What Are Bad Credit Loans, and Should I Borrow Them With Good Credit?

If you have a poor credit history, you may well have looked into bad credit loan options when borrowing money. But if you have good credit, you may not have considered these loans at all, as presumably they are not aimed at you.

While bad credit loans are intended for people with a low credit score, this does not mean certain people are restricted from borrowing a bad credit loan. You can make a loan request with a high or low credit score, though there are obviously other criteria that you’ll need to meet, such as being aged 18 and above, and a US resident.

So if bad credit loans are available to people with a good credit history as well as bad, what exactly are they?

What is a Bad Credit Loan?

Essentially, a bad credit loan is a type of loan designed for people who have a lower credit score, but can be accessed by most people. They can be either payday loans, which are repaid as a lump sum, or installment loans, which are spread over a longer period of time.

Specialist loans, such as bad credit loans, can help people rebuild their credit score too. By paying back a loan on time or early, you should leave more positive markers on your credit report. So when your credit score is calculated, this will be taken into account, and your score should hopefully improve.

Those with a poor credit history may also search for ‘no credit check loans’ but these don’t really exist. When a lender advertises such loans, they are generally referring to loans with soft credit checks, which don’t appear on your credit report. Most lenders undertake hard credit checks, which are reported on your credit file, and can impact your credit score. 

Why Do People Take Out Bad Credit Loans?

For some people, bad credit loans are the only option when it comes to taking out credit. If they have a low credit score, they may need a specialist loan. But as some short term loans are also classed as bad credit loans, some people borrow these loans simply because they’re looking for a form of short term credit. 

The purpose of any short term loan is to cover an unexpected expense. This could be anything from a leaking roof to an emergency medical bill. They're not intended to be used for long term expenses, or to pay back other credit, and if you are in financial difficulty, it’s a good idea to seek third party advice before looking into borrowing.

Not everyone has enough money saved up to pay for unforeseen costs that may crop up, so instead take out credit, and repay the loan when they next receive their paycheck. And if they need to borrow a larger amount, they can pay back in installments rather than in full. 

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Types of Bad Credit Loans

Bad credit loans tend to be unsecured loans, which means you don’t need any collateral in order to borrow. However, some secured loan providers do offer loans for bad credit, though these may be more specialist lenders. You may even be able to find bad credit mortgages - it’s just important to make sure that the lenders offering such loans are reputable. 

Unsecured loans are usually for smaller amounts than secured loans, allowing you to borrow around $25,000 or less. As you don’t need to secure any collateral against the value of the loan, there is also less risk with an unsecured loan. With a secured loan, should you default on the payments, there is a chance that your property could be repossessed. 

Pros and Cons of Bad Credit Loans

There are a number of pros and cons with bad credit loans, some more obvious than others! We’ve listed the main things you should consider when weighing up loans for bad credit below:

Disadvantages

  • Perhaps the biggest disadvantage of a bad credit loan is the interest rates, which are often higher than other forms of credit
  • Most people who opt for these loans have had issues managing their finances in the past, so are often considered a high risk for lenders

Advantages

  • Bad credit loans allow people with poor credit histories to borrow money when they need it
  • These loans can be a lifeline when people need to cover a significant purchase or consolidate other debts
  • Loans for bad credit can help people build up their credit score by showing lenders that they can manage money responsibly

What’s Your Credit Report and is This Different From Your Credit Score?

When we talk about bad credit loans, it’s important to understand what we mean by ‘bad credit’. If you’ve not looked into your credit score before, bear in mind that this can play a big part in the amount of credit you can borrow, as well as the type of loan you take out. 

Your credit report compiles information about you and your credit history, and is held by the main credit bureaus. It contains things like your full name, address, date of birth, as well as the loans and credit cards you have taken out previously. You may also find cellphone contracts and utility bills listed. 

Information normally stays on your credit report for around six years, so any negative marks on this report could impact you for years to come. That’s why it’s so important to check whether a loan is affordable before borrowing. 

Your credit score is a number calculated from the information on your credit report. This can vary, depending on the agency working out your score, but they are usually pretty similar. This credit score will often be used when lenders make a loan decision.

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How to Improve Your Credit Score

If you have a bad credit score, and want to improve this, there are a few things you can do. Some take more time than others, and not all of them will be applicable, but with enough time and effort, you could be able to increase your credit score.

As mentioned above, one of the ways in which you can improve your credit score is to take out further credit. This may seem a little odd, but it allows borrowers to demonstrate that they’re able to pay loans back on time. Other lenders can therefore see that the individual can budget, and manage their money well. 

Another way you might be able to boost your credit score is to check whether the information on your credit report is accurate. If any details are dated or incorrect, you can ask to have them amended. 

You can furthermore increase your credit score by repaying any existing debt where possible, before taking out further credit. Other lenders may be hesitant to lend to you if you already have a lot of outstanding debt. 

Once you have tried out these few techniques, in the longer term, it’s important to pay credit back on time in order to maintain or improve your credit score.

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