Installment Loans For Bad Credit? Pros, Cons and How To Avoid Those Predatory Lenders

Last Updated on June 1, 2021

MyFinancialTimes is a reader-centric site. We may receive compensation from the products and services we mention or recommend in this story, but the opinions are the author's own. Remuneration may impact where offers appear. We may not include all available products or offerings. To learn more you can visit our advertising policy and editorial policy.

Installment loans could be the answer if you’re in a tight spot financially. Even with bad credit, installment loans on a fixed schedule could help rebuild your credit and pay off debts.

 

What Are They?

 

Installment loans are borrowed funds that you must repay over time in fixed amounts. Those “installments” are paid over a period of time from two weeks to 30 years. They’re different from a credit card, which allows you to borrow funds with every purchase.

 

If you’re not familiar with the term, you’ve likely heard of the types of installment loans out there.

 

Mortgages are an installment loan used to buy a house, usually with high loan limits. You pay the financial institution back over 15-30 years, with a monthly payment plan decided before the money is distributed. There are set interest rates that won’t change, though, so you’ll have an idea of the payments you need to make each month.

Auto loans help you purchase a vehicle and are usually paid off in anywhere from 12 to 96 months. The longer the term, usually the lower the monthly payments but the higher the interest rates. Pay it off quicker and you’ll be expected to front more money, but pay less over time.

Personal loans can be used to pay off debts, medical bills, or other sudden financial disturbances. These installment loans have terms between 12 and 96 months and have higher interest rates than other loans like mortgages – usually because you don’t put up collateral.

 

No-credit-check loans are short-term loans with high-interest rates and fees. Your credit won’t be checked, but you’ll face high penalties for late payments and pay exorbitant rates throughout the loan. Use these with caution and as a last resort.

 

Why Installment Loans?

 

Installment loans are an excellent way to stay accountable during the loan period. With fixed interest rates and monthly payments you can anticipate, paying off the loan isn’t a guessing game. You’ll have already locked in rates from the beginning and can plan accordingly each month, budgeting for the monthly bill. However, most installment loans require an application process to be accepted.

 

Some fast-cash installment loans can be predatory. Fast cash installment loans target people with bad credit scores, issuing insane borrowing fees and hidden costs that can drain you dry. Stay vigilant when choosing installment loans. Just because you have bad credit doesn’t mean you need to pay exorbitant prices.

 

Bad Credit … Be Gone!

 

Installment loans can help or hinder you. Given the opportunity, installment loans can bring you back from bad credit. Stay up to date on your payments by setting monthly reminders or using an auto-pay system that sends money directly from your bank account each month.

 

Be careful! Your credit score can suffer a lot if you miss a payment. Use installment loans to your advantage, don’t let them hurt you instead.

 

Alternatives to High-Cost Installment Loans

 

Bad credit doesn’t have to be a life sentence. There are ways to build credit without having to give up financial freedom.

 

Credit union installment loans could be your best bet. Loans from First Tech FederalNavy FederalPenFed, or other recognized credit unions are great for those with bad credit. It may knock some points from your credit score at the beginning and you’ll have to become a member of the credit union to apply, but it could be the best option for getting a loan for your specific financial circumstance.

 

Choose installment loans wisely by comparing rates, acknowledging fees, and deciding on favorable terms. The best installment loans come with APR (annual percentage rates) between 6 and 36 percent. Compare rates from multiple lenders who will lend to someone in your situation. Even those with bad credit are allowed to be choosy if it means saving money over time.

 

Be sure to choose terms that are favorable to your situation. Calculate your potential monthly payments before deciding on a loan term. The longer the term, the higher the interest rates. If you have the money to start paying off the higher monthly payments, consider a shorter term.

 

Payday loans are a last-ditch effort if you’ve got bad credit. They’ll usually come with APR upwards of 300 percent and expect payment within your next payday cycle. The lenders will usually withdraw the money straight from your account and expect it to be paid in full. Payday loans will not help you build credit and can be extremely detrimental to your finances if you’re not careful. There is, however, no minimum credit score for these loans, so most people can get them. Consider other options before seeking this kind of loan.

 

Phone a Friend

 

If you’re stuck with bad credit and don’t qualify for traditional installment loans, there are better options than heading for predatory practices or payday loans that can leave you worse off next month.

 

Ask a nonprofit, local charity, or religious organization. They may have loans or one-time gifts they can give you.

 

Talk to your employer about an advance on your paycheck. You can get the money sooner and won’t pay 300 percent after it’s all said and done.

 

Find alternative routes to making money. Attend focus groups, complete online surveys, or become a driver for Uber or Lyft to earn extra cash.

 

Call a friend and ask for a loan through lending circles or loan agreements that will keep you accountable and could benefit them, too.