Installment loans for bad credit: What are your options?
Bad credit isn't a dead-end for installment loans.
Contributing Writer at Tally
June 2, 2020
Bad credit can make borrowing money stressful, as you may get more rejections than approvals. Bad credit can also be disheartening, but it isn't an absolute disqualifier for installment loans. There are plenty of options when you're seeking installment loans for bad credit, though some may have terms that aren't ideal.
Below, we'll cover all your options and the terms you can expect, but first, we'll look into what qualifies as an installment loan and what bad credit really is.
Installment loans defined
Installment loans are some of the more common types of loans available. Any loan with fixed payment terms for a fixed number of months or years qualifies as an installment loan. The payments — whether monthly, quarterly, weekly or biweekly — are the installments.
There is a variety of installment loans available that fit a range of financial needs. Some of the more common installment loans include:
Debt consolidation loans
Home equity loans
In some cases, like with mortgages and auto loans, installment loans are long-term solutions, as their repayment terms can run for years or even decades.
There are also short-term installment loans that only last several months, including small personal loans. These short-term loans come in handy in times of immediate financial need that you expect will pass — for example, taking out an installment loan to cover expenses while unemployed or furloughed.
Bad credit defined
Bad credit can be a subjective term, but the FICO credit score model injects some objectivity.
Your credit score is broken down into four main categories, according to the FICO scoring model, the most common model used to determine creditworthiness.
Exceptional: 800 and higher
Very good: 740-799
Poor: 579 and lower
Using the FICO score ranges, a credit score of 669 or lower falls into the bad credit range.
If you land in the "Fair" range, there are still plenty of lenders to choose from, according to MyFICO. You may end up with a higher interest rate or additional loan fees, but you can get approved with this level of bad credit. If you fall in the poor credit range, MyFICO says this "demonstrates to lenders that you are a risky borrower," which can make it a challenge to get a traditional installment loan.
Installment loans for bad credit
Bad credit can make it harder to get installment loans, but it’s not always an automatic disqualifier, especially if you fall on the "Fair" side of the bad-credit spectrum. Here are a few installment loan options for bad credit.
Secured installment loan
If you fall into the "Fair" credit score range, MyFICO states you can still get secured installment loans. With a secured loan, the value of the loan is secured with an asset, like a car or home. If you default on the loan, the lender can seize and liquidate the asset to repay the debt. There are various types of secured installment loans, including auto loans, mortgages and home equity lines of credit.
You can get approved for these secured installment loans, but bad credit may result in a few less-than-ideal situations, including:
Higher interest rate
Higher loan fees
Additional qualification terms
Higher down payment requirement
Lower loan amount
Higher monthly payments
You can apply for a secured installment loan at a brick-and-mortar bank or credit union or through an online installment loan provider. The best place to start is the bank where you have a savings or checking account. This existing banking relationship may help with the approval process.
Unsecured installment loans
Unsecured installment loans may be a little harder to get approved for, as there is nothing of value protecting the lender if you don’t repay the loan. These unsecured personal loans do, however, offer more flexibility, as they generally come in the form of personal loans you can use for whatever you please.
You can use these loans for debt consolidation, making unexpected household repairs, or having extra cash in times of need, like extended unemployment.These unsecured loans are flexible but have many of the same downsides as secured installment loans.
Because they are unsecured, they often include higher interest rates, lower loan amounts, shorter terms and higher monthly payments.
Fortunately, you can shop around at banks and online lenders for the best loan rates. Some lenders will preapprove you based on a soft credit check, which will allow you to know the rough loan terms with no impact on your credit score.
If you struggle to find a loan through a direct lender, you can look into loan aggregators. These companies take your credit history and score to multiple lenders to get you approved. This can save you the headache of filling out dozens of loan applications trying to get approved, but they often come with a significant one-time fee of 10% or more.
A title loan, which some call a pink-slip loan or title pawn, is when you use the title of your vehicle as collateral on a short-term installment loan. Because the vehicle title secures the loan, the car must either be paid off and free of liens or have enough equity — the amount the car is worth minus how much you owe on the auto loan — to cover the title loan.
