or finding it flat-out impossible — you may start to feel discouraged. Before you settle for an expensive loan product, though, here are some bad credit loans that you should avoid — whether you just need a few hundred dollars, want a $10,000 loan, or anything in between.
Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.
1. Payday loans
A payday loan is a small, short-term loan intended to tide you over with an advance until your next payday. Storefront payday lenders typically offer these loans, but you may also find them online. Depending on your state, there may also be a maximum borrowing limit, often $500 or less. Lenders usually require borrowers to repay these loans in two to four weeks’ time, in one lump sum, plus fees.
If you’re struggling to make ends meet before your paycheck hits, this can seem like an enticing loan option, especially if you need same-day funds.
Why you should avoid them: Most payday loan lenders don’t have strict credit- or income-based qualifications, so they often loan money to people who may struggle to repay the debt. Additionally, these loans are notoriously expensive. While most states cap 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 too much, when you consider the length of the loan term and the low borrowing limits, these fees work out to an astronomical APR. For example, a $100 payday loan with a two-week repayment term 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 loans really work 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 some important ways, though. For starters, you can usually borrow a lot more with a cash advance loan, with some lenders offering as much as $5,000. You don’t always have to repay a cash advance loan in just a few weeks, either; you may be able to take out a cash advance that you can repay in monthly installments.
Why you should avoid them: Cash advance loans are still significantly more expensive than traditional personal loans, or even credit cards. Depending on the lender, your cash advance loan could have an APR of 299% or more.
3. Car title loans
If you have bad credit and need to borrow money, using your vehicle as collateral to get a car title loan could be one option. But car title loans aren’t a good choice for most borrowers.
Title loans often have repayment terms as short as 30 days, though you might find installment options as long as 24 months. The amount you can borrow depends on your location, as well as the value of your vehicle — as long as you own your vehicle free and clear.
Why you should avoid them: The downside? You probably already guessed it: You’ll pay significantly more in interest with a title loan than with a traditional personal loan. It’s not uncommon for car title loans to have APRs in the triple digits.
More than that, though, you’re securing the loan with one of your most important assets: your car. If you were to default on your title loan, the lender could take ownership of your vehicle.
4. Pawn shop loans
A pawn shop loan is a short-term loan that’s secured by something you own, such as jewelry or other valuables. These loans typically allow you to access money quickly, depending on how much your valuables are worth.
Pawn shop lenders typically don’t run a credit check, so these loans can seem like a good option for borrowers with poor credit or those looking for a no-credit-check loan. The pawn shop will usually offer a percentage of the pawned item’s value in loan form. You’ll need to repay the loan by an agreed-upon date, or the shop keeps the item.
Why you should avoid them: If you repay the loan as agreed, you can get your valuables back. But your pawn shop loan will have accrued interest in the interim, which you’ll also need to pay. These loans also tend to have a variety of fees tacked on, such as storage, setup, and even appraisal fees. For this reason, a lower interest rate can be deceptive, as the loan will actually end up costing you considerably more in the end.
Try a personal loan instead
If you need funds for an unexpected expense, large purchase, or even to refinance high-interest debt, a traditional personal loan is often your best bet — 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 may be the answer to getting approved or snagging better interest rates. Just note that your cosigner will be responsible for making the loan payments if you default, and the debt will be reported on their credit.
- Check your credit reports. If your low credit score is keeping you from getting a personal loan, it’s important to understand why. Check your credit reports to see what sort of negative items are bringing down your score. In some cases, you may find errors that you can dispute, which will help improve your score quickly if it’s corrected.
- Consider a secured personal loan. A secured loan uses one or more of your assets as collateral for the debt. Because of this added protection, lenders often have lower credit score requirements for secured loans and may even approve borrowers with a bad credit score. Some financial institutions might not even require a minimum credit score at all, as long as you’re securing the loan with an asset. But keep in mind that if you fall behind on your loan payments, the lender can take your collateral.