Bad Credit Loans: Options and Strategies
Not financial advice. This guide is for information only. It is not a recommendation to borrow, lend, invest or take any financial action. Read the full disclaimer.
Having bad credit does not mean you cannot get a loan.
Bad-credit loans are loans available to borrowers with FICO scores roughly below 640, and the single most important fact about them is that the cost of credit is proportional to the risk the lender is taking. A score in the 560-639 band will typically pay 15-36% APR on a personal loan, versus 8-12% for someone above 720. The strategic goal is not to find the cheapest bad-credit loan — it is to use the smallest, shortest loan you can while repairing the score in parallel, so the expensive loan is a one-time cost rather than a permanent condition.
What 'bad credit' actually costs you
Lenders price on probability of default. The FICO score bands translate into fairly consistent rate spreads across personal loans. Where a prime borrower pays around 10% APR, a subprime borrower pays roughly double to triple. On a $10,000 five-year loan, that spread is not marginal: 10% APR costs about $2,124 in total interest, while 25% APR costs about $7,485. The difference — more than $5,300 — is the price of a low score.
The second cost is availability. Auto loans and mortgages have tiered pricing where a subprime borrower is not rejected but pays a much higher rate. Unsecured personal loans are stricter: below roughly 580, many mainstream lenders decline outright, which pushes borrowers toward payday loans, title loans, and other high-cost products where the cost escalates again.
Secured vs unsecured when your score is low
When your score is low, a secured loan is usually the cheaper route — but only if you can afford to lose the collateral. A car loan secured by the vehicle, or a credit-builder loan secured by a savings deposit, carries a lower rate than an unsecured personal loan because the lender can recover something if you default.
The exception is a credit-builder loan, which is the single most useful product for someone repairing a score. You borrow a small amount (often $300-$1,000) that the lender holds in a locked savings account while you make payments. At the end you receive the savings. You get the on-time payment history without any risk of losing money you already had — the only cost is the interest, which is often zero or near it at credit unions.
Worked example: $8,000 needed at a 590 score
You need $8,000 and your score is 590. Option A: unsecured bad-credit personal loan at 28% APR over 4 years — about $274/month and roughly $5,150 in interest. Option B: you spend three months repairing your score: open a credit-builder loan, pay down a maxed card from 95% to 30% utilisation, and dispute one erroneous collection. Score moves to about 660. The same $8,000 now prices at 17% APR over 4 years — about $231/month and roughly $3,090 in interest.
The three months of work saved about $2,060 in interest and $43/month. That is a return of roughly $687 per month of effort, entirely risk-free. The lesson is not 'wait forever' — it is that a 90-day repair sprint is usually the highest-paid work available to a subprime borrower.
Loan options by credit situation
| Product | Typical score floor | Typical APR | Secured? | Best use |
|---|---|---|---|---|
| Credit-builder loan | None | 0-10% | Yes (savings) | Rebuilding a score |
| Credit union personal loan | ~600 | 10-18% | No | Members with fair credit |
| Secured auto loan | ~500 | 12-20% | Yes (vehicle) | Needed transportation |
| Subprime personal loan | ~560 | 18-36% | No | Genuine emergency |
| Home equity (low score) | ~620 | Varies | Yes (home) | Large, planned expense |
| Title / payday loan | None | 300%+ | Yes/Fee | Avoid — last resort only |
Risks and Points of Caution
- Rate-shopping with multiple full applications within a short window causes repeated hard pulls; keep the window to 14 days so they count as one inquiry.
- Secured loans risk the collateral — default means losing the car or the deposit.
- Some 'credit repair' firms charge upfront fees for work you can do free by disputing errors yourself.
- A cosigner transfers the risk to someone else's credit file and does not build yours meaningfully.
- Paying a high-rate loan on time helps your score, but only if the payment is affordable from the start.
What to do next
Work the repair and the borrowing in parallel rather than sequentially if the need is urgent.
- Pull all three credit reports free at annualcreditreport.com and dispute every error.
- Get every revolving account below 30% utilisation — this is the fastest-moving score factor.
- Open a credit union credit-builder loan and set it to autopay.
- Ask a credit union, not a payday lender, for a personal loan quote.
- Keep rate-shopping for any loan inside a single 14-day window.
- Set every bill to autopay so a single missed payment does not undo months of progress.
Sources and Further Reading
- Credit Reports and ScoresConsumer Financial Protection Bureau
- Free Credit ReportsFederal Trade Commission
- Credit Builder LoansNational Credit Union Administration
Sources were consulted when this guide was last reviewed. Where a figure is a range, it reflects the spread across the sources listed rather than a single quoted number. See our source policy and fact-checking process.
Key Takeaways
- A subprime borrower pays roughly two to three times the APR of a prime borrower on the same loan.
- A 90-day credit repair sprint can save thousands in interest before you borrow.
- Credit-builder loans build payment history with near-zero risk.
- Keep all loan shopping inside a 14-day window to avoid repeated hard pulls.
Frequently Asked Questions
Can I get a loan with a 500 credit score?
Yes, but almost always a secured loan (auto or credit-builder) or a high-cost unsecured loan. Mainstream unsecured lenders typically decline below about 580, so a credit union or a secured product is the realistic path.
How fast can I raise my credit score?
Utilisation changes can show up within one billing cycle — often 20-40 points in 30-60 days if you drop from near-maxed to under 30%. Negative items like collections take longer to age off or be removed.
Does using a cosigner help me build credit?
Marginally. The account appears on your report and on-time payments help, but the primary benefit and primary risk sit with the cosigner. A credit-builder loan is a cleaner way to build your own history.