Your credit history is taken into account when you apply for credit, so where does this leave you when you have a poor credit score? With lenders now offering bad credit loans suitable for such situations, we take a closer look to find out the facts.
For borrowers with a bad credit history, whatever the reason, finding a loan can be more difficult. If you’ve defaulted on a financial agreement, missed a repayment or struggled to service your debt, it can all leave a negative mark on your credit report, limiting your options for borrowing.
Even for those who have not struggled financially, bad credit can be a problem. If you’ve never had a loan or a credit card before, lenders won’t be able to find any evidence you can manage debt and may be more likely to reject your application.
However, many lenders do offer bad credit loans that are more likely to accept such borrowers. In this piece, we explore the ins and outs of borrowing with bad credit to help you decide if a bad credit loan is right for you.
What is a bad credit loan?
Bad credit loans, as the name suggests, are loans for people with a poor credit history, who may struggle to be accepted for credit.
Because the status of the borrower presents a higher risk to the lender, interest rates tend to be higher than on comparable loans, but provide good options for those with an imperfect credit history.
Why choose a bad credit loan?
Bad credit loans can be a good option for those who have struggled to get credit elsewhere. You may be in this situation if you have CCJs, account defaults or missed repayments; you are retired, self-employed or are yet to build up your credit history.
Loans for bad credit can be used for a wide range of purposes, whether you’re dealing with emergency car repairs, consolidating multiple debts into one easier to manage payment or looking to upgrade your home.
By taking on a bad credit loan and managing your repayments effectively, you may even see your credit score start to recover over time.
However, if you have struggled with debt in the past, it’s important to fully assess your own ability to keep up with repayments before you apply.
Types of bad credit loan
Those applying for a bad credit loan are likely to be offered one of two types of borrowing.
Guarantor loans allow you to borrow money by designating a friend or family member to guarantee the loan repayments. Your guarantor is a reference who gives the lender an extra layer of insurance, who becomes legally liable to pay off your loan if you do not make the repayments.
An unsecured loan allows you to borrow money without needing an asset, such as your home, to act as collateral.
Advantages of a bad credit loan
A bad credit loan allows you to borrow money, which can often be more difficult for those with poor credit.
Taking out a bad credit loan may also help improve your credit rating. Making sure you keep up with the repayments will demonstrate to lenders a good record of repaying debt and will work in your favour in the future.
Disadvantages of a bad credit loan
When borrowing with bad credit, the main thing to consider is that interest rates are likely to be significantly higher than for standard credit products.
Many bad credit loans are tiered depending on how much you want to borrow. What this tends to mean is that the more you borrow, the lower the interest rate. If you find that your loan amount is just below one of these tiers, it might be worthwhile borrowing a little extra to benefit from a lower interest rate.
Whatever terms you choose, it’s important to remember that you must be able to afford monthly repayments. Failing to do so will seriously affect your credit score.
Should I apply for a bad credit loan?
A bad credit loan may be a good option if you have been struggling to get the credit that you need. However, as with all loans, you need to be aware of the costs involved.
Establish what the fees and charges are, and work out the interest, so you know the full extent of the product you are applying for and can ensure you can afford the repayments. It is important to always do your research to find the best product to suit your circumstances.
Another way to lower your interest rate is to choose a secured or homeowner loan. This means the loan is secured against your property, meaning there’s less risk to the lender. If you do choose this approach, it’s even more important to ensure you can keep up with your repayments, as your home could be at risk if you default on the loan.