Quick Answer
Types of personal loans for bad credit include personal installment loans, personal lines of credit, Payday Alternative Loans (PALs), payday loans and title loans. Each option has different eligibility requirements, costs and repayment terms, so compare them carefully before borrowing.
If you have bad credit and need to cover an emergency expense, a personal loan may be one borrowing option to consider. Before you apply, it’s important to understand the different types of personal loans and how they work.
Not all personal loans are the same. Some give you a lump sum of money, while others let you borrow only what you need over time. Learning about the different types of personal loans can help you compare your options and choose the one that best fits your budget and financial goals.
5 types of personal loans for bad credit.
There are many types of personal loans, and each is designed for a different borrowing need. Common options include personal installment loans, personal lines of credit, employer salary advances, cash advance apps, credit card cash advances, Payday Alternative Loans (PALs), payday loans and title loans.
Understanding how each one works can help you choose the loan that best fits your financial situation.
1. Personal Installment Loans
A personal installment loan gives you the full loan amount upfront. You repay it through regular monthly payments over a set loan term.
Many installment loans have fixed interest rates, which means your monthly payment stays the same from the first payment to the last. These are also called fixed-rate loans. Because your payment doesn’t change, they can make budgeting easier.
Installment loans may be used for larger, one-time expenses such as debt consolidation, home improvement projects or purchasing a vehicle.
2. Personal Lines of Credit
A personal line of credit works differently than an installment loan. Instead of receiving one lump sum, you are approved for a credit limit and can borrow from it as needed.
You usually pay interest only on the amount you borrow. As you repay your balance, those funds may become available again.
Some personal lines of credit have variable interest rates, meaning your payment may change if market conditions cause interest rates to rise or fall. Variable-rate personal loans also have interest rates that can change over time, depending on the loan terms.
A personal line of credit may be a good option if your costs are spread out over time or you aren’t sure exactly how much you’ll need to borrow.
3. Payday Alternative Loans (PALs)
Some federal credit unions offer Payday Alternative Loans (PALs) as a lower-cost option than traditional payday loans.
PALs usually have lower interest rates, smaller loan amounts and longer repayment terms than payday loans. You generally must become a member of the credit union before you can apply.
These loans may be worth considering if you need a small amount of money and qualify through a participating credit union.
4. Payday Loans
Payday loans are short-term loans that are usually due on your next payday. They can provide quick access to cash, but they often come with high fees and short repayment periods.
If you can’t repay the loan on time, you may have to pay additional fees or borrow again to cover the balance. This can increase the total cost of borrowing. Before choosing a payday loan, compare other loan options that may offer lower costs and more flexible repayment terms.
5. Title Loans
Title loans are secured loans that use your vehicle as collateral. If you’re approved, your vehicle serves as collateral for the loan until the loan is repaid.
Because your vehicle serves as collateral, the lender may have the right to repossess it if you don’t repay the loan according to the loan agreement.
Title loans also tend to have high interest rates and short repayment terms, making them a risky option.
What is a personal loan?
A personal loan lets you borrow money from a lender and repay it over time. Your loan agreement outlines the amount you borrow, your interest rate, repayment terms and any scheduled payments.
Personal loans are often used for:
- Debt consolidation
- Home improvement projects or home renovations
- Vehicle repairs or auto loans
- Emergency expenses
- Major purchases
Secured personal loans require you to pledge an asset as collateral. Depending on the lender and loan type, this could be a savings account backed by a certificate of deposit, a vehicle or another valuable asset. If you don’t repay the loan according to the loan agreement, the lender may be able to take the collateral.
Unsecured personal loans don’t require collateral. Instead, lenders decide whether to approve your application based on factors such as your credit score, credit history, income, debt-to-income ratio (DTI) and overall creditworthiness.
How to choose the right type of personal loan.
Choosing the right type of personal loan starts with understanding your financial needs and comparing your borrowing options. Consider how much you need to borrow, what monthly payment fits your budget and how long you’ll need to repay the loan before deciding which type of personal loan is right for you.
As you compare lenders, pay attention to:
- The loan amount and whether it covers your needs.
- The APR, interest rate and any origination fee or prepayment penalties.
- The loan term, repayment terms and estimated monthly payment.
- Whether the loan is secured or unsecured and if a co-signer or co-borrower could help you qualify.
You may also want to compare offers from banks, credit unions and online lenders. Some lenders let you check your eligibility with a soft credit check before you apply, making it easier to shop around without affecting your credit score.
As you compare loan options, make sure you understand the terms before you borrow. The Consumer Financial Protection Bureau (CFPB) also offers educational resources about personal loans, borrowing and your rights as a consumer.
How personal loan interest and fees work.
Personal loan interest and fees determine the total cost of borrowing money. In addition to the interest rate, some lenders charge fees that increase the amount you’ll repay over the life of the loan. Understanding these costs can help you compare loan offers and choose the option that best fits your budget.
The annual percentage rate (APR) combines the interest rate with certain loan costs, making it useful for comparing loan offers. You should also review the loan agreement for fees such as origination fees, late payment fees and any prepayment penalties.
Keep in mind that a longer loan term may lower your monthly payment, but it can also increase the total amount of interest you pay over time.
How personal loans affect your credit.
A personal loan can affect your credit in several ways. Some lenders perform a hard credit inquiry when you apply, which may temporarily lower your credit score. Others let you check your eligibility with a soft credit check first.
If your lender reports to the major credit bureaus, making your monthly payments on time can help build positive credit history. Missing payments, however, may hurt your credit score and stay on your credit report for years.
Taking on more debt can also affect your debt-to-income ratio (DTI), which some lenders review when you apply for future credit. Borrowing only what you need and making payments on time can help you manage your credit responsibly.
The Federal Reserve publishes data on consumer borrowing trends, including how Americans use different types of credit over time. While those trends don’t determine whether a loan is right for you, they can provide helpful context as you research your borrowing options.
Final Thoughts
There are many types of personal loans, and each one is designed for a different borrowing need. An installment loan may work well if you know exactly how much you need to borrow and want fixed monthly payments. A personal line of credit may offer more flexibility if your expenses happen over time. Other options, such as Payday Alternative Loans, payday loans and title loans, have different costs and risks that are important to understand before you borrow.
No matter which loan you choose, compare loan amounts, APRs, repayment terms, fees and eligibility requirements from multiple lenders. Taking the time to review your options can help you choose a borrowing option that fits your budget and financial goals.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
