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Long-term personal loans can be an attractive option if you’re facing large expenses like medical bills or home repairs. By spreading out repayment over a longer period of time, long-term loans may allow for lower monthly payment amounts that can make major costs more affordable.

However, long-term loans can have drawbacks, too. They may have higher cumulative interest than short-term loans and can be difficult to qualify for since they’re often unsecured.

Here’s what you need to know if you’re deciding whether or not a long-term, unsecured personal loan is right for you:

What Is a Long-Term Loan?

As its name suggests, a long-term loan is one whose repayment period, or term, is fairly lengthy. Generally, long-term personal loans carry terms between 60 and 84 months, or five to seven years.

Mortgages and private student loans are also examples of long-term loans. Mortgages, for instance, are frequently repaid over as many as 30 years.

For the purposes of this article, we’re talking about long-term, unsecured personal loans, which borrowers can use for a variety of things. These loans can allow consumers to make big purchases or pay expensive bills by paying the total off over several years’ time.


💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.

Benefits of Long-Term Personal Loans

There are plenty of reasons why a long-term loan might be a worthy consideration for large expenses.

Large Loan Amounts

While short-term loans and credit cards may cap out at a few thousand dollars, long-term, unsecured personal loans are available at much higher amounts — up to as much as $100,000.

So depending on what you need the money for, a long-term personal loan might give you more leverage than other types of funding.

Affordable Monthly Payments

Since long-term personal loans are paid off over many months, the monthly payments are often lower than they would be with a shorter-term loan.

However, that doesn’t mean a long-term loan is less expensive in the long run.

Flexibility

Unlike secured loans, which are tied to a physical piece of collateral or the need to be used for a specified purpose, unsecured personal loans can be taken out for a wide range of intended purposes. Common reasons borrowers take out personal loans include:

• Home renovations or repairs.

• Medical expenses.

• Wedding loans or funeral expenses.

• Debt consolidation.

Affordable Monthly Payments

Since long-term personal loans are paid off over many months, the monthly payments are often lower than they would be with a shorter-term loan.

However, that doesn’t mean a long-term loan is less expensive in the long run.

Drawbacks of Long-Term Personal Loans

There are also some drawbacks worth considering before you apply for an unsecured personal loan.

Potentially Higher Interest Rates

Although long-term, unsecured personal loans may have smaller monthly payments, they may carry higher interest rates than shorter-term, unsecured personal loans. And even at the same interest rate, they cost more over time.

Personal loan interest rates can range from as little as 6.99% to as much as 35.99% APR.

For example, imagine you take out a $10,000 loan at an interest rate of 10%. To repay the loan in a single year, you’d have to pay a whopping $879 per month, but you’d only pay a total of $550 in interest over the lifetime of the loan.

To repay the loan in seven years, you’d pay only $166 per month, but you’d also pay $3,945 in interest along the way.

So while long-term, unsecured personal loans can make large purchases feasible, factoring in the total cost over the lifetime of the loan before you sign those papers is also important.

Long-Term Debt

Along with higher interest rates, long-term loans do, obviously, mean going into debt for a longer period of time — unless you plan to pay off your loan early. A thorough review of the loan agreement will disclose prepayment penalties or other fees that can be costly in their own right.

Furthermore, the future is unpredictable. Five to seven years down the line, that promotion you were counting on might fall through or another life circumstance might supersede your repayment plans.

If you find yourself in a situation where you need to borrow more cash, it can be difficult to increase your personal loan amount.

Although unsecured personal loans can be helpful when life throws big expenses your way, they’re still a form of consumer debt, and, ideally, minimizing debt is a smart thing to do.

Qualification Difficulties

Long-term, unsecured personal loans may have more stringent qualification requirements than other types of credit. That’s because, from the lender’s perspective, they’re riskier than loans for smaller amounts or those that come attached to physical collateral.

