For anyone looking to take out a loan, it is important to understand options—and even those with a substandard credit score have them. A bad credit loan is one such option for those who need cash, but are lacking in credit.

What is a Bad Credit Loan?

A bad credit loan is a type of personal loan offered to borrowers with a low FICO score (anything below 630 is considered a “bad” score). There are different types of bad credit loans offered by numerous financial institutions, including banks, online lenders, and credit unions, amongst others.

Bad credit loans are generally expensive as borrowers with weak credit will be charged higher interest rates than those with good credit. If you have bad credit, you are viewed as high risk for lenders because it means you have a history of late or missing payments on your debts. Charging higher interest rates allows lenders to offset the possibility of borrowers defaulting, and actually make money on high-risk lending arrangements.

Unsecured and Secured Bad Credit Loans

All bad credit loans fall under one of two basic categories: unsecured and secured. For an unsecured bad credit loan, a borrower must repay the loan according to contractual terms and conditions. Should they fail to do so, the lender can use a collections agency or other legal action to obtain the money owed. Unsecured bad credit loans include credit cards, personal installment loans, and student loans.

For secured loans, a borrower will use an item that can be readily converted into cash—a home, a car, or a piece of jewelry—as collateral in order to “secure” the loan. If the borrower defaults on the loan, the lender can legally seize this item and sell it to recover their losses. Secured bad credit loans include car title loans, mortgages, and pawnshop loans.

Legitimate Lenders

While quick cash without a credit check might sound appealing, the catch can come by way of short loan terms, debt rollover, and lofty annual percentage rates (APRs). The safe and smart way to obtain a bad credit loan begins by finding a responsible, legitimate lender.

A bad credit loan is a viable option for those who have weak, bad, or non-existent credit and need money now. To learn more about loan options, and to further improve your financial education, check out today.