Bad credit loans, as the name suggests, are loans for people with bad credit histories. That can include anyone who has a poor credit rating – whether it's because you have missed loan repayments in the past, been rejected for loans elsewhere or had a County Court Judgment (CCJ) against you.
Why choose a bad credit loan?
The short answer is ‘because there isn’t an alternative’. Mainstream lenders tend to avoid offering loans for bad credit customers or, if they do, they will give them a punitive rate of interest. However, there are lenders who specialise in bad credit loans and credit cards who may be able to offer you a better deal.
Loans for bad credit can be invaluable if you need to raise funds quickly in an emergency - for example, unexpected car repairs or fixing a broken boiler in the middle of winter. They can also be a way of taking control of money worries, by consolidating debts into one larger loan with smaller monthly payments.
This latter option will not only help you to manage your money more effectively, but it can help you to actively repair your credit rating. So long as you always make your repayments on time, you will show lenders that you can manage your debts responsibly.
Things to remember when taking out a loan with bad credit
The first thing to consider when taking out loans for bad credit is that you will pay a much higher rate of interest. This is because many people with a bad credit rating have struggled managing their finances in the past, so they represent a much higher risk to the lender than someone with a good credit rating.
The second thing to remember is that although a longer term will keep your monthly payments down, it will mean you are paying those high interest rates for longer – costing you more in the long run. So it is recommended to go for the shortest repayment term you can afford.
Finally, 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 financially benefit from a lower interest rate. Just make sure you can afford the repayments.
Another way to lower your interest rate is to choose a secure or homeowner loan. This means the loan is secured against your property, making you less of a 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.