Finding the best bad credit loan for you

If you have a bad credit score, you’re still able to get a loan. Our guide will tell you how and everything you need to know about bad credit loans.

What is a bad credit loan?

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, take out a loan or get finance on a car or mobile phone contract.

Can I get a loan with bad credit?

Yes, you can, but the loan may be more expensive. Banks are reluctant to lend to people with bad credit, but 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.

A good first step to getting an online loan with bad credit is to check your credit score and work on repairing it so you can get better, cheaper credit in future.

Why does bad credit make it harder to get a loan?

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:

  • Take out a loan
  • Get a credit card
  • Sign up for a mobile phone plan
  • Apply for a mortgage

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.

How much can I borrow with a bad credit loan?

The amount you can borrow with bad credit depends on the type of bad credit loan you apply for and the lender’s affordability criteria.

You may be able 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.

What types of interest rates are available for bad credit loans?

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.

What are the different types of 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:

Personal, unsecured loans

This type of loan is typically charged at a lower interest rate than a credit card, 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.

Short term loans and payday loans work on the same basis but are, as the name suggests, offered for days, weeks or months rather than over 12 months or more.

Guarantor loans

Guarantor loans are a type of unsecured loan where someone else (usually a close friend or family member) guarantees that the loan repayments will be made if you can’t make your repayments.

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.

Secured loans

A secured loan is also known as 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.

However, if you are unable to repay the loan, your house could be repossessed, and the equity in your home will be used to cover the money you owe.

It’s the cheapest way to borrow with bad credit, although your home is at risk if you fail to keep up repayments.

What are the advantages of bad credit loans?

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:

  • They are easier to get than a bank loan
  • If you repay on time and in full, it could help repair your credit score
  • It’s a simple application with an instant decision
  • You can access money fast if you’re approved

What are the disadvantages of bad credit loans?

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:

  • Higher interest rates
  • Risk of repossession for bad credit secure loans
  • Expensive charges, such as arrangement, late or missed payment fees
  • Further damage to your credit score if things go wrong

Are there any alternatives to bad credit loans?

Debt consolidation loans

If you are seeking a secured loan to pay off multiple debts, a debt consolidation loan allows you to borrow a set amount to pay off multiple debts, e.g. credit cards, store cards, overdrafts, which you then pay back with one monthly payment.

If you are having trouble keeping track of what you owe, this can be a helpful way to gain control over your debt and build your credit score.

Credit building cards & bad credit cards

A credit builder credit card is worth considering if you want a small bad credit loan. These cards have low credit limits and lower rates than a bad credit loan. However, you must repay the balance on time and in full every month to build your credit score. If not, you could damage your rating further and face late payment fees and penalties.

Credit union loans

If you are a credit union member or belong to a community with a credit union, you could approach them and see if they would be 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.

Peer to peer

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, but you still need to pass credit and affordability checks. Your credit score will determine the rate of interest you’ll be charged, so it could be high.

Loans for bad credit FAQs

Can I get a loan with very bad credit?

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.

What is classed as bad credit?

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: 

  1. Late or missed payments
  2. Unpaid debts
  3. Repossession of home or assets
  4. Filing for bankruptcy
  5. County court judgements (CCJs) and IVAs

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.

Are loans more expensive when you have bad credit?

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.

What if I can’t pay my loan?

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.

What is APR?

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.

More loan options

We compare a range of loans to help you find best guarantor loan, short term loan, car loan or home improvement loan for you.