Along with your credit score and history, a potential lender might also require proof of income and employment or a certain debt-to-income ratio. Depending on the stability of your financial situation, you may or may not qualify for the best interest rates and terms or be considered eligible to take out the loan at all, at least without a cosigner or co-borrower.


💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.

Alternatives to Long-Term Loans

Ideally, the best way to pay for a large purchase is to save up the cash and pay for it without going into debt at all. Of course, this may not always be possible or realistic.

If you’re not sure about taking out a long-term, unsecured personal loan, there are other alternatives to consider. However, each of these comes with its own risk-to-reward ratio as well.

You might consider borrowing money from friends and family, but those important relationships can suffer if your repayment doesn’t go as planned. A written repayment agreement can go a long way toward making the transaction as transparent as possible, with expectations of both parties clearly outlined.

Another option might be saving part of the money you need and applying for a short-term, unsecured personal loan for the remainder. This means delaying a purchase until savings can accumulate, and might not work if the money is needed sooner rather than later.

The Takeaway

Long-term loans are those whose repayment periods generally span between five and seven years, which can help borrowers fund expensive purchases while making affordable monthly payments.

However, the longer-term can also mean more interest charges over time, making these unsecured personal loans more expensive relative to shorter-term lending options. And like any form of consumer debt, they carry risk.

Your credit score and/or financial situation can suffer if you find yourself unable to repay the personal loan.

That said, when used responsibly, long-term, unsecured personal loans can be a smart financial choice, particularly if you shop around for a lender who offers affordable, fixed interest rates, low fees, and great customer service to ensure you’ll always be in the know and in control.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

Photo credit: iStock/Melpomenem

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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On the popular credit score spectrum of 300 to 850, where does a score start breaking bad? Different sources cite 670 or 630 or 600. But each lender makes its own determination of which credit scores are considered risky.

You usually need a credit score of at least 620 to get a conventional mortgage (one not backed by a government agency), but someone with a credit score as low as 500 to 580 may be able to qualify for an FHA or VA loan.

We’ll sort through the different credit score requirements, and the factors that might cause your score to drop, so you can work on building better financial habits.

Bad or Poor Credit Score Ranges

The most commonly used credit scores are calculated by FICO® and VantageScore®, and the two companies rank scores a little differently.

As you can see, a Poor credit score from FICO is not the same as that from VantageScore. FICO defines Poor as 579 or below (no one has a score below 300), whereas VantageScore’s Poor range tops out at 600.

To complicate matters, lenders may choose from multiple scoring models and industry-specific scoring models. This makes it tricky to know which one you’re being evaluated on. And your credit scores vary — yes, you have multiple scores.

A score in the 600s is typically high enough to qualify for some loans and credit cards. And generally, the best rates go to borrowers with scores in the mid-700s and above.

What’s the nationwide average? “Good.” As of this writing, Americans had an average FICO Score of 716 and a VantageScore of 698.

Recommended: How to Get Approved for a Personal Loan

What Determines Credit Scores?

A credit score is a number that summarizes your financial history in order to help lenders gauge the risk of extending credit. The higher your credit score, the more confident they are that you’ll repay your debt, and on time.

Your credit score is based on factors like how often you pay your bills on time, how many loans and credit cards you have, your debt relative to your credit limits, and the average age of your accounts. It also considers negative financial events such as judgments, collections actions, and bankruptcies.

Not all financial transactions get reported to the credit bureaus. Payday loans, a type of unsecured personal loan, are considered risky for consumers but don’t affect your credit score for better or worse.

Three major credit reporting agencies — TransUnion, Equifax, and Experian — compile the information on your history of borrowing, and then a company like FICO or VantageScore translates that data into a number.

Recommended: Secured vs Unsecured Personal Loans

Why Your Credit Score May Be Bad

If you’re worried about your credit score, it can help to understand what actions, or inaction, count against you. First there are the obvious slip-ups: missed payments, late payments, and defaulting on accounts. Applying for a lot of credit in a short time is also a red flag for lenders.

