People with bad credit scores often find themselves in a particularly challenging situation when the need for quick cash arises. A credit card cash advance is where many people turn, but when you either don’t have a credit card or don’t have a high credit limit, this isn’t an option.
Oftentimes, taking out a personal loan from a brick-and-mortar bank or online lender is the only way to bridge the financial gap in these situations.
Some types of unsecured personal loans can be beneficial — others, however, should be avoided. How you use the loan can make all the difference. Below we discuss 16 of the best and worst uses for a personal loan that folks with bad credit may want to consider.
Consider these types of loans if you really must take out a subprime personal loan to meet urgent expenses. Each has its merits and can be a suitable way to gain access to the financial resources you need.
Consider your situation and how each of these loan types may best serve you. Each has its own unique loan amount, loan term, origination fee, and minimum credit score.
Getting a cash loan from a lender or from a private source may be the most straightforward type of personal loan you can obtain. Frequently, cash loans require some form of collateral or pre-arranged commitment to pay — either automatically, as is the case of a payday loan money transfer, or even via a post-dated check.
You may also be able to get a cash loan from a relative or someone you know, which may be a more preferred avenue. Chances are, a friend or relative won’t charge you an origination fee, or do a hard or soft credit check via a credit bureau, or charge you penalties for missing a monthly payment. If you do decide to borrow from a friend or relative, you should still consider signing a personal loan agreement that spells out the terms of the loan — hopefully one that features a lower interest rate than you’d receive from a subprime lender.
Emergency loans are frequently associated with the workplace, where you request an advance on future earnings or on accumulated vacation pay. If an employer offers such a program, this may be a viable alternative in some cases.
Emergency loans can also be requested and withdrawn from funds that you have contributed to, such as a 401(k), an individual retirement account, a healthcare flexible spending account or something similar.
Emergency loans are typically short-duration loans of between 30 and 90 days. The creditor, the borrower, and (if needed) the cosigner should spell out the loan amount and loan terms clearly to ensure the emergency loan is good for all parties.
An installment loan is simply a loan that is paid back over time in incremental (and usually equal) payments. Installment loans are typically used for purchases of big-ticket items such as furniture, vehicles, and even houses.
The average installment loan usually requires a good credit score to obtain, but if your credit score is high enough to qualify, this may be a good option.
If you’re an active member of the military, you may qualify to take out a personal loan against future earnings. Active service members should check with their commands to see if this is an option for them.
Another type of military loan is a VA or Veteran’s Administration loan for the purchase of a home. This type of military loan is available to anyone who has served and was honorably discharged from active service.
Because these loans are guaranteed by the government, they offer service members great terms and rates.
Getting married can be a huge expense. If you need cash to pay for some or all of your wedding costs, you may want to consider a wedding loan.
To be fair, what we’re really talking about here is a personal loan for the purposes of paying wedding expenses. Plenty of lenders will make loans to cover the costs of a wedding, and payments can sometimes be spread over as many as seven or eight years.
Of course, if you own a home already, tapping your home equity line is another way to secure a wedding loan.
Buying a boat is a big expense, and you should consider carefully whether taking out a personal loan is in your best interest. However, if you’ve found a great deal on a boat and need a loan, there are some lenders that will grant subprime boat loans for folks with less-than-perfect credit.
Like an auto loan, a boat loan will require you to make a substantial down payment, but if you have the means to do so, you could be the proud owner of a new boat. If you make payments on time, and you could over time turn your poor credit into an excellent credit score.
The government offers different types of loans through various agencies, and for a number of specific purposes. Some examples of government loans include small business and business expansion loans, housing loans, student or education loans, farming loans, and even disaster relief or emergency loans.
To learn more about the specific government loan type you’re interested in, check with the appropriate agency or government-sponsored enterprise (GSE) responsible for issuing these loans.
A debt consolidation loan is a type of personal loan typically used to pay off high-interest rate credit cards or other debt. As the name suggests, it’s a way of combining or consolidating your disparate debt payments into a single payment each month.
