Alternatives To Bad Credit Loans

ArtistGNDphotography/Getty Images

When you need cash in a hurry, it can be tempting to consider bad credit loans — personal loans available to people with poor or little credit history. These loans are convenient because they are accessible to most people without requiring a credit check. However, there is a trade-off to these loans: high interest rates that will likely lead to more expenses for you in the long term.

Before exposing yourself to bad credit loan risks, it’s worth exploring your alternatives. If possible, it’s best to exhaust these options before pursuing a high-interest loan. The alternatives present better options — lower interest rates, less strict repayment plans, and less risk of long-term financial challenges.

One of the ways that you can get better terms on a loan is by improving your credit score. Doing this opens up the possibility of securing a personal loan that has lower APR and a longer repayment period, as well as more flexibility when it comes to things like your monthly payment date.

This option can easier said than done, and it does require some time for your actions to reflect in your credit score. But if you have the time and ability, these are the best ways to raise your credit score quickly:

  • Get a secured credit card: If you have some cash available, consider using it to get a secured credit card. Your own money backs secured cards, so if you don’t make a payment, you don’t owe interest — you pay it off with your initial deposit. When you make payments on time, they are reported to the credit bureaus and improve your credit score.
  • Pay credit balances: This might seem counter-intuitive for someone who needs immediate cash, but paying down your balances to lower your debt utilization has a high impact on your credit score. Pay off your balances strategically by getting your debt utilization below 30%.
  • Request higher credit limits: Another way to improve your debt utilization is by upping your available limit. Contact your credit card issuer and ask if they will raise your credit limit — though make sure you ask if they will require a hard inquiry, as that will temporarily lower your score.
  • Dispute credit history errors: It’s quite common for a credit report to contain incorrect information thay hurts your score. Request a free credit report, look for any mistake, and ask the credit bureau to correct the error.
  • Get credit for monthly expenses: Some services like Experian Boost will consider your monthly payments when calculating your credit score. That includes rent, utilities, and cable bills. Making consistent payments on time can help boost your score with these services.

The best way to avoid relying on bad credit loans is by generating extra income, if possible. In most cases, this requires both time and effort. However, there are opportunities available through the gig economy that could allow you to generate additional income.

If you have a car, consider driving for a company like Uber or Lyft. if you are crafty, consider launching an Etsy store. If you have property, you can try to rent it to turn it into additional income. Consider making donations of blood or plasma. Try selling products, furniture, appliances or clothes you no longer need.

All of these solutions will require time to start producing returns, so know that you may have to wait to see results.

The prospect of asking loved ones for money can be scary, but it can also be the best option for you financially. There is pressure to repay the loan based on maintaining your relationship with the person or persons who lend to you, but the terms are likely to be way more friendly than a bad credit loan.

Know that you aren’t alone in this, too — more than 10% of American adults borrow from loved ones. Financial struggles affect many people, and your friends and family will likely understand your challenges the most. Even if they can’t help directly, they may be able to support you in another way once they understand your struggle.

Some financial institutions are willing to look past credit score and consider other factors beyond just credit history when making decisions on who to lend money to. Online lenders will often look at your bank statements and paystubs to confirm that you have income available and would be able to pay off the loan, even if your credit score is less than perfect.

Make sure you look at the terms of these loans, as they may still have steep interest rates or restrictions. But these loans are often much better than traditional bad credit loan options.

Credit unions may offer more friendly terms than a traditional lender and sometimes consider factors outside credit score and history when considering a borrower. Credit union loans are typically for smaller amounts but are worth considering to cover some of your expenses.

While it’s not an ideal solution, you might be able to pay some of your imminent bills by securing a credit card. A credit card will carry an interest rate higher than most personal loans. However, the rates can still be significantly better than those made available by lenders that offer bad credit loan options.

If you have a home or property that you have made payments on, you can take out a loan or a line of credit that allows you to turn your equity into cash. In the case of both a home equity loan and a home equity line of credit (HELOC), you will have to refinance your mortgage, but this will allow you to access cash.

A home equity loan will be paid out in a lump sum, whereas HELOC operates more like a credit card, giving you money on an as-needed basis. You will have to pay closing costs from refinancing, but it is an option to get access to money faster.

Bottom line

Bad credit loans can offer short-term financial support but are one of the easiest ways to get trapped in a cycle of debt that can become increasingly difficult to break. If you can avoid this option, you should do so.

There are ways to secure money that is not reliant on your credit score and likely will not carry the same onerous terms as the average bad credit loan. Make sure you explore your options before seeking a bad credit loan.