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    Bad Credit Installment Loans - Is It Worth It?

    Securing a loan to pay for urgent expenses can be tricky when your credit isn’t stellar - and many borrowers turn to fixed-term loans as an alternative. Yet, are they worthwhile and affordable?

    • Installment loans provide you with a set amount that you repay over a fixed period of time - that’s why they are also known as fixed-term loans. 
    • There’s a special subcategory of these loans for borrowers with low to average FICO scores. While lending requirements aren’t so strict on these loans they often come with higher costs that you’ll want to watch out for. 

    Read on to take an in-depth look at the aspects you may want to consider before applying for a bad credit loan. 

    Factors To Consider

    There are several things that make a bad credit installment loan different. 

    These factors can make the difference between affordable monthly payments and an expensive loan that could break your budget. 

    Interest Rates & APR

    One of the characteristics of bad credit loans is that they usually come with higher interest rates and APRs.

    • The interest rate is a percentage added on top of the amount you borrow. 
    • Lenders charge different interest rates depending on your credit score and the federal interest rate during the loan underwriting process. 
    • The APR on your loan includes interest plus additional fees. Since fees vary between lenders it’s useful to compare APRs to see what the real cost of a loan will be from various providers. 
    • The APR on a loan will almost always be higher than the interest rate - unless the lender is discounting your interest during an introductory period. 

    Fees 

    Like interest, fees tend to be higher when you apply for a loan with bad credit.

    This adds to the total cost of borrowing.

    • Lenders may charge a variety of fees including processing fees, administrative fees, document compilation fees, early settlement fees, and late payment penalties. 
    • These fees range from 2-6% of the total loan amount and may be deducted from the amount you actually receive after approval. For example, a 5% fee surcharge on a $2000 loan would come to $100, meaning you would only receive $1900 after fees are deducted. 

    Repayment Schedules

    Loans catering to borrowers with weaker creditworthiness may offer shorter repayment schedules than traditional lending products.

    • You can expect to be offered a repayment schedule that will stretch between several months and a year or two depending on the amount.
    • This can translate into higher monthly payments since your loan amount must be repaid in full over a shorter period of time. On the plus side, you’ll avoid paying interest for years on end.
    • A $5000 loan at 15% APR per year would cost you $118 a month on a five-year loan. The same loan repaid over two years would cost you $242 a month. 

    Beware - Installment Loans And Payday Loans Are Not The Same

    It’s easy to confuse these two popular types of bad credit lending products - but there are crucial differences between them. 

    • Fixed term loans are repaid over a period of months or years. Payday loans are typically repaid in full when you receive your next paycheck (two to four weeks after the loan is issued). 
    • While installment loans usually require a soft credit check for prequalification you’ll find that payday loans can be issued without a credit check altogether. 
    • The price you pay for the speed and flexibility of a payday loan is extremely high interest rates and APRs. These can go as high as 400% per year. Installment loans usually come with APRs of 36% or lower. 

    Bad Credit Installment Loans Alternatives 

    Before you apply for any loan, it’s always worth exploring other options.

    You may be able to borrow the funds you need at a more affordable interest rate and lower your monthly payments. 

    • If you don’t need the funds that urgently you could always try to improve your credit score before you apply for a loan. 
    • Paying down your credit card debt, never missing payments, and resolving errors on your free annual credit report are all effective ways of accomplishing this. 
    • You may want to apply for a low APR credit card or request a limit increase on your current card to save on interest charges and application fees. 

    Conclusion 

    Installment loans that are geared toward borrowers with weaker credit are a good source of funds - but they can be costly. 

    The higher interest and APRs and shorter repayment schedules associated with these loans make them more expensive than many credit cards. 

    You’ll want to consider your options carefully and only opt for the most affordable type of credit you qualify for.