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What is a Bad Debt Personal Loan?

By Bethany Keene
Updated May 16, 2024
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A bad debt personal loan can refer to a number of different things. Most commonly, it refers to an unsecured personal loan that is given to an individual for the purposes of allowing him or her to pay off and essentially consolidate credit card debt. Some for-profit debt consolidation companies offer these types of bad debt personal loans. The borrower only need then make one payment per month, to the consolidation company, rather than a number of payments to credit cards. A bad debt personal loan may also refer to a loan that is given to someone with poor credit, but is secured by collateral, such as a vehicle.

The first kind of bad debt personal loan is more common, and this may be referred to as a credit consolidation loan. This type of loan is typically unsecured, meaning there is no collateral placed against it. It is offered to people with very low credit scores, extensive credit card debt, or even those with bankruptcies on their credit report. This type of loan is generally used to pay off and consolidate existing credit card debt, though it may also be used for other purposes. The designated purpose of the loan typically depends on the institution lending it.

This type of loan typically carries an extremely high interest rate, since these are very risky loans to make. They may have short terms of a few months or a few years, but again, it depends on the lending institution as well as the amount and purpose of the loan. A bad debt personal loan such as this should typically be used as a last resort, especially if other questionable debt consolidation practices are already being used. For instance, some debt consolidation companies will ask borrowers to stop paying on their credit cards, so the consolidation company can then "settle" with the credit card company for a lesser amount than is owed. This will destroy the borrower's credit.

Sometimes, a bad debt personal loan may also be secured with collateral, and then used for other purposes than paying off credit cards. This can also lead to a slightly lower interest rate. If individuals have a vehicle that is paid off, for instance, the vehicle can be used as collateral. Some companies will also offer this type of loan to borrowers who are risky, but still want to purchase a new car, and will attach an extremely high interest rate to the loan. This is just one of the many reasons it is important to maintain a good credit history.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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