Other factors may not hurt your credit score, but they won’t help you build a solid credit history either. If they surprise you, you’re not alone.

•   You’re a recent grad. Although age cannot be used against you, younger people generally haven’t been financially independent long enough to have built up a significant financial history. “Credit age” accounts for about 15% of your score.

•   You rarely use credit cards. Paying through money-transfer apps (also known as peer-to-peer, or P2P, apps) is convenient, but using them doesn’t contribute to your credit history. “Credit mix,” or the different types of credit you use, makes up 10% of your score.

•   Your credit limit is low, and you spend almost the limit every month. You may think you’re living within your means, but lenders consider this a risky situation. “Credit utilization” accounts for a whopping 30% of your score.

How Bad Credit Can Affect You

Your credit score is just one factor that lenders consider when evaluating your application for things like a loan, but it carries a lot of weight. Your credit score not only affects your odds of approval for loans and credit cards, it plays a big role in determining the interest rates and repayment terms you’re offered.

Here are some of the things that take your credit history into consideration:

•   Credit cards

•   Car loans

•   Home loans

•   Personal loans

•   Private student loans

•   Federal PLUS loans

•   Car insurance premiums (in some states)

•   Homeowners insurance

In addition, your credit history may be weighed during a job or rental application.

Nonprime borrowers — generally defined as those with credit scores from 601 to 660, and who have negative items on their credit report — typically don’t get the lowest rates or most ideal terms when procuring a home or car loan.

For example, the interest rate on a subprime 30-year mortgage can be double or triple the average rate. A bigger down payment is usually required, and the repayment term may stretch to 40 or even 50 years, so the amount of interest paid over the life of the loan can be extraordinary.

Building Your Credit Responsibly

Millions of Americans have no credit score because they don’t have enough of a history to calculate one. If this is your situation, you have a couple of options. You may want to consider taking out a secured credit card that will allow you to access a modest line of credit by putting down a deposit.

You can also ask a friend or family member to add you as an authorized user to their credit card account. An authorized user can use the account but does not have any liability for the debt.

If you fall into the so-called bad credit score range, remember that it isn’t set in stone. There are steps you can take to help build your credit. It won’t happen overnight — any promise of a quick fix could be a scam.

But with a sustained effort, you may see a change in six months to a year, according to the Consumer Financial Protection Bureau (CFPB), a government agency. Here are some ideas to add to your Financial Adulting checklist.

Pay Bills on Time

An effective way to improve your creditworthiness in the eyes of lenders is to pay all your bills by the due date, every single time. If you have been late with any payments, consider getting caught up.

If you tend to forget bills, consider brushing up on how autopay works and set up payments through an app, an online bank account, or the entity billing you. Putting reminders on a paper or electronic calendar can help as well.

Pay Attention to Revolving Debt

Remember “credit utilization”? It’s generally a good idea to use no more than 30% of your total available credit. The CFPB says that paying off credit card balances in full each month helps to keep the ratio low and strengthen a credit score.

Credit utilization involves credit card and other revolving debts, not installment loans like mortgages or student loans.

Check Credit Reports and Scores

Between identity theft and plain human error, it’s worth reviewing your credit report for any unfamiliar charges or records, since the information in your credit report is used to generate your credit scores.

You can order a copy of your credit report from each of the three major reporting agencies for free at AnnualCreditReport.com. Look for mistakes in your contact details, accounts that don’t belong to you, incorrect reports of late payments, or accounts you closed being shown as open.

Credit reports do not show credit scores. How to get credit score updates then? A few options:

•   Buy your FICO Score from myfico.com.

•   Get your FICO Score for free from Experian.

•   Look for your scores on a loan or credit card statement.

•   Sign up for SoFi Relay, which provides weekly credit score updates and tracks all of your money in one place at no charge.

