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In a recent blog post, we explained FICO® credit scores. Plus, we offered tips on how to track your credit score. This time around, we’ll focus on loans for people with “bad credit.”
With holiday shopping in high gear, and the tax season on the horizon, you may be feeling an economic pinch. It’s tempting to get a new loan, line of credit, or credit card to tide you over. But if you have what’s considered “bad credit,” you may be shut out.
What exactly is “bad credit”? As a quick reminder, a credit score ranging from 300 to 579 is considered poor. With a score in this range, many lenders may not provide you with a new loan or credit card.
If you have a fair score between 580 and 669, you’re likely to have difficulty getting new credit. And if you succeed, you’ll probably pay higher interest rates than people with scores ranging from good (670 to 739) to very good (740 to 799) to exceptional (800 to 850).
But if you have a low credit score, and you need money fast, you have two main options: a payday loan or an online installment loan.
Payday loans are short-term, high-interest loans you’re expected to pay off by your next payday, within two or four weeks. In most cases, you’ll probably be approved for a payday loan regardless of your credit score.
Payday loans are widely available. About 12 million Americans take out payday loans each year, spending $9 billion on loan fees, according to Pew Research.
Depending upon your state of residence, payday loans can be available online or through storefront lenders. Most payday loans are for $500 or less, with the average loan size of about $400.
Payday loans can provide a quick infusion of funds for emergencies. But there are significant drawbacks.
* The loan must be repaid in full, in one payment, on your next payday—which is why they’re called payday loans.
* Unfortunately, most people with poor credit can’t pay off a loan that fast. So, they roll the amount borrowed into a new payday loan, which adds yet more fees and quickly gets expensive. A payday loan’s interest rate, when finance charges are added, can range from 390 to 780 percent or higher, according to the Consumer Federation of America.
As a result, payday loans can throw you into a downward debt spiral. In fact, the average payday loan borrower spends five months paying off the loan, according to USA Today.
Compared to payday loans, short-term installment loans like Spotloan are more flexible. With Spotloan online installment loans, you can choose your loan amount (from $300 to $800) and number of months (from 3 to 10) to pay back the loan in installments. Each payment made is applied toward interest and principal. Also, you can pay off the loan early without prepayment penalties. You don’t have to fill out a lengthy, cumbersome application, because Spotloan uses the latest technologies—such as artificial intelligence—to rapidly approve applicants and provide installment loans.
In business since 2012, Spotloan loans are for people who need money quickly but have bad credit scores or lack a credit history. But Spotloans, with a maximum rate of 490 percent, aren’t for everyone. If you want a lower interest rate, consider credit card cash advances or personal bank loans and credit lines.
If you already have a credit card, you may be able to get a cash advance on your card. Keep in mind you’ll probably pay a higher interest rate than you would for a purchase. And you’ll pay a one-time fee for the cash advance, usually 2% to 5% of the amount borrowed.
Many banks offer personal loans (as opposed to business loans) to customers, as well as personal lines of credit. The difference? With a loan, you get one lump sum. You can tap a line of credit as needed (until you reach the maximum borrowing amount). A loan’s interest rate is usually set, while a line of credit’s can vary.
But unlike payday and short-term installment loans, it can take several weeks to get the money from a new loan or line of credit. Also, your credit score often needs to be at least 640 to qualify. As always, your credit score can determine the APR you’re charged. The lower your credit score, the higher the interest rate—and vice versa.
Further reading
“How Credit Scores Work and What They Say About You” (The Balance)