Bad Credit Loans: What to Expect

Bad credit can limit which loan products are available to you and affect the rates and terms you're offered. If you have a low credit score, you may still qualify for certain loan options, but they often come with higher costs and stricter requirements than loans available to borrowers with stronger credit.

This article covers the types of loans available if you have bad credit, what you can expect in terms of rates, fees and the application process, and steps you can take to improve your chances of approval.

Key points

• Bad credit loans span several product types, with costs, fees, and terms that generally become less favorable as credit scores fall.
• Borrowers should watch for advance-fee loan scams that promise guaranteed approval in exchange for an upfront payment, and should carefully weigh the risks to a co-signer if considering that option to improve approval odds.
• Alternatives like credit-builder loans, and payday alternative loans from credit unions can offer lower-cost ways to access credit or build a payment history without taking on a traditional bad credit loan.

What is a bad credit loan?

A bad credit loan is a loan product marketed to borrowers with low credit scores. FICO® credit scores typically range from 300 to 850, and a lower score generally means it's harder to qualify for credit, with any credit you do qualify for likely carrying higher interest rates. ^[1]

There is no single threshold that defines "bad credit" across the industry, but under FICO Score 8, borrowers are categorized into credit score ranges that include poor (below 580), fair (580 to 669), good (670 to 739), very good (740 to 799) and exceptional (800 to 850). Borrowers in the poor and fair ranges are the group that might be most likely to look for bad credit loan products. ^[1]

Types of bad credit loans

Secured and unsecured personal loans

Personal loans are either secured or unsecured. Secured loans require collateral, such as a vehicle or savings account, which lowers the lender's risk and may result in a lower interest rate. Unsecured loans don't require collateral, but carry more risk for the lender and often come with higher rates. Borrowers with bad credit may find secured loans easier to qualify for, since the collateral offsets some of that risk. ^[3]

Credit builder loans

A credit builder loan is a secured loan designed to help you establish or rebuild credit rather than provide immediate funds. The lender holds the loan amount, typically between $300 and $1,000, in a locked account while you make payments over a set period. Once your term is completed, you receive the funds minus interest and fees, and your payment history would have been reported to the credit bureaus throughout. ^[4]

Payday alternative loans (PALs)

Federal credit unions can offer PALs as a lower-cost alternative to payday loans. The NCUA caps PAL interest at 28% and application fees at $20. PAL I loans range from $200 to $1,000 over one to six months and require at least one month of membership; PAL II loans allow up to $2,000 over one to 12 months with no waiting period. Credit unions can't issue more than one PAL per borrower at a time, or more than three within a rolling six-month period. ^[5]

Rates and terms

Interest rates on loans generally rise as credit scores fall, since lenders use your credit history to assess repayment risk. As of May 2026, the average rate on a 24-month personal loan at commercial banks was 11.86%, according to Federal Reserve data, but this figure reflects an average across all borrowers, and if you have bad credit you can likely expect a rate above this baseline. ^[6]

This pattern is the same across different loan types: borrowers with scores in the 620 to 680 range generally pay the highest rates of those who qualify and have the fewest choices, and may have trouble qualifying for a loan depending on the loan type and lender. ^[7]

Some products build the higher cost of bad credit into a capped structure rather than a market rate. Payday alternative loans offered through federal credit unions, for example, have interest rates capped at 28% by the NCUA, regardless of the borrower's credit score. ^[7]

Loan terms can also differ for borrowers who have bad credit. You may be offered a shorter repayment period, a smaller loan amount, or a requirement to provide collateral, all of which are intended to offset the lender's risk.

Fees and costs

Beyond interest, personal installment loans can carry additional fees that add to the total cost of borrowing. Common fees can include an origination fee, a documentation fee to process paperwork, optional credit or disability insurance, non-filing insurance on secured loans, and late fees. ^[8] You can find the specific fees that apply to your loan in the lender's required disclosures, which you should review before agreeing to the loan.

Some loans may also carry a prepayment penalty, a fee charged if you pay off your loan balance before the end of the loan term. This type of fee most commonly applies to mortgages, though it can also appear in other loan types. ^[9] Not all lenders charge this fee, so it's worth confirming whether your loan includes one before signing.

Fee structures can also be capped by regulation for certain products. Payday alternative loans offered through federal credit unions, for example, limit the application fee to no more than the cost of processing the application, up to $20, in addition to the NCUA's 28% interest rate cap. ^[5]

Applying for bad credit loans

When you apply for a loan, the lender will ask you to submit an application, and before you agree to the loan, you can review the required loan disclosures the lender provides to understand any fees or terms that apply. ^[8]

As part of your application, lenders will generally run a credit check known as a hard inquiry. This differs from a soft inquiry, which may result from things like checking your own credit, or lenders offering you pre-screened promotional offers. Unlike a hard inquiry, a soft inquiry doesn't affect your credit score. ^[10] If you prequalify with a lender before submitting a full application, that step will typically involve only a soft inquiry, while the formal application usually triggers a hard inquiry.

