Guide to bad credit loans and alternatives to them
- Bad credit loans may be an option if you're struggling to get credit from another source
- Interest rates are likely to be high
- Make a soft search to find deals available before applying, and explore alternatives to bad credit loans
- Think carefully before transferring unsecured debt into a secured loan
- Make sure you meet repayments and avoid taking on additional debt - a bad credit loan could be the last-chance saloon for your credit history
A bad credit loan is an option to consider for would-be borrowers who are struggling to find credit from other sources.
It's likely that the interest rates levied on such loans will be high, a reflection of the borrower's lack of other choices and the fact that they're likely to have a poor or non-existent credit history.
Bear in mind that people who have had County Court Judgements (CCJs)† against them or those who have been declared bankrupt† in the past are unlikely to be accepted for a loan offered through Gocompare.com.
What's more, making an unsuccessful application could damage your credit score even further.
What's a bad credit loan?
A bad credit loan isn't a 'bad' thing in its own right - it's simply a loan for people with a poor credit history.
Perhaps you've missed repayments, missed bill payments and/or made failed applications for credit.
Even if you've never borrowed in the past, you might still struggle to qualify for the market-leading loans. After all, the lender has nothing to show that you can be relied upon to make your repayments.
To some lenders you're too much of a risk, but to others you're a chance to do some business in a competitive lending market.
Why choose a bad credit loan?
There's no getting away from the fact that if you're considering one of these products it's likely to be because your options are limited.
Having said that, these are acceptable financial products that are a lot better than some of the options out there for people struggling with their finances.
Because you're looking at less competitive rates, it's even more important to compare bad credit loans so that you can find the cheapest borrowing possible
What's more, if managed responsibly a bad credit loan could help you build or repair a poor credit score.
One way of thinking about a poor credit loan is as a last-chance saloon for your record.
If at all possible it's good to avoid taking on extra debt but, depending on your circumstances, you might be able to use a bad credit loan to manage any current deficits.
For example, you could consolidate your debt, extend your repayment period, or even cut your interest rate.
Concentrate on meeting your repayments to avoid damaging your credit rating further and, if at all possible and your deal allows it, try to make overpayments to pay down your loan as quickly as possible.
Make a soft search for a bad credit loan
Because you're looking at less competitive rates, it's even more important to compare bad credit loans so that you can find the cheapest borrowing possible.
You should be aware, though, that the best deals will only be available to customers that the lender judges to have the best credit scores.
Take extra care before turning unsecured, personal debt into a secured loan, even if the repayment figures look attractive
Also, if you have an application rejected it'll leave a mark on credit files, which could further damage the way a lender scores you.
That's why it makes sense to make a soft search (also known as a 'smart search') for loans before applying.
If you use Gocompare.com's smart search loans comparison tool you'll only see the deals that you're likely to qualify for, giving you a better idea of the actual rates available to you and helping you make the right application.
Secured v unsecured debt
If you're a homeowner or you have another significant asset such as an expensive car that you can use as collateral, then making your bad credit deal a secured loan is an option.
Secured loans are likely to be offered at lower rates than personal loans, and they may be the only option if you're looking to borrow a significant sum.
If you already have a bad record of repayments it's especially important that you know what you're getting into before putting your home at risk.
Take extra care before turning unsecured, personal debt into a secured loan, even if the repayment figures look attractive.
Protecting an unsecured loan
While the last thing you're likely to want or need is an extra monthly outgoing, it's worth considering an income protection policy to protect your loan payments.
If your loan is secured against your home, such a policy could help you meet essential repayments in unexpected circumstances.
Alternatives to bad credit loans
If you're searching for this sort of deal it almost goes without saying that your alternatives are limited, but there are a few avenues you may be able to explore.
Did you know...?
- Credit unions are not-for-profit institutions intended to serve their members
Speak to your bank or building society
If you have an established reputation with your current financial provider it's possible that they could offer a deal tailored to your circumstances.
This may be more appropriate and attractive than the dedicated bad credit options advertised to the wider market. If you don't speak to your current provider, you won't know.
Is there a possibility of getting or extending an overdraft on your current account to cover the amount you need? Some banks offer a 0% interest overdraft on a certain amount, or interest and fees that may work out cheaper than a bad credit loan.
Make sure that you never go over the agreed overdraft limit though, as unarranged overdraft fees can be very costly.
Credit unions are community co-operatives owned by their members that can offer a real alternative to banks for those in financial difficulty, although you'll need to be a member to qualify for a loan.
Such institutions have a reputation for being more understanding and supportive of those in financial difficulties - because they're not-for-profit institutions their purpose is intended to be to serve their members.
If you have a poor financial history you're going to struggle to find the most attractive credit card deals, but there are dedicated cards for people with bad credit ratings.
Unfortunately named 'bad credit cards' are likely to have low credit limits and high interest rates, but it's again worth looking at the options.
As with loans, try to conduct a smart search as failed applications for credit cards will be noted on credit records.
A guarantor loan is an unsecured loan where a second person is responsible for paying off the debt if the person who has taken out the loan misses their repayments. You should be aware that rates can be high and that you may end up paying more than the original borrowed sum in interest, on top of your monthly repayments.
Options apart from banks and mutual societies
Payday loans (don't do it!)
If you're considering irregular lending options, at all costs stay away from loan sharks
If possible, pay down debt
If you do have savings, remember that interest rates on loans will almost certainly be higher than the interest levels applied to your savings, so think about paying down debt.
Also, if you have non-essential assets that you could sell it may be worth doing this in order to limit the amount you have to borrow.
If you receive benefits, you may be eligible for an interest-free budgeting loan. This is to be spent on everyday essentials that you're unable to afford currently, for example rent.
Be aware that, because of high demand, only those deemed to be in urgent circumstances will receive a payout and it's not a quick process. You can look online to check the benefits you're entitled to from the government, or find out more about a budgeting loan from the social fund.†
Could family and friends help?
Approaching your nearest and dearest for a loan is unlikely to be comfortable, but it may be worth thinking about - according to a Gocompare.com survey, 57% of the UK population often lend money to friends and family.
Depending on your relationship and your confidence in your ability to repay, you may even be able to work out a mutually beneficial deal with family and friends that involves paying the debt plus interest.
The interest could, perhaps, be at a lower rate than that demanded by a regular lender, but at a higher rate than that offered by savings accounts.
"When borrowing from or lending money to friends and family, it's important to consider the effect it might have on your relationship with the person," said Gocompare.com's Matt Sanders.
"For instance, if you're considering borrowing money it's important to be clear, honest and realistic about how you intend to pay the person back and to agree a time frame in which you intend to do so."
Explore peer-to-peer lending
Such irregular lending that avoids the middle man is one of the reasons for the growth in peer-to-peer lending. P2P is worth looking into, but attractive deals are likely to require a good credit history.
If you are considering irregular lending options, at all costs stay away from loan sharks. Should you be struggling with debt to such an extent that you're considering this, speak to your existing lender as a first port of call. The lender won't want you to default on the debt, and may find a way to help.
By Felicity Hannah