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Personal Loans for People with Bad Credit

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Unless you're a multi-millionaire, you could very well find yourself in a position where you may need a quick, easy loan to relieve a financially challenging situation. Consumers in this situation who have good credit can seek a conventional personal loan as a solution. But if you have little to no credit history, or if your credit history has been marred by non-payments or a recent bankruptcy, it can be difficult to secure a conventional personal loan through regular lenders or banks. In this scenario, it may be necessary to secure a personal loan designed for consumers with bad credit.

What is an Personal Loan?

Unlike a secured loan, which uses a piece of property as collateral, a conventional personal loan is unsecured and relies on evidence of good credit and your good word verified by a signature on a piece of paper - which is why it is also known as a "signature loan".

Personal loans can be used for any reason, such as to pay student tuition or medical bills, finance an investment, or even to start a new business. They are useful in situations where there is an immediate need for cash and you know you'll be able to repay the loan in a reasonable amount of time.

Conventional unsecured personal loans are subject to higher interest rates than secured loans, because there is more risk involved for the bank or lending institution if you default on repayment of the debt. This type of loan is also highly dependent on a good credit standing, making it almost impossible for someone with a bad credit history to get a conventional personal loan.

Personal Loans for People With Bad Credit

If a consumer with a poor credit history can't get a personal loan from a bank or conventional lender, where can they turn? There are special lenders and financial institutions that offer loans specifically to people who have experienced credit problems.

There are several types of bad credit personal loans. These range from short-term, very high interest "payday loans" and cash advances to longer-term personal loans from lenders who are willing to take a risk on someone with questionable credit.

Payday loans have some of the highest interest rates in the industry, but even the longer-term loans from bad credit lenders charge more interest than a loan from a conventional banker - meaning you'll pay considerably more for their services than you would for a conventional personal loan from a bank. Some banks are willing to give personal loans to people with bad credit if they can put up collateral - such as a car or other property - to secure the loan.

When to use a Bad Credit Personal Loan

Bad credit loans are useful in situations where you need to get money quickly and easily, but they come at a steep price. Payday loans are easy to get - usually only requiring that you have a stable job and a bank account - but they can charge as much as 30% for a week-long loan of $100-$1,500. That's equivalent to a 1500% annual APR, a huge cost to pay for a quick advance on your paycheck. In some regions, there is a limit on the amount of interest rates on payday loans, while some states outlaw this kind of loan entirely.

Bad credit loans from banks are a better option, but even they can charge high interest rates and may require collateral. If you don't keep up with your loan payments, the bank can potentially claim your car or other property. Some bad credit lenders charge a fee to repay the loan early, as well as requiring all the interest that would have been incurred if the loan had been repaid as scheduled.

Finally, anyone with poor credit who is considering a personal loan should be wary of scammers looking to take advantage of people struggling to overcome financial obstacles. If a lender requires a fee to process an application or asks for an upfront payment before granting you a loan, move on to another provider.

Bad credit personal loans are usually best for short-term needs. They are useful for paying a credit card bill or utility bill a few days before your paycheck will arrive or to cover dental or medical bills that the insurance company will eventually reimburse. However, they are not ideal for long-term borrowing or as a way to consolidate other debts.