Closing and Opening Credit Cards Carefully

The average age of your accounts plays a role in your credit score, so you may want to keep some of your oldest cards open, even if you don’t use them often. Remember that closing cards also reduces your available credit, affecting your credit utilization ratio.

Opening cards affects your credit score as well. Every time you apply, the credit card company runs a hard inquiry on your credit, and your score takes a slight hit. Applying for a bunch of cards in quick succession can make it look like your financial situation has taken a turn for the worse.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

The Takeaway

A bad credit score is defined differently by individual lenders and credit bureaus. But a score in the 500s will make it difficult to qualify for a conventional mortgage, and can cost you money through higher interest rates. But with time and dedication, the tide can be turned.

If you’re struggling to reduce high-interest credit card balances or other debt, an unsecured personal loan may come in handy. SoFi fixed-rate personal loans can be used for almost any purpose.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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If you need cash to cover an emergency expense, like a car repair or medical bill, a payday loan or an installment loan are two options you may consider. However, these two loans are different in key ways that are crucial to understand before making a choice between them. Namely, a payday loan tends to have a short turnaround before you need to pay it off, and typically offers extremely high interest rates.

We’ll explain more about the features of each loan type, and why people choose payday loans vs installment loans.

What Is a Payday Loan?

There is no set definition of a payday loan. Generally speaking, they are short-term loans that are due to be paid back on your next payday. Payday loans don’t charge interest per se, but they do charge high fees.

Payday loans are typically for relatively small amounts. In fact, many states limit the amount of a payday loan to $500. Borrowers usually repay the loan in a lump sum on their next payday. The specific due date is often between two and four weeks from when the loan was made.

To repay the loan, borrowers must make out a post-dated check to the lender for the full balance of the loan plus any fees. As an alternative, borrowers can give permission for the lender to electronically debit the funds from their bank account on a certain date. If the borrower doesn’t repay the loan by the due date, the lender can cash the check or debit the funds — either way, the lender gets paid.

In some states, borrowers may be able to roll over the amount of the loan, paying only the fees when it comes due, while the lender pushes out the due date.

Risks of a Payday Loan

The risks of payday loans include sky-high fees and the potential for falling into a cycle of debt. Many states set a limit on payday loan fees, but they can still run from $10 to $30 for every $100 borrowed. Consider that a $15 fee for $100 is the equivalent of nearly 400% APR. By comparison, the average personal loan interest rate is 9.41%, according to the Federal Reserve of St. Louis.

Pros and Cons of Payday Loans

Before signing on for a payday loan, carefully consider the advantages and disadvantages.

What Is an Installment Loan?

When a borrower receives an installment loan, their lender will give them a lump sum upfront, which the borrower has to repay in fixed payments with interest over a set period of time. Personal loans are a good example of an installment loan.

They can range in size from a few hundred dollars to $100,000, and the money can be used for any reason, from covering unexpected expenses or consolidating debt to remodeling a home. Repayment terms may stretch from a few months to a few years.

How Installment Loans Work

During the loan application process, lenders will consider factors such as a borrower’s credit score and reports, their income, and the amount and length of the loan.

Typically, borrowers with good credit scores will receive the best terms and interest rate options. These loans may have variable interest rates or fixed, meaning they don’t change over the life of the loan.

Installment loans may be secured or unsecured. Unsecured loans, such as unsecured personal loans, do not use collateral to back the loans. Secured loans do require collateral and may offer borrowers a lower interest rate since they present less risk to the lender.

Recommended: How to Get Approved for a Personal Loan

Pros and Cons of Installment Loans

Personal installment loans tend to offer borrowers the option of borrowing at lower rates than are available through revolving credit or payday loans. However, it’s still important to consider disadvantages in addition to benefits.

Payday Loans vs Installment Loans: Key Differences

By now you’ve likely got a good sense that installment loans and payday loans differ in some important ways. Here’s a side-by-side comparison.

