6 Red Flags to Look Out for with Bad Credit Loans

Unfortunately, taking out bad credit loans can be a recipe for disaster. A $12,000, 29.99% APR loan on a two-year repayment term could wreak havoc on monthly budgeting, forcing debt-to-income ratios north of 50% with consecutive overdraft fees knocking you into a negative balance.

First of all, know that bad credit loans are not payday loans. Payday loans are expensive. And these days there are much better options. There are better payday loans for bad credit alternatives that you can get.

Fortunately, navigating the large payday loan minefield is easy with a little leg work. This article covers bad credit loans and ways to recognize red flags, such as exorbitant interest rates and predatory lending practices, empowering you to make better financial decisions. In it, we’ll also review interesting loan statistics and find answers to the most frequently asked questions about bad credit loans. 

What Are Bad Credit Loans?

Bad credit loans represent one of the most convenient sources of emergency cash for individuals with limited to no credit history. These loans carry higher-than-average interest rates, reaching up to 35.99% APR. Repayment periods span from a few weeks to several months, offering flexibility for smaller or larger purposes. Among the various bad credit loan types available, borrowers can choose from payday loans, installment loans, and/or personal loans for bad credit. 

One of the biggest draws of bad credit loans is their easy approval criteria. Instead of relying on a traditional credit score, bad credit lenders assess your ability to repay by verifying your income and debt-to-income ratio (DTI). This ratio is calculated by dividing your total monthly debt payments by your gross monthly income. Typically, a minimum of $800 monthly and a ratio No greater than 40% is required.

Another important factor in the approval process is your employment record. A common requirement is at least three consecutive months of full or part-time employment. These criteria make bad credit loans accessible to a broader range of individuals, offering a potential financial solution for those facing credit challenges. 

One of the best things about bad credit loans is that most are unsecured, meaning no collateral is required (e.g., a vehicle or piece of jewelry). As a result, expect higher-than-average interest rates and shorter repayment terms to compensate lenders for the increased borrowing risk. 

Despite this, bad credit loans are an excellent opportunity to obtain quick and emergency cash to pay off life’s unexpected expenses — everything from broken window shutters to cover three consecutive overdraft fees on a negative account balance. 

Bad Credit Loan Example

To better illustrate the cost of borrowing with any bad credit loan, consider the example of a $17,000, 3-year term loan with a 29% APR. After the end of the term, the estimated cost of borrowing will be $31,790, of which $14.790 belongs to interest charges. 

With interest charges alone being nearly the same as the principal, we recommend boosting your credit score before any loan application. Even a quick 50 to 100-point boost can pay immediate dividends, making you eligible for APRs in the 18% to 21% range rather than 31% to 35.99%. It can be as easy as negotiating your credit limit with issuers to lower your utilization ratio or paying off a small outstanding balance and bringing your overall utilization ratio down naturally. 

Common Pitfalls of Bad Credit Loans

Here are common pitfalls of bad credit loans to look out for:

Predatory Lending Practices

Unfortunately, the bad credit loan industry is rife with predatory lending practices that exploit vulnerable borrowers, subjecting them to excessive interest rates, hidden charges, and renewal fees as high as $49 for an additional two weeks to repay—a barely sufficient amount to pay off the loan in full on time 

Additionally, unscrupulous lenders promote aggressive collection practices with late-night phone calls and other threatening communication. 

Fortunately, there are many ways to vet direct lenders, such as scouring third-party reviews (preferably TristPilot and the Better Business Bureau) and conducting safe checks, such as the existence of SSL encryption and HTTPS protocol, which prevents phishing and other identity theft scams. 

Impact on Credit Score

Unfortunately, bad credit loans could open up a number of late/missed payments, high number of  new inquiries, high utilization, and other damaging marks on your score. Even a single late payment could drop your score by 50+ points, disqualifying you from sub-15 % interest rates.

Ensure an established repayment plan is in place before signing any loan agreement. Whether applying the avalanche or snowball method or even prioritizing debt consolidation, any strategy could work over the long term. 

Limited Financial Education

Compared to banks and credit unions, bad credit lenders usually do not promote financial literacy with online resources and educational programs, including direct lines to credit counselors and other financial professionals. This is in the name of a profit-driven approach prioritizing profits over  consumer education. 

For example, Alliant Credit Union, one of the country’s largest digital-only credit unions, has an extensive resource section and blog that covers useful financial topics from how to make New Year’s resolutions to the advantages of banking with credit unions. 

Another strong example belongs to Navy Federal Credit Union, one of the leading financial institutions for current and former military personnel, which hosts a robust financial education hub with hundreds of articles and tools on popular financial wellness topics, such as investing, home ownership, auto, and business loans. It could even cover military-specific topics like the blended retirement system. 

For more information on Navy Federal Credit Union Financial Resources, visit Navy Federal Credit Union – Making Cents – Smart Money Strategies.