A title loan is generally easy to get with minimal FICO score and credit history requirements, but the Federal Trade Commission warns borrowers to use caution when considering a title loan. The FTC warns this type of loan often comes with triple-digit annual percentage rates due to its high interest rates and fees.
If you can't afford to pay off the title loan according to the terms, you can request a longer period using the rollover option. The problem is this comes with even more fees, further increasing the APR.
Worst of all, if you fail to meet the title loan's payment terms, the lender can repossess the vehicle.
For these reasons, a title loan should be a last resort.
Like a title loan, a payday loan is a short-term installment loan that gives you access to cash now with minimal credit rating requirements. Instead of securing the loan with a car title, the lender secures it with future income.
For example, if you earn $1,000 per week and need a $200 loan you would write the lender a check for $200 plus the lender’s fees. The lender won't cash that check until the due date, which is generally your next payday.
Like title loans, the FTC has stern warnings about payday loans. The biggest issue the FTC takes with payday lenders is their high fees. For example, if you take out a 14-day $100 payday loan with a $15 fee, that would equal a whopping 391% APR.
If you can't afford to pay off your loan on the due date, you roll it over for another 14 days, but you incur another $15 fee. This rollover can start a vicious cycle of debt that can be hard to break free of, which is why this should be a last resort.
Other options for bad credit
If your bad credit disqualifies you from traditional installment loans, but you refuse to pay the outrageous fees for title or payday loans, you may want to toss your hands in the air in disgust. Don't give up, though. There are alternative paths to getting an installment loan for bad credit.
Use a co-signer
If you've exhausted all your options for a traditional secured or unsecured loan and keep getting denied, a co-signer may be the boost you need to get approved.
A co-signer is a person who agrees to share financial responsibility for the loan. This agreement adds their good credit to the application and may get you that approval.
Co-signers typically don’t make the monthly payments, but they are just as responsible for the loan as you are. This responsibility for the loan brings us to the negatives of a co-signer.
First, the loan shows on their credit and increases their debt. It also means if you miss a payment or make a late payment, it can damage their credit.
Reduce the loan amount
If you're struggling to get a loan for the amount you need, you may be able to reduce the loan amount to get it approved. This smaller loan can help get you through while you use alternative routes to make up the remainder.
Paying down this smaller amount helps build your credit, which can help you get approved for future loans. This brings us to the next alternative.
Wait and build credit
If the installment loan you're trying to get isn't for an emergency, you can always put it on the back burner while building your credit. Once you manage to build a good credit profile, you can reapply for the installment loan.
Waiting and building your credit not only increases your chances of approval, it can also end with you getting better repayment terms and interest rates.
The downside is building credit can take years to accomplish, especially if you have no existing debt or credit cards to help.
Credit card cash advance
A credit card cash advance can offer you short-term access to quick cash. Getting a credit card cash advance requires no credit check, as long as you already have a credit card with a cash advance option.
To get a credit card cash advance, simply use your credit card at the ATM, using the PIN the credit card issuer provided. If the issuer never provided a PIN or you lost it, call the issuer's customer service phone number on the back of the card or visit the issuing bank for help.
A credit card cash advance is great for quick cash, but it has a few downsides, including:
The interest rate is generally higher than the interest rate on purchases
It often includes one-time flat fees
It can take years to pay off if you're paying only the minimum payment
It's not a true installment loan
Borrowing money from a friend or family
Borrowing money from a friend or family is a great way to get yourself out of a financial bind with little to no extra cost. If the amount is small, a friend or family member may be willing to lend you the cash you need without interest.
Asking a friend or family member for help is an inexpensive option with no harm to your credit score. Use care when going this route because borrowing money can create a delicate situation.
If the friend or family member suddenly falls into their own financial bind, they may ask for immediate repayment. Also if you fail to repay them in accordance with the agreed-upon terms, it could create friction in the relationship.
Don't let bad credit stop you
Bad credit can make it more challenging to get the installment loan you need. Fortunately, it’s a challenge you can overcome.
You may endure a few rejections, but you’re just one approval away from the cash you need. If you can't get approved now, there are alternatives to consider, including waiting and building credit, borrowing money from a friend or family or even getting a co-signer for the loan.
To find out what your options are, you've got to get out there and submit a few loan applications to see what terms you can get approved for.