Whenever you apply for credit, one of the biggest factors the lender will consider is your credit history. This is a detailed look into what you’ve borrowed and how you’ve managed your debts and helps the lender decide whether to approve your application.
For borrowers with a poor 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, poor 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 loans for people with poor credit that are more likely to accept such borrowers. In this piece, we explore the ins and outs of borrowing with poor credit to help you decide if borrowing is right for you.
What is poor credit lending?
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.
I need a loan but I have poor credit
Poor credit lending 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 people with poor 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 borrowing money 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.
Advantages of getting a loan with poor credit
Low credit score loans allow you to borrow money, which can often be more difficult for those with adverse credit.
Taking out a loan with a poor credit score 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 borrowing with poor credit
When borrowing with a poor credit score, the main thing to consider is that interest rates are likely to be significantly higher than for standard credit products.
These types of loan 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 loan with poor credit?
Borrowing 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.
Visit our Know How section for more information on money matters.