If you need a short-term loan but don’t have a favourable credit score, you may not qualify for a personal loan from most financial institutions. That’s why you may want to consider taking out a bad credit loan.
Although there are some downsides to loans for bad credit, by doing your homework and carefully looking at your options, you can use this to build up your credit profile again.
Let’s take a closer look at what a bad credit loan is and how you can borrow money with bad credit.
Bad credit refers to a poor credit history. In the UK, the three major credit reference agencies (CRAs) - Experian, TransUnion, and Equifax - all have different criteria. However, a poor credit score is generally considered to be a score between 550 and 690.
A score lower than 550 is considered to be a very poor credit rating and you are less likely to be approved for any type of loan. Remember that your credit history is recorded and stored by all credit reference agencies and negative marks like a late or missed payment dates back six years.
Some reasons why you may have a bad credit history can include:
Late defaulted payments
County court judgements (CCJs) or individual voluntary agreements (IVAs)
Filing for bankruptcy
Too many hard searches on your credit record (due to multiple loan applications)
Not having updated details on the electoral register
Incorrect details on your credit report, like an old address
No credit history (when you’ve never had credit before)
Keep in mind that if you have filed for bankruptcy, have any active CCJs, or are still paying towards an IVA, you will not qualify for a bad credit loan.
Another possibility why you may have bad credit is that you don't really have a credit history at all for lenders to evaluate. This is often the case for young adults who haven't had time to establish a credit history and have never opened a bank account.
If you’ve recently relocated to the UK, you may also have a limited credit history in the UK as your credit history does not automatically transfer internationally.
A CCJ is a county court judgement. This is a type of court order that is usually obtained by personal loan lenders if you haven’t paid your debt. It orders you to pay back what you owe.
A legal credit agreement called an IVA, or individual voluntary arrangement is made between you and any lenders you owe money to and states that you will pay back all or part of your debts over a certain period of time.
You will be debt-free after your IVA is completed. However, the IVA will continue to appear on your credit report for six years after it began.
A bad credit loan is a loan that is often given to borrowers with bad credit scores. These loans are typically secured, which means you’ll need some form of collateral to secure the loan.
This is different to personal loans from traditional lenders as these are unsecured loans that do not require any collateral and also come with lower interest rates.
Just like a payday loan, bad credit loan rates are often substantially higher than those of regular personal loans. Because of this, they are an expensive choice for borrowing money. They may also come with lower maximum loan amounts, as they will carry a higher risk to the lender.
Your credit profile will also influence your chances of being approved for a loan at a competitive rate. The higher your credit score, the better the chance of you getting a favourable credit rating.
Your credit report contains information on your whole financial history, including credit applications and late payments. Entries usually stay on your credit report for six years.
Lenders can view your credit file through credit reference agencies (CRAs) like Experian and Equifax, even if they are not privy to your credit score.
Not all lenders provide loans to borrowers with poor credit histories, and even those that do may deny your application if your credit history is really bad.
Bad credit loans often have an APR (annual percentage rate) of around 49%. Typically, the least expensive rate on a personal loan is roughly 3% by contrast.
This is why it makes sense to work on raising your credit score before requesting a loan.
The annual percentage rate is referred to as APR. The interest on the loan as well as any late payment fee or other fees are included in the cost of borrowing over a 12-month period.
Start by calculating how much you can comfortably afford to pay back each month. Then compare loans from other lenders to find one with the lowest interest rate, and the one that best suits your needs.
Make an effort to only apply for loans that you have a good chance of getting, as each full application will result in a hard search on your report, which could harm your score.
To qualify for a bad credit loan, start by verifying that you meet all of the application requirements before applying. The lender or loan broker service will also conduct an affordability assessment.
Remember that your credit score can be further harmed if you receive a refusal.
Additional elements that could affect your application include:
Your annual income
Your current debts
Your income ratio
Your credit score
Your monthly expenses
Before submitting a formal application - which will trigger a hard credit pull - look for lenders who offer a free eligibility check. This will give you a better idea of whether or not you might be approved, and it only does a soft credit check on your profile.
Soft inquiries don't show up on your credit report and won't lower your score. They function differently from hard searches, which appear on your credit file when you formally apply for credit.
As an example, when you compare personal loans with Experian, you can view your eligibility rating free, without influencing your score.
You can also choose a lender that offers an online application process as this is often faster, easier, and less time-consuming. Online lenders and credit brokers can typically provide an instant decision with a fast pre-approval process, making it easy to get an affordability check that has no impact on your score.
It really depends on your unique circumstances. For example, if you own a home, it might be easier for you to be approved for a secured loan, or even get a guarantor loan if you have little or no credit history.
However, both of these funding options carry risks and might not be ideal for you.
In general, secured loans are easier to get if you have a low credit score or limited credit history.
Some of the advantages of bad credit loans include:
You have a higher chance of approval than with a typical personal loan
If you make payments on time it can help increase your credit score
It typically has a fast application process
The cons of bad credit loans are:
If offers fewer options for borrowers
It’s not a wise choice for long-term financing or debt consolidation
There are a few alternatives to bad credit loans that you can consider, including:
Credit cards for bad credit
A budgeting loan is an interest-free loan from the government. The maximum you can borrow is £812 and the money must be used towards specific expenses like funeral costs or an advance on rent
To qualify for a budgeting loan you must be receiving one of these benefits for a minimum of six months:
Income-based Jobseeker Allowance
Income-related Employment and Support Allowance
If you are receiving a Universal Credit then you can get a Budgeting Advance instead.
These credit cards, also referred to as credit building cards are typically low-limit cards made available to people with bad credit. Bad credit credit cards allow you to avoid paying excessive interest rates and establish your credit history at the same time.
But every month, you must pay these credit card companies back in full and on schedule.
If you miss a monthly payment, you risk further lowering your credit score and can end up paying expensive late penalties and increased interest rates.
Credit unions offer loans to local communities and these loans are typically less expensive than other short-term lenders. They might offer a good alternative for smaller loans (typically under £3,000).
To borrow money from a credit union you may need to join one in your area. Some may even demand that you initially begin saving with them.
Personal loans with a named guarantor are those where the borrower commits to pay back the loan if they are unable to do so themselves.
Because the lender has further security that the loan will be returned, the rates may be lower than those of negative credit loans.
Before listing your chosen guarantor on your application, make sure you check with them. They must have good credit and, if they own a home, at least 50% equity in order to make such a significant payment.
Private lenders that use their savings to lend you money through peer-to-peer lending provide you with unsecured personal loans in exchange for interest on the loan.
Even if you have bad credit, these lenders might be more inclined to examine your application. Rates may be less expensive than those for loans to people with terrible credit.
If you need emergency cash for an unexpected expense and you don't qualify for a traditional loan from mainstream lenders you can consider a bad credit loan.
Whether you work with a direct lender, loan broker, or even an online lender, always make sure that you review the loan terms carefully and look at the interest rates they offer. If you can comfortably afford the monthly repayment terms you might even improve your credit score.