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Whether the month lasts longer than your paycheque 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
A payday loan is a short-term loan that’s meant to cover a cash shortfall until your next pay.
Although it’s a very expensive way to borrow money, it might be tempting to go to a payday lender. You can borrow up to $1,500, which you are required to pay back with your next paycheque. In some provinces, you have up to 62 days to pay back your payday loan.
The cost of payday loans, which are very expensive compared to other ways of borrowing money, may be equivalent to an interest rate of 500% to 600%. Since this can make the loan more difficult to pay back, you should carefully consider the long-term consequences of taking out a payday loan.
Title loans
Like payday loans, title loans can have very high fees. With a title loan, you pledge the title to your car in exchange for the loan.
Title 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.
This is a kind of secured loan, which uses an asset as a promise to your lender that you will pay back the loan. This asset is considered collateral. If you can’t make your payments, the lender can take the asset.
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. Some credit unions offer affordable alternatives to payday loans. Options include:
Line of credit: A preset amount of money made available to you by a financial institution like a bank or a credit union. You can draw from the line of credit when you need it, up to the maximum amount. You’ll pay interest on the amount you borrow.
Credit card cash advance: A short-term loan you can take against the available balance on your credit card.
Overdraft protection: With this service, which you have to sign up and be approved for, you can withdraw more money than you have in your bank account. You will pay interest on the overdrawn amount.
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.
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 inquire with your employer about getting a short-term advance from your paycheque.
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.
Home equity line of credit
If you own your own home, another option is taking out a home equity line of credit, or HELOC for short. This allows you to tap into the equity you’ve built up in your home to bridge short-term cash needs.
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 title 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.