Why You Should Avoid Payday Loans

Payday loans are usually predatory in nature and should be avoided. Fees make them an expensive form of credit. If you don’t have the money to repay it on the due date, lenders may try to cash the post-dated check, which will bounce, triggering fees. Or if you provided your bank account information, the lender may try to withdraw the funds, triggering overdraft fees with each attempt.

Payday lenders might also sell your loans to a debt collector, which can lead you to being harassed by collections calls.

Explore SoFi’s Low-Rate Personal Loan Options

Payday loans and installment loans both provide quick cash to cover emergency expenses. However, because of their astronomical fees — equivalent to a 400% APR — payday loans fall under the heading of “predatory lending.” On the other hand, installment loans vary in their terms but generally are a much better deal, provided that you meet eligibility requirements.

Considering options for borrowing? Check out personal loans from SoFi with low fixed rates on loans between $5,000 and $100,000. What’s more, personal loans from SoFi charge no fees and offer funding as quickly as the same day the loan is approved.

FAQ

Are payday loans installment loans?

No, payday loans usually require you to pay off the loan amount in full on your next payday, usually two to four weeks from when the loan was made.

What is an installment loan?

When you take out an installment loan, you immediately receive the money you’re borrowing. You then pay it back to your lender in a series of regular fixed payments known as installments.

Are personal loans installment loans?

Personal loans are one type of installment loan. Money from the loan can be used for any purpose, such as debt consolidation or a home remodel.

Photo credit: iStock/Prostock-Studio
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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You’ll likely need a credit score in the Good range (670 to 739) or higher to qualify for a $20,000 personal loan with a competitive interest rate. If your credit rating is Poor or even on the lower end of Fair, you may have difficulty getting approved for a personal loan.

Personal loans offer relatively low interest rates compared with other options, such as high-interest credit cards. Ultimately, the interest rate will depend on the size of your loan, the term, and your credit score.

Here’s a closer look at what it takes to apply for a personal loan this year.

Can I Get a $20,000 Personal Loan with Bad Credit?

Your credit score helps banks understand your history of managing debt. A high score suggests that you have a history of paying your bills on time while managing multiple accounts. As a result, banks see borrowers with high scores as at relatively low risk of default. Therefore, they may offer these borrowers better terms and interest rates on loans.

Lenders see borrowers with low scores as risky. To compensate for this risk, they may charge higher interest rates, if they offer a loan at all. It may be more difficult for those with bad credit to find a $20,000 personal loan, or to find one they can afford.

What Is the Typical Credit Score Required for a $20,000 Personal Loan?

When applying for a loan, a FICO® credit score in the Good range (670 to 739) or higher will help you qualify for loans with better interest rates from a wider variety of lenders.

If you have Poor credit (a FICO score of 300 to 579), or even in the low end of the Fair range (580 to 669), you may have difficulty getting approved for a personal loan.

If this is the case, all is not lost. You can work to raise your credit score by paying down debts and making sure to always make payments on time.

What Can You Use a $20,000 Personal Loan for?

A personal loan is money that you borrow from a bank, credit union, or online lender that you pay back in regular installments with interest, usually over about two to seven years. One feature of personal loans is the flexibility it provides borrowers in how they can spend their funds. Here are a few common options:

Debt Consolidation

Debt consolidation is one of the most popular uses for personal loans. If your current debt carries high interest rates, you may be able to pay it off in one fell swoop, combining all of your debt under a lower interest rate. Consolidating confers a number of advantages, including saving money in interest and replacing several debts with just one payment, which may be easier to keep track of and pay off on time.

If you consolidate credit cards, be wary of running up more debt on your cards while you pay off your personal loans. You don’t want to increase the amount of debt you’ve taken on.

Medical Expenses

If you’ve had an accident or unexpected illness, and you find yourself with growing medical bills, you may consider a personal loan to help you get them under control. Medical bills can be extremely pricey, so before committing to a loan, see if there is a way to negotiate the price down.

