You may feel like you have no options for personal loans because you have bad credit, but that’s not true. In fact, there are six types of personal loans that you can get if you have bad credit. You’ll need to understand the difference between these types of loans so that you know which one is right for you.
What are the 6 Types of Personal Loans
- Unsecured personal loans
- Secured personal loans
- Variable interest personal loans
- Fixed-rate personal loans
- Personal lines of credit
- Debt consolidation loans
A personal loan is a line of credit that you will receive from a financial lender such as a bank or credit union. Personal loans typically have an interest rate between 5% and 35%, depending on how bad your credit score is. Personal loans are great for debt consolidation or paying for unforeseen emergencies.
If you’re unsure of which personal loan is right for you, we’ll explain these types of personal loans in detail below.
1. Unsecured Personal Loans
Unsecured personal loans don’t require collateral, and you can use them for a variety of reasons. These loans typically require a good credit score and creditworthiness. If you have a bad credit score, an unsecured personal loan may not be an option.
Unsecured personal loan terms and interest rates:
- 5% to 35% interest rates (depending on credit score)
- Repayment terms from 1 to 7 years
2. Secured Personal Loans
Secured personal loans require you to offer the bank the item that you are financing as collateral to secure the loan. It reassures the bank that you will make your payments on time; otherwise, the bank can seize the item if you fail to make payments.
Secured personal loans are a great option for those who have bad credit because they don’t require a good credit score to be approved. You can have bad credit and still get approved by offering the item as collateral for the loan.
Secured personal loan terms and interest rates:
- Lower interest rates between 2% and 15% depending on credit score
- Repayment terms from 6 months to 60 months
3. Variable Interest Personal Loans
Any time you take out a variable interest loan, your monthly payment can change. A variable interest loan means the interest you pay each month can change, depending on the market. If the market interest rates increase, your interest rate will also increase, causing your monthly payment to go up. If the market rates decrease, your interest rate will also decrease, causing your monthly payment to decrease.
Variable interest personal loan terms and interest rates:
- Low starting interest rate
- The interest rate will change according to the market
- Terms up to 10 years
4. Fixed-Rate Personal Loans
Most personal loans are fixed-rate loans. Fixed-rate loans are ideal for borrowers because there is no uncertainty about what your monthly payment will be. Your monthly payment is based on the principal amount of the loan and the fixed interest rate of the loan. Fixed-rate personal loans may have higher interest rates than other types of personal loans, but they have high approval odds for those with bad credit.
Fixed-rate personal loan terms and interest rates:
- Higher interest rates
- Same interest rate and monthly payment each month
- Flexible term limits
5. Personal Lines of Credit
When you apply for a personal line of credit, the lender will consider your income, credit score, and debt before you are approved. If approved, the personal line of credit will give you many available funds up to a certain amount, with the maximum amount being around $100,000. A personal line of credit doesn’t have a fixed number of payments. You only have to pay back the amount you borrow plus interest.
The terms and interest rate for the personal line of credit depends on your credit score. Typically, personal lines of credit only get approval for borrowers who have a good credit score of 680 or higher, but in some instances, a personal line of credit is approved for those with bad credit.
Always check with your financial institute and review their requirements for personal lines of credit. If you know that you don’t meet the minimum requirements to be approved for a personal line of credit, applying for another personal loan for your situation is an option.
6. Debt Consolidation Loans
Many people have bad credit because of numerous types of debt, which may be from multiple credit cards, medical bills, or loans taken over some time. A debt consolidation loan will combine all of the debt from your credit cards, loans, and medical bills into one monthly payment.
Debt consolidation loans have high approval ratings for those with bad credit because lenders understand that debt consolidation loans are often the best method to get back on track.
Debt consolidation loan terms and limits will vary, but they typically have lower interest rates than your current credit cards or loans.
Why You Should Consider a Personal Loan
You should consider a personal loan to consolidate your credit card debt to one easy monthly payment. Multiple credit cards with high-interest rates can cost you money over time, but consolidating the debt into one monthly payment with a lower interest rate can help you save money. You may also want to consider a personal loan if you need to prepare for an emergency or if it will enable you to lower your interest rates and payments to get out of debt faster.
Personal loans are different from credit cards because they are not a revolving debt. Once you have paid the personal loan in full, the loan is closed, unlike a credit card, where you can continue using the credit limit available each month until you close the account.
If you have bad credit and need a personal loan, you may be able to consider any of these six options. You should contact your bank to discuss the options best for you with the credit score you have. If you have bad credit and need a personal loan, you should consider a fixed-rate personal loan so you know what your monthly payment will be each month.