Even in the current economy with tightened credit policies, personal loans for people with bad credit are readily available. As implied by the term “personal”, the purpose of loans of this type is to provide funds to pay personal expenses. Many sometimes find themselves in need of loan for necessities like food, clothing, an emergency plane ticket, or when hit with an unexpected expense that has not been budgeted for.

Bad credit is defined as credit with a FICO score ranging anywhere from 580 and below up to 619. Given the massive layoffs we have witnessed during the current recession, many have experienced significant cuts in income and may find themselves with a bad credit rating in spite of the fact that they have always used credit responsibly. There are many loan agencies and other lenders who specialize in lending to those with poor credit. Personal loans for people with bad credit might just be the answer for some caught up in a difficult financial position during these challenging financial times.

Types of Personal Loans for People with Bad Credit

There are two general types of loans for people with bad credit, secured personal loans and unsecured personal loans. Generally, while having more relaxed requirements for credit ratings, lenders who extend personal loans of either type often require that borrowers have steady employment that generates at least $1,000 per month of income and have and maintain a personal bank checking account. Secured personal loans require the pledging of something of value, like a car as security for the loan.

There are advantages to secured personal loans. Larger amounts can usually be borrowed, interest rates are generally lower than for unsecured loans, and they are often given for longer terms. A disadvantage is that they take longer to process and require more paperwork. Unsecured loans are for borrowers who need money quickly, who need only a short-term loan to get over a financial hump, and who either don’t have assets to pledge as collateral or who don’t want to complete extra paperwork.

Unsecured loans are those that are based on nothing more than a borrower’s promise to repay to lender. While the amount that can be borrowed is generally less than what might be borrowed under the terms of a secured personal loan, many lenders commonly lend up to $1,500 or more. Primary advantages of unsecured personal loans are the ease of the application process and quick turnaround times for approval. In many cases, prospective borrowers can begin the application for an unsecured personal loan by completing a brief application on-line and if the loan is approved can have the money in hand within 24 hours.

Disadvantages include steep interest rates in most cases, some of the highest in the lending industry and the fact that loans are usually only extended for short-term periods before they must be re-paid. Interest rates generally reflect a lender’s perception of risk and act as the premium for a lender undertaking the risk. The higher the perceived risk, the higher the interest rate. Those with poor credit are perceived as the riskiest of borrowers so naturally, lenders require a higher rate of interest when granting personal loans for people with bad credit.

Pay-Day loans are a special category for personal loans for people with poor credit. While technically an unsecured personal loan, lenders who offer this type of loan often require the borrower to issue to them a post-dated check drawn on their personal checking account. The lender holds the check until the agreed upon time and then deposits the check to affect re-payment of the loan along with interest and any fees.

These loans carry the highest interest rates of all, sometimes as high as 400% and should be used judiciously. At first blush these rates seem ridiculously high, even usurious. Yet it must be taken into consideration that these loans are for relatively modest amounts and very short terms. If for example a loan of $300 was taken out for 10 days, even a hefty rate of 50% interest would amount to only a few cents of interest, a profit too small to compensate a lender for the trouble of making the loan. Still when considering a pay-day personal loan, one must consider the costs of interest and fees and do a fair bit of comparison shopping to get the best deal.

Borrowing from lenders who specialize in lending to those with poor credit may not contribute to improving credit history, even if loans are re-paid on time and in accordance with the loan terms. Also, as mentioned interest rates can be high. Still for many people facing a financial need, personal loans for people with bad credit may be both appropriate and a godsend.