You may also be able to negotiate a payment plan that allows you to pay off your bill in installments, which might be more manageable and wouldn’t require taking out a loan that saddles you with interest payments.

Home Improvements

Borrowing money for home improvements is sometimes necessary and smart. For example, repairing a leaking roof in a timely manner can help prevent further damage to your home, which could cause pricier repairs down the road. In some cases, improvements or remodels can increase the value of your home.

That said, beware of taking out loans for home improvements that are simply “wants.” For example, it may not be prudent to borrow money to install a hot tub.

Funeral Expenses

In 2021, the median cost of a funeral was approximately $7,848, according to the National Funeral Directors Association. Personal loans may be an option for those who can’t afford to pay these expenses out-of-pocket.

Vacation Expenses

You can use a personal loan to pay for anything, but should you? The answer is likely no. When it comes to discretionary spending, like vacations, consider saving up money from your paycheck to cover the cost. Otherwise, because you’re paying interest, your vacation could end up costing you a lot more than the sticker price.

What’s more, if you miss a payment, you’ll be putting your credit score in jeopardy, which may not be worth it for a few days of fun in the sun.

Recommended: 11 Types of Personal Loans

Applying for a $20,000 Personal Loan

To secure your money, you’ll need to get approved for a personal loan. Once you know how much you want to borrow, you may consider getting prequalified for a loan. Lenders will ask you to provide basic information, including your address, income, and Social Security number. They may then perform a soft credit check that won’t hurt your credit score.

Finally, they’ll offer you a prequalified quote, including how much money you qualify to borrow, your monthly payment, and your interest rate. You can use this process to shop around with a few lenders to secure the best quote.

Once you’ve decided which lender to go with, you’ll submit an application. You’ll need to provide proof of income, address, and employment, and you’ll need to submit to a hard credit check.

Recommended: Personal Loan Calculator

Applying for Other Small Loan Amounts

If you don’t qualify for a $20,000 personal loan that you can afford based on your credit, you might consider taking out a smaller loan, such as a $3,000, $5,000, $10,000, or $15,000 personal loan. Smaller loans present less risk to lenders, so you may be able to qualify with a lower score.

The Takeaway

To get the best terms and interest rate for a $20,000 personal loan, you’ll likely need a Good credit score (670 to 739). But no matter your score, shop around and consider using prequalification to find the loan that’s best for you.

Consider personal loans from SoFi, which have no fees and offer low rates for loans of $5,000 to $100,000. Borrowers can receive funds as quickly as the same day their loan is approved.

FAQ

What credit score is needed for a $20,000 personal loan?

To access personal loans from a broad array of lenders offering the best interest rates, you’ll need a credit score of at least 670.

Where can I get a $20,000 loan with bad credit?

Some lenders may offer you a personal loan if you have bad credit. However, they may charge much higher interest rates.

What’s the monthly payment on a $20,000 personal loan?

Your monthly payment will depend on the term you choose and your interest rate. Typically, shorter terms will carry higher monthly payments and lower interest rates, while longer terms will have smaller monthly payments and higher interest rates.

Photo credit: iStock/AsiaVision

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Subprime personal loans provide financing to people with poor credit who cannot qualify for a conventional prime-rate loan. Borrowers who have poor credit have a higher risk of defaulting on loans, so lenders protect themselves by adding charges to the loans. These charges come in the form of higher interest rates, longer term lengths, and higher financing fees.

Read on to learn how subprime personal loans work, the different types of loans, some alternatives to these high-interest loans, and whether they might be an option for you.

What Is a Subprime Personal Loan?

A subprime personal loan is a loan that caters to borrowers with subprime credit, who are considered to be at a high risk of default. A subprime lender will charge a higher interest rate and set longer loan terms to cover the cost of their risk.

There are fairly rigid credit score requirements for a personal loan. The Consumer Financial Protection Bureau lists five credit score levels; the first column shows what type of loan someone will qualify for.

