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Unsecured Loans For Bad Credit Explained

Rebecca Safier • January 18, 2024

Having bad credit can make it challenging to qualify for a loan, but you’re not out of options. Several lenders specialize in unsecured loans for bad credit and can provide the funds you need to cover a large expense or consolidate high-interest debt.

Unsecured loans don’t require any collateral, so you won’t have to risk any of your personal property when you borrow. However, lenders may charge higher interest rates and fees if you have weak credit.

An unsecured loan can be a valuable financial lifeline if you need cash, but watch out for potentially high borrowing costs.

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Understanding how unsecured loans work

So, what is an unsecured loan, and how does it work? Unsecured loans offer a lump sum you can repay over time. Unlike secured loans, unsecured loans aren’t secured by collateral, like a car or savings account.

They can have higher interest rates than secured loans, but you won’t have to risk any of your personal assets. However, you will need to meet a lender’s requirements for credit, income, and other financial criteria.

Depending on the lender, you may see repayment terms ranging from one to seven years and fixed interest rates from around 6% to 36%. According to the Federal Reserve, the average rate on a two-year personal loan is currently 12.17%.1

You can use an unsecured personal loan for various purposes, including home renovations, emergency expenses, and debt consolidation. After receiving the loan, you’ll generally pay it back every month over a set period of time.

How to get an unsecured loan

While some lenders have hefty credit requirements, others accept lower credit scores. Shopping around can help you find a lender that’s willing to work with you and offers you a reasonable deal.

Here’s how to get a loan with bad credit:

  • Check your credit score. You can use a free credit monitoring service or check with your credit card issuer to find your score. Purchasing your scores from is also an option. A poor credit score is anything below 580 in the FICO® range.2,3 It’s worth reviewing a copy of your credit report from, too, to see if there are any delinquencies or other issues you can resolve.
  • Review your budget. Evaluating your income and expenses can help you estimate how much you can afford to borrow and pay back each month.
  • Research lenders. You can find unsecured loans for bad credit from banks, credit unions, and online lenders. Some lenders let you prequalify for loans online, which lets you check your rates and terms without impacting your credit.
  • Compare your loan offers. As you compare lenders and prequalification offers, look for a loan that offers reasonable rates and fees, as well as repayment terms and monthly payments that work with your budget.
  • Submit an official loan application. Once you’ve chosen a lender, you can submit a full application. Along with providing your personal information, you may need to upload verifying documentation, such as pay stubs, tax returns, or bank statements.
  • Receive your loan. If the lender approves your application, it will disburse the loan proceeds to you. Some lenders can also send the funds to your creditors directly if you’re using it for debt consolidation. You’ll start paying back your loan on your agreed-upon terms.

Pros and cons of unsecured loans

There are both benefits and potential downsides to borrowing unsecured loans for bad credit. Here are some pros and cons to consider before you borrow.


Help improve poor credit score

Taking out an unsecured loan can potentially repair your credit score over time. For one, taking out an installment loan could improve your credit mix, which makes up 10% of your FICO score.

Even more importantly, making on-time payments can boost your score over time as your creditor reports your payments to the credit bureaus. Your payment history impacts 35% of your FICO score.4

Remember, making late payments on your unsecured loan can damage your score. Late payments can stay on a credit report for seven years.5

Easy to apply for

Multiple lenders offer unsecured loans for bad credit, and you can often apply for a personal loan with an online application. You may be able to prequalify online, which lets you check your rates in minutes without harming your credit score.

Some lenders can even approve your application and disburse your loan within hours or days, giving you fast access to the funds you need.

Better terms than other loans

Unsecured loans can have better rates and terms than some other financing options. For instance, you may qualify for a better interest rate than you would with a credit card. And you’ll almost certainly get a better rate than you would on a payday loan. Personal loan lenders often cap their rates at 36%, whereas payday loans can have 400% or higher APRs.6


Higher fees, penalties, and rates

One downside of borrowing unsecured loans for bad credit is that you’ll likely end up with higher fees and interest rates than a good credit borrower would. Having good credit can help you snag a rate on the lower end of a lender’s range and avoid loan origination fees.

Bad credit, on the other hand, could mean you get a significantly higher rate and may have to pay an origination fee that equals a percentage of your loan amount. Plus, you may encounter other penalties, like a penalty for paying off your loan ahead of schedule.

Predatory lending risks

Unfortunately, you may come across predatory lenders as you research bad credit loans. These lenders can prey on vulnerable borrowers and may charge hidden fees or large balloon payments.

Beware of lenders that use high-pressure sales tactics or make promises that sound too good to be true. For instance, lenders that guarantee a no-credit loan with no income verification or credit check may fall into this predatory lender category.