Risks to be aware of

Borrowers with bad credit are a common target for advance-fee loan scams, in which a scammer promises a loan or line of credit regardless of your credit history, then asks for a fee before releasing the funds. According to the FTC, legitimate lenders will not guarantee you a loan or credit before reviewing your application, and any request to pay a fee before a loan is issued, particularly one described as being for "insurance," "processing" or "paperwork," is a sign of a scam. ^[11]

The FTC identifies several other warning signs of an advance-fee loan scam, including advertising that guarantees approval regardless of credit history, offers made through unsolicited calls or texts, and lenders without a verifiable business address or state registration. You can confirm whether a lender is registered to do business in your state by contacting your state attorney general or banking regulator. ^[11]

How to improve your chances of approval

• Check your credit report for errors. The FTC recommends reviewing your credit reports regularly and disputing any inaccurate information, since errors can affect your ability to get credit and the terms you're offered. You can get a free copy of your report from each of the three major credit bureaus through AnnualCreditReport.com. ^[12]
• Reduce your existing debt. Lenders weigh your current obligations against your income when evaluating an application, so paying down revolving balances before you apply may make you a stronger candidate.
• Consider a co-signer. If you're unable to qualify on your own, a co-signer with stronger credit may help you get approved or secure better terms. The FTC notes this is a serious commitment for the other person: a co-signer becomes fully responsible for the debt if you don't pay, the loan can appear on their credit report as their own obligation, and the lender can pursue the co-signer for payment without first attempting to collect from you. Anyone considering this option should understand these risks before agreeing to cosign. ^[13]

Alternatives to bad credit loans

• Credit unions and payday alternative loans (PALs). Federal credit unions can offer PALs capped at 28% interest, giving you a lower-cost option than a traditional payday loan if you need short-term funds. ^[5]
• Secured credit cards. With a secured credit card, you make a refundable deposit that serves as collateral, which typically sets your credit limit. Because the deposit offsets the card issuer's risk, secured cards are generally more accessible to people with limited or poor credit history than unsecured cards. On-time payments are reported to the credit bureaus, and issuers may eventually convert the account to an unsecured credit limit once you've built a positive payment history. ^[14]

Bottom line

If you have bad credit, you still have loan options, but expect higher costs, stricter terms, and more limited choices than borrowers with stronger credit. Comparing loan types, checking your credit report for errors, and looking into alternatives like credit union payday alternative loans or secured credit cards can help you find a more affordable path forward.

Whatever option you choose, review the terms and fees carefully, and watch for advance-fee scams that guarantee approval in exchange for an upfront payment.

Sources

1. CFPB, “What is a Credit Score?” https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-score-en-315/ Accessed July 15, 2026
2. CFPB, “Borrower Risk Profiles” https://www.consumerfinance.gov/data-research/consumer-credit-trends/student-loans/borrower-risk-profiles/ Accessed July 15, 2026
3. CFPB, “Differentiating Between Secured and Unsecured Loans” https://www.consumerfinance.gov/consumer-tools/educator-tools/youth-financial-education/teach/activities/differentiating-secured-unsecured-loans/ Accessed July 15, 2026
4. Federal Reserve, “An Overview of Credit Building Products” https://www.federalreserve.gov/econres/notes/feds-notes/an-overview-of-credit-building-products-20241206.html Accessed July 15, 2026
5. My Credit Union, “Payday Alternative Loans” https://mycreditunion.gov/manage-your-money/consumer-loans-credit-cards/payday-alternative-loans Accessed July 15, 2026
6. St Louis Fed, “Finance Rate on Personal Loans” https://fred.stlouisfed.org/series/TERMCBPER24NS Accessed July 15, 2026
7. CFPB, “Get Your Money Situation in Order” https://www.consumerfinance.gov/owning-a-home/prepare/get-your-money-situation-in-order/ Accessed July 15, 2026
8. CFPB, “Do Personal Installment Loans Have Fees?” https://www.consumerfinance.gov/ask-cfpb/do-personal-installment-loans-have-fees-en-2120/ Accessed July 15, 2026
9. BHG Financial, “Personal Loans With No Prepayment Penalty” https://bhgfinancial.com/personal-loans/personal-loans-with-no-prepayment-penalty Accessed July 15, 2026
10. Experian, “Hard Inquiry Vs Soft Inquiry” https://www.experian.com/blogs/ask-experian/hard-inquiry-vs-soft-inquiry/ Accessed July 15, 2026
11. FTC, “What to Know About Advance Fee Loans” https://consumer.ftc.gov/articles/what-know-about-advance-fee-loans Accessed July 15, 2026
12. FTC, “Disputing Errors on Your Credit Reports” https://consumer.ftc.gov/articles/disputing-errors-your-credit-reports Accessed July 15, 2026
13. FTC, “Cosigning a Loan FAQs” https://consumer.ftc.gov/articles/cosigning-loan-faqs Accessed July 15, 2026
14. Philadelphia Fed, “Secured Credit Cards” https://www.philadelphiafed.org/consumer-finance/payment-systems/secured-credit-cards Accessed July 15, 2026

About the author

Becca has over 10 years of experience as a content writer, working across various industries including finance, digital marketing, education, travel, and technology. Her work has been featured in publications including Forbes, Business Insider, AOL, Yahoo, GOBankingRates, and more.