A borrower with a FICO score below 620 will find it difficult to secure a loan from a traditional lender. Many online lending platforms allow consumers to search a network of subprime personal loan lenders to find the best deal. Borrowers submit a loan application online to pre-qualify.

Subprime loans have certain characteristics. They may require a larger down payment. Someone with a fair credit score who takes out a car loan may have to pay 5% down, whereas someone with poor credit might have to put 10% down. A subprime loan may come with an adjustable interest rate or a fixed interest rate.

Types of Subprime Loans

There are four main types of subprime loans: interest-only, fixed-rate, adjustable-rate, and dignity loans.

Recommended: Personal Loan Interest Rates Now

Interest-Only Subprime Loan

Sometimes called exotic loans, an example of an interest-only loan is an adjustable-rate mortgage where the borrower pays only the interest for the first few years before beginning to cover some of the principal. If interest rates have gone up, the payments can become huge.

Fixed-Rate Subprime Loan

Fixed-rate subprime loans allow the borrower to lock into a fixed interest rate for the life of the loan. The monthly payments don’t change, so there are no surprises for the borrower. However, the terms of these loans are longer, and borrowers pay more interest over the life of the loan.

Adjustable-Rate Subprime Loan

Interest rates on an adjustable-rate subprime loan are fixed for an initial period. After that, the interest rate will become variable, and your monthly payments will go up and down with market interest rates.

Dignity Subprime Loan

For a dignity subprime loan, borrowers put down 10% of the loan amount to qualify. The interest rate is higher initially. Then the rate changes to the prime rate if the borrower has kept up with the payments.

Pros and Cons of Subprime Personal Loan

The advantages and disadvantages of subprime personal loans center around the interest rates and fees. How disciplined the borrower is in their money management is also a factor.

Pros of Subprime Personal Loan

The pros of a subprime personal loan can be summed up as “perceived affordability.”

Adjustable Interest Rate

Adjustable interest rates are a double-edged sword. On the one hand, subprime loans with an adjustable rate are attractive because the initial rate is low. This frees up cash that savvy borrowers can use to earn money elsewhere or pay off the loan principal sooner. However, once the initial period is over, the rate can skyrocket with market rates.

Longer Repayment Period

A longer repayment period means that the borrower will have lower payments. However, they will end up paying more in interest over the life of the loan. Still, lower payments can be beneficial, particularly if the loan has a fixed interest rate, and the borrower knows exactly how much they must pay each month.

Cons of Subprime Personal Loans

The perceived affordability of subprime personal loans comes with trade-offs.

Higher Interest Rate

Subprime loans have significantly higher interest rates than prime loans. That means a subprime borrower can pay much more in interest over the life of their loan. For example, the median personal loan rate for a borrower with a credit score of 700 is 10.93%, whereas the median rate for a borrower with a 600 score is 15.91%.

An adjustable rate loan may have a low initial interest rate, but higher rates will eventually increase your monthly payments substantially.

Higher Fees

Subprime personal loan lenders charge higher fees to subprime borrowers to cover the cost of potential default.

What Credit Score Is Required for a Subprime Personal Loan?

According to the Consumer Financial Protection Bureau, credit scores of 620 and below qualify for a subprime personal loan.

The Impact a Subprime Personal Loan Has on Your Credit

Taking out a subprime loan will not affect your credit score. When a lender runs a credit check on a potential borrower, it affects the credit score a few points, but that is the same regardless of the type of loan.

On the other hand, how you manage the payments can affect your score. Making regular payments can boost your credit because your payment history improves. You may then be able to qualify for a prime-rate loan once you have paid down your debt.

Top 3 Subprime Loans

Here are the top three subprime lending platforms based on a Google search at the time of writing. Lending platforms allow borrowers to search a network of subprime lenders for the best loan terms.