You may also want to avoid loans with APRs higher than 36%, as that’s generally seen as the line between an affordable loan and an unaffordable one.7

3 tips to improve your credit with an unsecured loan

An unsecured loan can help improve your credit over time, provided you pay your bills on time. With improved credit, you’ll have an easier time accessing financial products in the future, as well as become eligible for better interest rates and terms. Here are a few tips for improving your credit with an unsecured loan:

  • Choose a lender that reports your payments: First, find out if your lender reports your payments to the major credit bureaus, Equifax, Experian, and TransUnion. Some lenders may not report payments, while others will only report to one or two credit bureaus. If improving credit is your top priority, consider choosing a lender that reports to all three.
  • Manage your payments responsibly: Your lender will report both on-time and late payments to the credit bureaus, so try to pay on time. A payment that’s more than 30 days late could significantly decrease your score.8 Create a budget, mark your payment due dates on your calendar, and consider setting up autopay from your bank account to stay current on your loan. Along with preventing damage to your credit, paying on time will help you avoid late fees.
  • Learn how to consolidate your debt: Using an unsecured loan to consolidate high-interest debt could also help your credit. Borrowing an installment loan could improve your credit mix, for one. If you can lower your interest rate and simplify repayment, you may also be able to pay off your debts faster and reduce your “amounts owed,” which makes up 30% of your credit score.3 And if you use a loan to pay off the balances on your credit cards, you’ll also reduce your credit utilization, which can improve your score.
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Improve your credit score and manage your debt

An unsecured personal loan can be a useful financial tool if you’re looking to pay for home renovations, medical bills, or another large expense. You can also use it to consolidate debt, especially if you qualify for a better interest rate.

If you have bad credit, you probably won’t qualify for the best rates and terms a lender offers. However, it’s still worth shopping around to find a loan with the lowest borrowing costs.

If you choose to borrow, create a plan to repay your unsecured loan on time and in full. By making on-time payments, you can see your credit score recover in the months and years to come.

Learn more about how to manage debt to pay it off strategically while protecting your credit.

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1 Information from Federal Reserve's Consumer Credit - G.19 as of January 8, 2024:

2 Information from myFICO's What is a FICO® Score? as of January 8, 2024:

3 FICO® Scores are developed by Fair Isaac Corporation. The FICO Score provided by, Inc., also referred to as Experian Consumer Services ("ECS"), in Experian CreditWorks℠, Credit Tracker℠ and/or your free Experian membership (as applicable) is based on FICO Score 8, unless otherwise noted. Many but not all lenders use FICO Score 8. In addition to the FICO Score 8, ECS may offer and provide other base or industry-specific FICO Scores (such as FICO Auto Scores and FICO Bankcard Scores). The other FICO Scores made available are calculated from versions of the base and industry-specific FICO Score models. There are many different credit scoring models that can give a different assessment of your credit rating and relative risk (risk of default) for the same credit report. Your lender or insurer may use a different FICO Score than FICO Score 8 or such other base or industry-specific FICO Score, or another type of credit score altogether. Just remember that your credit rating is often the same even if the number is not. For some consumers, however, the credit rating of FICO Score 8 (or other FICO Score) could vary from the score used by your lender. The statement that "90% of top lenders use FICO Scores" is based on a third-party study of all versions of FICO Scores sold to lenders, including but not limited to scores based on FICO Score 8. Base FICO Scores (including the FICO Score 8) range from 300 to 850. Industry-specific FICO Scores range from 250-900. Higher scores represent a greater likelihood that you'll pay back your debts so you are viewed as being a lower credit risk to lenders. A lower FICO Score indicates to lenders that you may be a higher credit risk. There are three different major credit reporting agencies — the Experian credit bureau, TransUnion® and Equifax® — that maintain a record of your credit history known as your credit report. Your FICO Score is based on the information in your credit report at the time it is requested. Your credit report information can vary from agency to agency because some lenders report your credit history to only one or two of the agencies. So your FICO Score can vary if the information they have on file for you is different. Since the information in your report can change over time, your FICO Score may also change.Credit score calculated based on FICO® Score 8 model. Your lender or insurer may use a different FICO® Score than FICO® Score 8, or another type of credit score altogether. Learn More

4 Information from myFICO's What's in my FICO® Scores? as of January 8, 2024:

5 Information from Equifax's Can You Remove Late Payments from Your Credit Reports? as of January 8, 2024:

6 Information from the Consumer Financial Protection Bureau's What are the costs and fees for a payday loan? as of January 8, 2024:

7 Information from the National Consumer Law Center's Why Cap Interest Rates at 36%? as of January 8, 2024:

8 Information from Equifax's When Does a Late Credit Card Payment Show Up on Credit Reports? as of January 8, 2024:

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