Less Favorable Terms

Unfortunately, bad credit borrowers see slightly elevated terms such as higher APRs (up to 35.99%) and repayment terms of as little as two weeks. All of them can contribute towards higher monthly payments, making it easy for undisciplined borrowers to enter a debt cycle if they are not careful. 

Hidden Fees

One of the main drawbacks of bad credit loans is their propensity for hidden fees. It would help if you vetted legitimate lenders to avoid unforeseen costs, e.g., origination and prepayment penalties designed to break the bank. When reviewing any loan agreement, carefully review the fine print and reread website disclaimers citing implications of non-payment, fee structure, and other items that better illustrate the total cost of borrowing. 

According to Lending Tree, the average personal loan per borrower is higher than $11,000 (as of Q3 2023), making thorough checks for hidden fees, charges, and non-payment implications all the more wise and eat.

Poorly Written Disclaimers

Lenders have no greater opportunity to demonstrate transparency with well-written and clear disclaimers that call out many things you should know. Everything about the loan should be clearly stated, such as fees, charges, repayment options, grace periods, cancellation policies, and even privacy and security measures that let borrowers know how their information is being used. 

Other items disclaimers may call out include regulatory compliance and consequences of non or late payment, including all actions lenders will take to recover our portion of their costs, including potential lawsuits. 

Lastly, remember to check for actual physical addresses. No longer do you need to check for a physical address within the disclaimer, but we recommend entering it into Google to ensure it’s not a virtual PO box or other non-physical address. 

Lack of Reviews

Unfortunately, many bad credit lenders are new to the scene and have not amassed a sufficient number of reviews for new prospects to consider them, nor does word of mouth often recommend them. Avoid direct lenders needing more visibility into Trustpilot, Better Business Bureau, and other third-party review sites that lend credibility. 

Lack of Forbearance/Hardship Programs

One thing bad credit lenders are not known for is forbearance or hardship programs that allow you to enjoy debt relief and support, such as reduced monthly payments, temporary pauses, or even interest rate reductions. Sometimes, forbearance options are an excellent source of short-term relief,  allowing you to get back on your feet with any loan. 

Banks and credit unions have a much higher chance of offering these programs.

By examining the common pitfalls of bad credit loans, you’ll be better prepared to fully understand any loan agreement and its rates and terms to minimize your chances of falling into a debt cycle. 

Frequently Asked Questions 

How do bad credit loans work?

As with all loans, bad credit loans begin with an initial credit assessment using income, employment history, and the borrower’s ability to repay. Depending on the findings, each direct lender issues a formal loan offer with an actual amount, interest rate, and terms.

Loan referral services such as MoneyMutual and FundsJoy work as third-party platforms with a network of hundreds of participating direct lenders matched to individual borrower profiles. All you need to do is submit a loan application complete with personal and financial details, such as your income, name of employer, and banking routing and account number. 

As for approval and funding, funds are deposited directly into a borrower’s bank account as early as the next business day, with the approved amount based on the lender’s underwriting guidelines. From there, borrowers agree to adhere to a repayment schedule, with funds due as early as the borrower’s next payday or on a monthly repayment schedule over a few months or years. 

In short, bad credit loans with sub 35.99% APRs, flexible repayment terms, and no predatory finance charges are available for the taking, just as long as you perform the necessary research.

How do bad credit loans impact credit scores?

Bad credit loans can impact credit scores in various ways. 

Understanding that FICO utilizes payment history, utilization ratio, credit mix, and new lines of credit as grading factors is crucial. Any late or missed payment, an unusually high credit utilization ratio, a lack of a credit mix, or opening too many new lines of credit within a short window can lead to lower scores. 

What’s the most accessible loan to get with bad credit?

The most accessible loans to get with bad credit are payday, auto title, and pawnshop loans.

However, all three carry exorbitantly high APRs (300%+) with ultra-short repayment terms, excessive hidden fees and penalties, and optional origination, prepayment, and extension fees. The latter two are secured loans, meaning borrowers must put up collateral. 

According to Credible, pawnshop loans disburse anywhere from 25% to 60% of the item’s value. A second source, the National Pawnbrokers Association, states that roughly 30 million people use pawn shops every year to take out loans, with an average value of $150 as early as June 2022. The industry is so healthy, publicly traded pawn shop company EZCORP Inc. even called out its record high $204.2 million in total value with a 24% jump in total revenue and a 20% jump in gross profit. 

No wonder these are the most straightforward loans to get!

Why is an APR when considering a bad credit loan?

APRs are the end-all,vbe-all in determining the total cost of borrowing for any loan. It includes the interest rate and all applicable finance charges, including origination or prepayment penalties often viewed as hidden costs. Not only do APRs allow you to make better decisions, but they also help promote transparency and help borrowers best compare and contrast two of the same type of loan (e.g., payday loan or personal loan for bad credit) 


In short, navigating the complex world of bad credit loans does not have to be complicated. Understand the six common pitfalls to absorb all potential risks from exorbitant interest rates to hidden fees/charges, allowing you to make informed lending decisions and prioritize responsible borrowing for the short, medium, and long term. 


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