Personal loans for bad credit scores with low monthly payments can help people build positive history, which can boost ratings over time.
Also, lenders are more likely to give you a second or third chance if you can afford to repay the money on time and according to terms.
Both parties win in this arrangement!
However, consumers control one of the three elements that drive low monthly payments: the amount borrowed. Meanwhile, lenders determine the two remaining factors: the repayment term and borrowing costs.
Individuals with bad credit scores below 670 can get personal loans by requesting a modest sum from sub-prime lenders.
Small Loans have Low Monthly Payments
Personal loans with small principal amounts have low monthly payments, and the total cash borrowed is the one thing people with bad credit history can control.
It’s easier to get a smaller personal loan! (Sponsored Link) Online lenders are more apt to approve lesser amounts because the monthly payment is more manageable, and consumers with FICO scores below 670 are less likely to fall behind.
Therefore, keep your request as small as possible.
Affordable Payments
Small personal loans result in more affordable monthly payments – a key consideration for borrowers with lousy credit, as lenders approve consumers most likely to pay them back.
For illustration purposes, let’s assume a loan with a one-year term, a 0% interest rate. Notice how the monthly payment shrinks as the opening balance diminishes.
| Amount Borrowed | Monthly Payment |
|---|---|
| $6,000 | $500 |
| $3,000 | $250 |
| $1,000 | $83 |
| $500 | $42 |
Debt-to-Income
Smaller personal loans also result in better debt-to-income (DTI) ratios. Lenders use this fraction in their underwriting process to project the monthly payments’ affordability and are more likely to approve lousy credit consumers when the fraction is below 20%.
DTI = Monthly Payment/Monthly Income
There is little that you can do in the short term to improve your DTI by increasing your income. However, you can manage the numerator by keeping the size of your request as small as possible.
Long-Term Loans have Low Monthly Payments
Long-term personal loans have lower monthly payments because you spread the installments over more periods. However, consumers with a bad credit history influence but ultimately do not control the length of time they hold onto the lenders’ money.
Lenders typically decide whether to offer repayment terms of 3, 6, 12, 24, 36, or 60 months. In general, consumers with the worst borrowing credentials do not qualify for the longer terms (24 to 60 months). However, it never hurts to ask.
For illustration purposes, let’s assume a $3,000 principal amount at a 0% interest rate. Notice how the monthly payment shrinks as the terms grow longer.
| Length in Months | Monthly Payment |
|---|---|
| 3 | $1,000 |
| 6 | $500 |
| 12 | $250 |
| 24 | $125 |
Affordable Borrowing Costs mean Low Monthly Payments
Personal loans with affordable borrowing costs can also translate into lower monthly payments. However, consumers with bad credit history do not control what the lender decides to charge for the use of their money and often fork over more in interest and origination fees than the average borrower.
Interest Rate
Personal loans with affordable interest rates tend to have lower monthly payments. However, people with bad credit rarely qualify for the best rates as their default risk is much higher, and they often must pay more to borrow money.
For illustration purposes, let’s assume a personal loan with a one-year term and a $3,000 principal amount. Notice how the monthly payment shrinks as the interest rate drops.
| Interest Rate | Monthly Payment |
|---|---|
| 36% | $301 |
| 28% | $290 |
| 20% | $278 |
| 12% | $266 |
Origination Fee
Personal loans with affordable origination fees will tend to have lower monthly payments. However, consumers with bad credit profiles rarely qualify for the best origination fees and wind up paying more to borrow money than the average person.
An origination fee is an amount taken from the proceeds. For example, a personal loan amount of $3,000 with a 5% fee means you receive $2,850 in funding. However, if you need to net $3,000, you must borrow $3,158.
For illustration purposes, let’s assume a personal loan with a one-year term, 0% interest, and a $3,000 net principal amount. Notice how the monthly payment contracts as the origination fees drop.
| Origination Fee | Monthly Payment |
|---|---|
| 8% | $272 |
| 6% | $266 |
| 4% | $260 |
| 2% | $255 |