June 16, 2024

Plattform/ Getty Images; Image by Austin Courregé/Bankrate

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Essential points

  • Loans meant for people with poor credit typically attract higher interest rates and fees as opposed to conventional loans.
  • Even borrowers with imperfect credit can avail payday-alternative loans or credit card cash advances as options for emergency loans.
  • Despite being an alternative, payday and title loans often turn out to be exploitative, with exorbitant interest rates and therefore, should be bypassed whenever feasible.

When unforeseen circumstances arise and your savings are insufficient to bear the expenditures, borrowing money becomes inevitable. Yet, if your creditworthiness is not up to par, you would have to eradicate traditional personal loans from your options.

Although loans for bad credit are not absent, they come attached with stiffer interest rates and fees than other loans. Remember to weigh the advantages and disadvantages of each option before carrying out the application process, in order to preclude further financial complications.

Different forms of emergency loans for poor credit

Typically, emergency loans for bad credit bear more substantial interest rates and offer restricted limits. Short-term repayment schedules are generally the norm, with some rare exceptions.

Loan type
Loan amount
Repayment term
APR
Ideal for

Payday-alternative loan
Up to $2,000
1-12 months
Up to 28%
Members of credit unions who need a small loan amount in a hurry.

Credit card cash advance
20 to 30 percent of the available credit limit
Until balance is settled
Around 30%
Cardholders in urgent need of cash who can afford to quickly settle their balance.

Payday loan
Up to $500
15-30 days
Starting at 390%
Borrowers who are unable to procure a loan elsewhere and are certain they can repay swiftly.

Title loan
25 to 50 percent of your vehicle’s value
2-4 weeks
Approximately 300%
Borrowers urgently requiring funds who have exhausted all other money-borrowing options.

1. Payday-alternative loan

Certain federal credit unions provide payday alternative loans, permitting borrowing of amounts up to $2,000. These unsecured loans feature repayment terms spanning from one month to a year. Even though acquiring them might be less challenging than standard personal loans, borrowers still have to clear a credit check for approval.

Given that interest rates hinge on your credit score, those with inferior credit scores tend to draw higher rates. However, these loans limit the interest at 28 percent, which is lesser than certain credit cards and a majority of other emergency loans. Keep in mind that to be eligible for application, you have to be part of credit union rendering these loans.

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Advantages

  • Considering payday loans, interest rates are more favorable.
  • Application fee does not surpass $20.

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Disadvantages

  • Mandatory membership in a credit union.
  • Loan amounts offered are limited.

Ideal for

Credit union members with comparatively lower credit ratings who are in need of a small loan and are unable to secure a personal loan with competitive terms elsewhere.

2. Credit card cash advance

Certain credit cards incorporate a cash advance feature, allowing you to draw funds from your line of credit. You can either visit an ATM or bank branch to withdraw the required funds that do not exceed the cash advance limit or the available credit on your card, based on the specific card issuer’s protocol.

Card issuers levy a transaction fee for using this service, generally ranging between 3 and 5 percent. Moreover, the funds borrowed begin to accrue interest immediately since there is no grace period. Credit card cash advances are typically capped at 20 to 30 percent of your accessible credit limit.

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Advantages

  • Prompt availability of cash.
  • Absence of application process or credit check requirement.

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Disadvantages

  • Charge for cash advance.
  • Inflated APR and nonexistence of a grace period.

Ideal for

Cardholders with accessible credit in dire need of a small sum of cash, who have the ability to repay the balance promptly.

3. Payday loan

Payday loans are unsecured, short-term loans that offer immediate funding. The cap is generally set at $500 and due by your forthcoming payday, which is usually after two weeks.

Payday loans don’t usually require a credit check to get approved, making them easily attainable for borrowers with poor credit. However, lenders impose steep interest rates for these loans, and repayment is often facilitated by ACH withdrawal. If there are insufficient funds when the loan is due, the borrower may have to face banking charges. Although it might be possible to obtain an extension on your due date provided you live in a state with allowances for roll-overs,

Nevertheless, these types of loans often come with a hefty cost that may land you in a relentless debt loop.

There are states that have totally prohibited payday loans, while others have instituted lending regulations that establish caps on interest rates and charges.

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Advantages

  • No requirement for credit verification.
  • Availability of funds sometimes as quickly as a few hours.

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Disadvantages

  • Some loans have interest rates in the triple digits.
  • Heavy fees are attached to rollovers.
  • Generally, they don’t aid in building credit.

Best suited for whom

These are ideal for individuals who have no other alternatives and are sure they can pay back the loan by the stipulated due date.

4. Title loan

Title loans are protected loans which require you to surrender your vehicle’s title as security in return for cash. Most lenders permit you to borrow anywhere from 25 to 50 percent of your vehicle’s worth.

Just like payday loans, title loans should be viewed as a last-ditch effort due to a host of reasons. You face the risk of losing your vehicle if you fail to meet the loan payments. These loans attract high-interest rates, plus there are short repayment periods that can put a squeeze on your budget if the monthly repayment is hefty.

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Advantages

  • Funds could be available on the same day.
  • Oftentimes, no credit verification is needed.

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Disadvantages

  • Potential risk of repossession.
  • High borrowing expenses.
  • Does not help in building credit history.

Best suited for whom

This is ideal for individuals who are left with no other choices but to get the cash they need urgently.

Utilising Non-loan alternatives for poor credit

If a financial emergency arises and you prefer not to use credit as a solution, you might want to consider these non-loan alternatives:

  • Look into charity or local nonprofit support: Dial 211 for more information about financial help in your local area or through your state.
  • Ask for an advance on your paycheck: If you have a long tenure at your job, inquire to your employer about receiving an advance on your upcoming paycheck.
  • Seek a loan from a friend or family member: They may agree to lend you money interest-free, but always make sure to document the agreement.
  • Negotiate payment arrangements: If you need rapid cash to meet monthly debt obligations, reach out to the lender or creditor and request for a payment extension.
  • Borrow from your 401(k): Certain 401(k) plans allow for loans upto $50,000 or 50 percent of the vested balance — whichever is lesser — and the interest you shell out goes back into your account. Do note, this route could affect your retirement savings when there is a major tax deduction upon drawing from your 401(k).

Avoiding bad credit loan scams

Financial emergencies are often stressful and overwhelming. Unfortunately, scammers often take advantage of consumers by offering false or predatory loan products, which can lead to further financial distress. To avoid falling prey to such schemes, it’s crucial to take the time to evaluate your options.

Moreover, it’s important to meticulously research the lenders on your list. An online search will help you understand their reputation better, and you can check their status on the Better Business Bureau’s website before applying.