Pros and Cons of Personal Loans for Bad Credit

Bad-credit personal loans can be a helpful tool for consolidating high-interest debt or breaking up a large expense like an emergency home repair into smaller monthly payments. However, these loans can have high interest costs and may take years to repay.

Consider the pros and cons before you borrow, and weigh bad-credit loans against alternatives.

A bad-credit personal loan is generally offered to consumers with credit scores below 630. Some lenders’ minimum credit scores start as low as 550, but applicants with scores under 500 are unlikely to qualify.

These loans are unsecured, meaning a lender bases your annual percentage rate (APR) and loan terms on your credit score and income, rather than requiring collateral.

Online lenders offer personal loans to borrowers with poor or thin credit, but you may also get a bad-credit personal loan at a local bank or credit union.

Reputable bad-credit personal loan companies cap APRs at 36%, which is the highest rate a loan can have and still be considered affordable, according to most consumer advocates.

In 2024, the average personal loan rate for bad-credit borrowers is 19% to 28%, much lower than the triple-digit APRs charged by payday, pawn and car title lenders.

Credit card APRs typically max out at 30%, meaning a bad-credit borrower may get a lower rate on a personal loan than a credit card.

You may receive funds from a personal loan within a day or two of applying, depending on the lender. Some lenders can approve an application instantly and fund a loan the same day you apply, but most say they can send funds one to two business days after approval.

A lender may take more time to review a bad-credit borrower’s application and could request additional documentation, which may extend the approval timeline. Once approved, your credit score doesn’t affect funding time.

One week is usually the maximum amount of time it takes to get a bad-credit personal loan, which is faster than home equity financing and some credit cards that are sent in the mail.

Most lenders let you pre-qualify for a personal loan to preview your potential offer without undergoing a hard credit pull. Pre-qualification requires you to enter information like your address, employment, income, Social Security number, as well as your requested loan amount and reason for borrowing. The lender then does a soft credit pull to assign your loan amount, rate and repayment term.

The soft credit pull, which doesn’t affect your credit score, means bad-credit borrowers can check their rate with multiple lenders for the best offer.

Because personal loans are unsecured, you don’t have to pledge collateral to qualify. Examples of collateral include a home on a mortgage or a vehicle on an auto loan — something the lender can take if the borrower fails to make payments. If you fail to repay a personal loan, your credit will suffer but the lender won’t take your assets.

Most personal loan lenders report on-time payments to the three major credit bureaus, which means your personal loan repayment behavior becomes part of your credit report.

While it’s not advisable to get a personal loan solely to build credit, getting one when you have bad credit allows you to build your score through on-time payments.

The biggest drawback with bad-credit personal loans is their high rates. Though other types of financing can have higher rates, a personal loan with an APR of 20% or 30% is still an expensive option.

To find the best offer, compare bad-credit loans with low- and no-interest alternatives (more on those below).

Most bad-credit online lenders charge an origination fee, which is a percentage of the loan the lender takes to cover processing costs. This fee can be 1% to 10% depending on your credit and income — lower scores and incomes generally mean a higher fee.

The fee is commonly taken before the lender sends loan funds, reducing the actual loan amount. If you get a $3,000 personal loan with a 5% origination fee, you’d only receive $2,850. However, some lenders add the fee to the loan amount and you pay it as part of your monthly installment.

The minimum repayment term on most personal loans is one to three years, which may not be practical for all expenses. For example, if you borrow a bad-credit personal loan to cover a $2,500 household emergency, it could take a year or longer to pay it off.

High interest rates paid over long loan terms equate to high total interest costs. That $2,500 loan with a 20% APR and a one-year repayment term would cost $279 in total interest — more than 10% of the original amount borrowed. The same loan with a two-year repayment term would cost $554.

Unlike credit cards that allow you to borrow and repay as needed, personal loans come in a one-time lump sum and are repaid in equal monthly installments. If you need more money before your loan is paid off, you’ll need to apply for another loan.

A missed personal loan payment can cause a significant drop in your credit score — even if it’s already in the “poor credit” range. Payment history is one of the most important factors in credit score calculations, according to credit scoring company FICO. If you have bad credit, missed personal loan payments will hurt your ability to qualify for credit in the future.