You should use caution with this type of personal loan and only consider it if you can get a substantially lower overall interest rate. Also, if you choose to go the route of a debt consolidation loan, you need to have the discipline to stick to a budget and not add to your existing debt. If you’re the borrower on an unsecured or secured personal loan designed to consolidate debt, getting into more credit card debt may be a hole you’re unable to climb out of.
It can be tempting to turn to any available source when you’ve got a bad credit score and find yourself in need of cash. However, some subprime personal loans simply aren’t worth the risk.
Below is our list of the types of subprime personal loans you should avoid and why. Remember, there may be better options out there for accessing the financial resources you need.
When you need a loan to pay for higher education, private student loans actually offer less flexibility than their government-backed equivalents.
Some examples of why private student loans are a poor choice include:
- they have variable interest rates that can suddenly rise
- they offer no loan deferment, forbearance or forgiveness like federal loans do
- they are offered by institutions designed to make a profit
Consider a federal student loan instead of one issued by a private lender. Many students with a poor credit score make the mistake of using a payday lender that charges a high interest rate and prepayment penalty. The repayment term from such a predatory lender makes this loan option a disastrous one, trapping students in a cycle of debt.
When you’re in need of cash to start, expand or fund your small business, turning to a bank or lending institution for a small business loan can be tempting. However, this isn’t always a good idea.
Loans for small businesses can often come with high interest rates and exorbitant terms — especially if you have bad credit. Instead, consider a loan offered through the federal Small Business Administration.
This government-funded agency offers loans with reasonable rates and terms for things from expansion to short-term working capital.
Hard money loans are often referred to as the ‘loan of last resort’ for borrowers with bad credit. They are used when a conventional mortgage or home equity loan is impossible to get.
A hard money loan uses the value of a property as the collateral, but often with untenable terms. These loans are more expensive and have higher origination costs than a standard mortgage, making them impractical as a personal loan for most borrowers.
A commercial loan is money that is usually lent to a business instead of to an individual. These loans are also sometimes referred to as commercial and industrial or business loans.
They are usually secured by property — sometimes a personal residence — and are frequently used to fund business operations or expenses. These loans are usually short-term and can be very risky.
They also frequently come with high interest rates and severe penalties for non-payment. Commercial loans are a poor choice for a personal loan.
Peer-to-peer lending has gained popularity in recent years, thanks in large part to an explosion of P2P lending groups and websites. Although peer-to-peer loans may seem like friends lending to friends, this model has actually evolved into a far bigger business than its name might suggest.
And, while a booming business may seem good for everyone, you should think twice before requesting a peer-to-peer loan. One thing to consider is that the loan acceptance process of many P2P lenders may leave subprime borrowers paying higher interest rates than they deserve to.
Bridge loans are loans designed to bridge a gap between the purchase of something and the permanent source of financing for it. Bridge loans are usually of very short duration. Because of this, they can charge an extremely high APR.
A bridge loan that charges 6% interest for a loan that comes due in three months can actually be more expensive than if you borrowed on a credit card. And, due to their short duration, they are not a wise choice as a personal loan.
A construction loan is a loan type that is also usually short in duration. They are frequently used to pay for the costs of building a new home, after which you can apply for a standard mortgage.
The problem with many construction loans is that they can be expensive and risky. It used to be that small builders and developers could get their own financing and could “lend” the homeowner the money as part of the construction process. That went away to a great degree after the home mortgage meltdown.
Now, with the homeowner responsible for getting a construction loan, if anything goes wrong during the building process, they are on the hook.
Different from student loans that can be federally-backed, college and school loans refer to obtaining a personal loan for education from a non-standard source.
Frequently, government-backed lending programs can’t cover all of the costs of a 4-year degree, so alternative sources are sought.
Looking for college and school loans outside of the traditional methods can be very risky, as the rates are usually much higher, the terms are not as forgiving, and the penalties for default can be severe. If you are considering a personal loan for college or other school purposes, exhaust all of the traditional methods first. Even the best personal loans for bad cedit do not have as low an interest rate or the rate of forgiveness that many student loans offer.