CashUSA.com

Loans are available from $500 to $10,000. The subprime personal loans can be used for any purpose, and funds are deposited into the borrower’s bank account. There are no initiation fees.

For subprime personal loans, direct lenders offer APRs between 5.99% and 35.99% and loan durations from 90 days to 72 months. The site gives the following example: A two-year loan of $1,500 with an APR of 7.9% requires 24 monthly payments of $67.77, for a total amount payable of $1,626.54.

BadCreditLoans.com

Loans are available from $500 to $10,000. Funds are deposited into the borrower’s bank account the next business day. This lender charges no initiation fees.

Lenders from the site’s network offer APRs between 5.99% and 35.99%, with loan durations from 90 days to 72 months. The site gives the following example: A 12-month loan of $2,000 with an APR of 19.9% requires 12 monthly payments of $183.63, for a total amount payable of $2,203.56.

PersonalLoans.com

Loans are available from $500 to $35,000. Funds are deposited into the borrower’s bank account within one business day.

Lenders from the site’s network offer APRs between 5.99% to 35.99% and loan durations from 90 days to 72 months. The site gives the following example: A two-year loan of $8,500 with an APR of 6.99% requires 24 monthly payments of $380.53, for a total amount paid of $9,132.68.

Getting a Subprime Loan

Subprime personal loan lenders list few requirements. But the process for a subprime loan is generally the same as the steps to get any personal loan.

1.    Check your credit score. Look for any errors on your report that could be erased to boost your score. (Checking your own score doesn’t affect your rating.)

2.    Compare multiple lenders. Shop around for the best rate and term. Your current bank or credit union might offer good subprime terms to existing account holders.

3.    Select a lender. Make sure you understand the interest rate, repayment terms, and fees.

4.    Gather your documentation. Scan them ahead of time for quick uploading. Applicants are typically required to show:

a.    Proof of identity. Such as a driver’s license or passport.

b.    Proof of address. You can use a utility bill, rental agreement, voter registration card, or insurance card for your home or car.

c.    Proof of income. Choose from a paycheck, W2 or 1099, tax return, or bank statement showing paycheck deposits.

d.    Current monthly expenses. Use a bank statement, and highlight your major monthly bills.

5.    Complete the application. Once approved, you’ll need to sign for the loan to receive the funding.

Alternatives to Subprime Personal Loans

Subprime personal loans are not ideal. If you find yourself in the bad credit score range, consider alternatives like borrowing from friends or family, getting a cosigner to help you get a loan or credit card, or selling some of your assets to provide immediate cash.

For the future, try to improve your credit by paying debts on time, and check your credit report for errors.

The Takeaway

Subprime personal loans are typically offered by online lenders that cater to customers with a low credit rating who cannot qualify for loans with conventional financial institutions. Subprime lenders charge high-interest rates and financing fees to cover the risk of default. You can choose a fixed or adjustable interest rate.

3 Personal Loan Tips

1. Since lenders will do what’s called a hard pull on an applicant’s credit, and too many hard pulls in a short period can affect your application, it’s a good idea to know what interest rate a lender will offer you before applying for a personal loan. Viewing your rate with SoFi involves only a soft pull on your credit — and takes one minute.
2. Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.
3. In a climate where interest rates are rising, you’re likely better off with a fixed interest rate than a variable rate, even though the variable rate is initially lower. On the flip side, if rates are falling, you may be better off with a variable interest rate.

FAQ

What credit score do you need to get a subprime personal loan?

According to the Consumer Financial Protection Bureau, credit scores of 620 and below qualify for a subprime personal loan.

What are subprime personal loans?

A subprime personal loan caters to borrowers with subprime credit. That means they are considered at a high risk of default, so a lender will charge them a higher interest rate and set longer loan terms to cover the cost of their risk.

What are the requirements for subprime personal loans?

To obtain a loan, borrowers must submit a loan application online and provide financial documents to show they can manage the payments.

Photo credit: iStock/shapecharge

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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