Bad Credit Loans Explained
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Last updated: 28 October 2020
Cheap loans tend to only be available to those with the best credit scores – so what to do if that rules you out?
You can still get loans with bad credit, but you should know what to expect.
What is bad credit?
Credit scores are affected by all sorts of things that happen throughout your financial history.
If you miss regular payments – be that for bills, a phone contract, or any other debts – then your credit score will be negatively impacted. If you’ve ever been on a debt management plan, have had a loan application rejected, or have declared bankruptcy then this will all count towards a bad credit rating.
Be wary of over-searching your credit score too, as this can actually negatively affect it as a result. When financiers decide whether to accept your loan application, they perform what’s called a ‘hard credit check' on you. So, if you constantly run hard credit checks on yourself, it’ll show up on your record.
Importantly, an absence of credit history doesn’t work in your favour either, as lenders want proof you can be relied on to repay your debt. You might find yourself in this position if you’re fairly young or don’t have an extensive financial history in the UK.
You can improve your credit score by keeping up with payments and debits, and resisting the urge to repetitively check up on it. Or you can read our guide dedicated to helping you improve your credit score here.
What are bad credit loans?
Bad credit loans, therefore, are loans that are available to people who don’t have sterling credit scores. You’re not totally cut off from taking out a loan, but there are a few caveats – generally the interest rate you’re offered will be higher, for example.
What types of loans for bad credit are available?
Unsecured or Personal Loans – you can usually borrow up to £25,000 with an unsecured loan if you have bad credit. You won’t receive the best loan rates on the market as interest rates tend to be high, and your choice of provider will be limited.
Secured loans – these are when the loan is secured against a high-value asset, like a house or car. Because the lender knows they can recoup their money should you default on payments, you’re more likely to be accepted for a secured loan with a bad credit history than a personal loan. Your asset is used as collateral.
Guarantor loans – should you be unable to keep up with payments, you could get someone to guarantee your loan by nominating them to make repayments on your behalf. Typically, this would be a close friend or relative. It can be a great way for people with poor credit history to access loans, but its’ important that the guarantor knows what they’re getting into – they still have to pay if you don’t.
Peer-to-Peer loans - Instead of borrowing from a loan company, you borrow from an individual. You might be able to get a better rate of interest this way. However, you’ll still need to be approved and it might be tougher to get a good deal – if at all – if you haven’t got a great credit score.
Should I take out a loan with bad credit?
Keeping up with loan repayments can be a great way to actually improve your credit score! If you’re confident you can, and are in need of money, then taking out a loan could be the cheapest way to borrow.
What are the risks of bad credit loans?
The risks of bad credit loans are no different to those of regular loans. You should carefully consider these before taking one out.
Remember that someone with poor credit history is a higher risk to the loan company. As a result, loans for bad credit will typically have higher interest rate – the best loans are reserved for those with top credit scores.
Additionally, there will always be extra fees to factor in – be those penalties for missed payments, administration fees or even early repayment fees. Be sure to check the terms and conditions of the loan.
If you take out a secured loan, then repossession is a real risk if you fail to keep up with repayments – so this is not a decision to take lightly!
Finally, missing payments will damage your credit score further, fuelling a perpetuating cycle of bad credit.
What to consider before taking out a bad credit loan?
Before you take out a loan, think carefully about how much you want (or rather, need) to borrow. Then, work out what you can realistically afford to pay back – this’ll help you determine what type of loan you could take out, and what interest rates you can access.
It’s also worth being cognisant of what your credit score actually is as well, which can help guide your loan comparison.
How do I apply for a bad credit loan?
All this talk about bad credit loans, but where to actually find the best deals? Look no further! Use our loan comparison search engine here at usave to see what loan types, terms and interest rates are available to you. Plus, because our comparison tool only conducts a soft search, your credit score won’t be affected Once you’ve chosen your loan and have carefully considered the risks we’ve outlined, you’re ready to apply.
You’ll need to have certain information to hand in order to apply for a bad credit loan. Usually, you will need to provide your UK permanent address and full contact details (your lender can’t have you scarpering now, can they?!) You may also be asked to provide proof of income or spending habits. If you have applied for a guarantor loan, your guarantor’s details will need to be supplied too.