Whether the month lasts longer than your pay cheque does or a sudden emergency expense pops up, sometimes you may need a small loan for extra cash.
The good news is that there are plenty of options for small loans with bad credit. The bad news is that many of these loans are financially risky and can put you in a worse position than when you started.
That’s why you need to be strategic about getting a loan if you have bad credit. We’ll review some options and what financial terms and fees you should be aware of.
Loans to avoid if possible
Here are some common types of loans for people with bad credit, and why you may want to think twice before signing on the dotted line.
Payday loans
It might be tempting to go to a payday lender. After all, you can get your money immediately.
Payday loans are short-term loans that typically range from £50 to £1,000 and are usually due on your next payday. You’ll often hear of them as a way to bridge a financial gap until you get paid again.
Payday loans may be easily available, but you may want to be careful about taking one out. Their interest rates tend to be much higher than other forms of credit. And according to Experian, it’s not uncommon for them to have an APR of 1,500%.
Logbook loans
Like payday loans, logbook loans can have very high fees. With a logbook loan, you pledge your vehicle’s logbook or vehicle registration document in exchange for the loan.
Logbook loans can cost you your vehicle if you fail to pay up. And because the higher interest rates on these loans can make them difficult to pay off, that’s a risk you may not want to take.
Pawn shop loans
You may also be familiar with pawn shop loans. With these loans, you’ll bring in an item of value in exchange for a small loan up to the value of the item.
If you want the item back, you have to repay the loan before the term is up. Even then, you may have to pay expensive fees and interest. If you don’t repay the loan, the pawn shop can keep the item and sell it (and typically none of the sale proceeds go to you, the former owner).
Better loan options
These options may be a step up, but you’ll still want to plan how these loans will fit in your larger financial picture so you can make financial progress once the loan is paid off.
Payday alternative loans
You can explore options at credit unions for a small loan.
A payday alternative loan must meet several requirements, including interest rates that don’t exceed 3% a month or 42.6% a year APR for England, Scotland and Wales, 1% a month or 26.8% APR for Northern Ireland.
Personal loans from online lenders
Online lenders are another option for small personal loans for people with bad credit.
Personal loans are installment loans where you borrow a fixed amount of money and pay off the debt over a predetermined number of payments.
Some of these lenders are peer-to-peer lenders where loans are funded by individual investors instead of traditional financial institutions.
In general, the better your credit history the lower your interest rate. But even a loan from an online lender will typically be much cheaper than getting a payday loan.
Alternatives to small loans for bad credit
If you can’t qualify for a loan or find another way to bridge your cash needs, there are a few other options.
Budget cutting or payment assistance
If you need a small amount of cash, the best scenario may be to free up money elsewhere, if you’re able.
In these cases, you don’t even need to take out a small loan at all.
Cash advance
You can ask your employer about getting a short-term advance from your paycheck.
Another option for a small cash advance is getting one right from your credit card. This is a way to withdraw some of your available credit as cash, instead of purchasing something. Many credit cards offer this feature, although lenders often charge high interest rates — but nothing close to payday loans.
Secured loans
If you own your own home, another option is taking out a secured loan. This allows you to tap into the equity you’ve built up in your home to bridge short-term cash needs.
A secured loan — also known as a second mortgage, second charge or further charge — may be risky since the lender can repossess your home if you don’t keep up repayments.
If you take out a secured loan, you may have to pay arrangement fees and other charges. So be sure to shop around for the best deal before making a decision.
Equity release loans
Equity release, which includes a number of products for those over the age of 55, is a way of getting money from the value of your home without having to move out. The equity release scheme can pay you a cash lump sum, a regular income or a combination of both. When you no longer need the property, it is sold and the company gets back its share of the proceeds.
There are two options for equity release:
- Lifetime mortgage: You take out a mortgage secured on your property provided it is your main residence, while retaining ownership. The loan amount and any accrued interest is paid back when you die or when you move into long-term care.
- Home reversion: You sell part or all of your home to a home reversion provider in return for a lump sum or regular payments. You continue living in the property until you die, rent free, but you must agree to maintain and insure the property. At the end of the plan your property is sold and the proceeds are shared according to the remaining proportions of ownership.
Friends and family
Finally, if all else fails, you can consider asking your friends and family for a small loan. We think it’s a good idea to get this in writing with terms that include monthly payment amounts, interest charges and due dates. It’s a good idea to treat the agreement like it’s a loan from a traditional lender.
The downside of this option is that if you fail to pay the loan back, you could hurt your relationship with those closest to you.
Bottom line
If you truly need one, it is possible to find a small loan with bad credit. The key is to find the best option that works for you while avoiding predatory payday and logbook loans.
Once you’ve paid off the loan and the crisis has passed, make sure you make a budget and work toward saving up an emergency fund. That way, the next time you need a bit of cash, you’ll be able to give it to yourself right from your own bank account.