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By Laura Rettie, Personal Finance Journalist.
If you have a bad credit score, you're still able to get a loan. Our guide will tell you how and everything there is to know about poor credit loans.
A bad credit profile will arise if you do not repay money borrowed in line with your credit agreements or have had legal proceedings against you.
This could mean a history of:
Credit scoring differs between agencies and lenders, but you can access your credit report online from a credit reference agency like Experian or via an app like ClearScore.
Yes, you can, but the loan may be more expensive. Banks are reluctant to lend to people with bad credit. Luckily, there are specialist money lenders who may be able to help.
Bad credit loans work similarly to personal loans but are typically offered by direct lenders with higher interest rates. An online loan lender may accept your application even if you have bad credit, but the interest rate will be greater because of the risk you may default on repayments, which is where you stop making the required payments on a debt.
If you have bad credit and need a loan, it's a good idea to first check your credit score and focus on improving it. Doing so will allow you to access more affordable credit options in the future.
A low credit score, or even having no credit history at all, makes borrowing difficult. Personal loans for bad credit are harder to get because of the risk you pose to the lender.
If you want to do any of the following financial activities, a lender will check your credit score and history of borrowing money to work out whether to lend money to you.
If you want to:
Then your credit score will be checked.
The better your repayment history, the higher your score will be. To lenders, this means you are a reliable borrower, less of a risk, and you may be offered favourable interest rates because of this.
However, if you've struggled with repaying a loan, credit card balance, or bills in the past, unfortunately, your late or missed payments will be reflected in a low credit score and lenders will consider you high risk.
This means they may reject your application, and it's why people turn to loans for bad credit.
Loans for bad credit work the same way as other types of loans, although some are easier to get approval for than others.
Here are the main types of loans for people with bad credit:
This type of loan is typically has a lower interest rate than credit cards, although, for people with bad credit, the interest rate may be higher.
The interest rate is fixed, and repayments are made monthly. You can choose how long you'd like to repay the loan, but the longer you take to repay it, the more the loan will cost.
A guarantor loan is an unsecured loan that requires someone else, typically a close friend or family member to guarantee the loan repayments in case you are unable to make them.
You will both need to undergo affordability and credit checks, but the loan terms will be the same as a personal loan. This type of loan may attract a lower interest rate because your guarantor is reducing your lending risk.
A secured loan can also be called a homeowner loan. As the name suggests, you need to be a homeowner with a mortgage to be eligible for this type of loan.
If you've got bad credit or very bad credit, you have a better chance of getting a secured loan because you are considered less of a risk to lenders because the equity in your property.
In the event that you are unable to repay your loan, your home could be repossessed and the money you owe will be covered by the equity in your home.
It's the cheapest way to borrow with bad credit, although your home is at risk if you fail to keep up repayments.
A bad credit loan should only be taken as a last resort, but a short term, low credit loan can be helpful when you need to access funds but have a poor credit history.
The advantages are:
As with any borrowing, there are risks attached, and the drawbacks of taking out a bad credit loan are greater than with standard borrowing.
The disadvantages are:
If you’re looking for a way to reduce your debts, a debt consolidation loan allows you to borrow money to pay off what you owe, e.g. credit cards, store cards, and overdrafts, which you'll then pay back with one manageable monthly payment.
If you’re struggling to keep track of what you owe, this can be a practical way to get control over your debt and build your credit score.
A credit builder credit card is an alternative worth considering if you’re looking to borrow money but you have a bad credit score. These cards will typically have lower credit limits and rates than bad credit loans. It's important to pay off your balance in full and on time every month to build your credit score. If you don't, your credit rating could be negatively affected and you may also incur late payment fees and penalties.
If you’re already a credit union member, or belong to a community, workplace or organisation with a credit union, you could see if they are willing to lend to you. This type of loan has typically lower rates cost and is much cheaper than a bad credit or short-term loan.
Also known as P2P lending - it's a platform that helps people lend and borrow from each other rather than a bank or lender.
It could be easier to get a peer to peer loan than a personal loan from a bank. However, it’s important to note that credit and affordability checks will still need to be performed. The interest rate you receive will be decided by your credit score.
Read more about different types of loans; guarantor loans, car loans and home improvement loans
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.
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APR is short for Annual Percentage Rate. It's a calculation of the overall cost of your loan and takes into account all the costs during the term of the loan, including set up charges and the interest rate. Any extra fees are added to the loan amount before interest is calculated.
If you are unable to make repayments on your loan, you could spiral further into debt or even risk losing your home. If you miss or make late payments, you'll incur extra fees, which will add to your debt. You will also further damage your credit rating.
Yes, the poorer your credit rating, the more expensive your loan will be because the interest rate will be higher. The best way to get a cheaper loan is to repair your credit rating and improve your score.
A bad credit profile will arise if you do not repay money borrowed in line with your credit agreements or have had legal proceedings against you.
This could mean a history of:
Credit scoring differs between agencies and lenders, but you can access your credit report online from a credit reference agency like Experian or via an app like ClearScore.
Yes, it's possible to get very bad credit loans, but it will be more difficult and expensive. A loan broker or specialist lender will have access to the widest range of loans to suit your circumstances.
Also known as poor credit loans, bad credit loans are designed for people with a poor credit history or existing bad debt.
A person who regularly doesn't pay bills on time or consistently misses repayments may have a poor credit history. Their credit score will be low, and they may only be eligible for what's called bad credit loans or bad credit cards.
People with bad credit will find it difficult to get a mortgage, loan, car finance or even a mobile phone contract.
The amount you’re able to borrow with bad credit depends on the type of bad credit loan you apply for and the lender's affordability criteria.
It’s possible to get an unsecured loan for bad credit up to £25,000 from an online direct lender, but you'll need to pass affordability checks and provide proof of income. Small loans for bad credit will be easier to get approved for and faster to obtain.
If you want to borrow more than £25,000, a secured loan is a better option.
The interest rates on bad credit loans are always higher than standard personal loans from banks or lenders. The average APR is 49% compared to around 3-5% for a bank loan.
When you apply for a bad credit loan, the interest rate you're offered may be even higher than the advertised APR and can be as high as 99% or even more in some cases.
Compare bad credit loan interest rates and use an online loan calculator to check loan costs before you apply. Before you sign any credit agreement, check the total cost of the loan and what you'll need to pay out every month.
