Whether you’re struggling to make ends meet or a sudden emergency expense comes up, sometimes you may need a small loan for extra money.
The good news is that there are options for small loans with bad credit. The downside is that many of these loans are financially risky and can put you in a worse position than when you started.
That’s why you should be strategic about getting a loan if you have bad credit. But what exactly is bad credit? Each lender has its own definition of what constitutes bad credit. But people with credit scores of 579 or below are generally considered riskier borrowers. Read on for our picks for the best small loans, as well as the types of loans to avoid if possible.
Small loan lenders
There are lenders that offer “traditional” personal loans instead of loans with higher interest rates, such as payday loans. In addition, such lenders may even offer potentially quick financing and a number of options for how much to borrow when you need a small loan. But you’ll want to make sure you understand all the terms of your loan, so you don’t end up paying astronomical interest rates or fees.
Small loans to avoid if possible
A small loan can be a good solution to cover an emergency or unexpected expense, but there are a few more things you need to know.
When it comes to bad credit loans, some options will be better than others. The following are some common types of small loans that you may want to think twice about before putting your signature on paper.
A payday lender may seem like a good option if you have a poor credit rating or no credit history. After all, these lenders typically don’t do credit checks, and the application process usually gets you your money right away.
Payday loans are short-term loans that are usually made for $500 or less and are usually due on your next payday. You’ll often hear of them as a way to bridge a financial gap until you get paid again.
But “payday loans have long been considered a predatory product and have even been banned in some states,” says Thomas Nitzsche, a credit expert with Money Management International, an agency of the National Foundation for Credit Counseling. “The reason is that they often have very high-interest rates and consumers often find themselves stuck in a cycle of payday loan debt.”
Like payday loans, secured loans can have very high fees. With a secured loan, you pledge your car title as collateral in exchange for the loan.
Equity loans can cost you your vehicle if you don’t pay. And because the higher interest rates on these loans can make it harder to repay the loan, you may not want to take that risk.
Pawn Shop Loans
You may have also heard about pawnshop loans. With these loans, you give an item of value in exchange for a small loan, the amount of which can be up to the value of the item.
If you want the item back, you must repay the loan before the term ends (the term varies from state to state). Even then, you may have to pay expensive fees and interest. If you don’t pay off the loan, the pawnshop can take the item and sell it (and usually none of the money from the sale goes to you, the former owner).
Other small loans to consider
The following loans may be a step up from the types of loans we described above, but you’ll still want to plan how they’ll fit into your larger financial picture so you can move forward financially once the loan is paid off.
Alternative Payday Loans
You can explore options at credit unions for a small loan. Some federal credit unions offer inexpensive loans called alternative payday loans.
An alternative payday loan must meet several requirements, including interest rates no higher than 28%, loan terms of one to 12 months, and loan amounts of $200 to $2,000.
Personal loans from online lenders
Online lenders are another small personal loan option for people with bad credit.
Personal loans are installment loans where you borrow a fixed amount of money and pay off the debt in a predetermined number of payments. Some personal loans are collateralized, meaning they require collateral like a house or a car, but there are also unsecured personal loans that don’t require collateral.
Some are “peer-to-peer” lenders, meaning that personal loans are financed by individual investors rather than traditional financial institutions in an effort to get you a better deal.
In general, the better your credit score, the lower your interest rate. But even a loan from an online lender will usually have more favorable terms than a payday loan, which can have very high rates and fees.
Alternatives to small loans for bad credit
If you can’t qualify for a loan or find another way to meet your cash needs, there are a few other options.
Help for budget cuts or payments
If you need a small amount of cash, the best scenario may be to free up money elsewhere, if you can.
“If you’re someone with bad credit but you have assets that can be liquidated, then you may be able to sell items of value,” says Nitzsche. “Your credit card company may offer an emergency plan to reduce interest and payment. Your landlord might be willing to offer you a one-time extension or split your payments into two parts.”
In these cases, you don’t even need to take out a small loan.
You can check with your employer about getting a short-term advance on your paycheck.
“This would depend on your relationship with the employer and probably the size of the employer,” says Nitzsche.
Another option for a small cash advance is to get one directly from your credit card. This is a way to withdraw some of your available credit in cash, instead of buying something. Many credit cards offer this feature, although lenders often charge high-interest rates, but nothing like payday loans.
Home Equity Line of Credit
If you own a home, another option is to take out a home equity line of credit, or HELOC. This allows you to tap into the equity you’ve built up in your home to cover short-term cash needs.
When you apply for a home equity loan of credit, you’ll likely receive checks or a credit card that you can use to pay for purchases during a special “drawing period.” If you choose to spend some of this money, you will need to make minimum payments on the outstanding balance until the withdrawal period ends. The line of credit then often becomes a “payment period,” in which you pay off any outstanding balance over time or all at once, depending on the terms of your home equity line of credit.
Friends and family
Finally, if all else fails, you might consider asking your friends or family for a small loan. We think it’s a good idea to put it in writing with terms that include monthly payment amounts, any interest charges, and due dates. It’s a good idea to treat the deal as a loan from a traditional lender.
The downside of this option is that if you default on the loan, it could damage your relationship with those closest to you.
Next steps: Start planning for your next emergency or big expense
Although it can be difficult to break the cycle of trying to make ends meet, try to start regularly setting aside small amounts of money for emergencies if you can.
Even saving $5 or $10 on each paycheck can help you create a “pay yourself first” mentality. This means you make sure some of your earnings go into a savings account each payday so you’re not tempted to spend more money on wants than needs and end up with credit card debt or other unwanted expenses.
Keeping your savings in a high-yield savings account can also help make it easier to keep these funds set aside for emergencies. The key is to save what you can on a regular basis so that you have an emergency fund that you can use in the future instead of resorting to small loans.