A bad credit loan is an option if you’ve got a poor or limited credit history - maybe you’ve missed repayments in the past or had failed applications for credit.
Most poor credit scores are because of previously rejected applications or missed payments. But even if you’ve never borrowed before, your credit score might not meet some lender’s requirements. That’s because there’s no proof to the lender from previous borrowing that you’ll repay on time.
If you apply for a loan and don’t get accepted you could cause more damage to your credit score - the more applications you make more in short spaces of time, the worse it gets.
There are a few reasons why you might be considering a bad credit loan:
Sometimes more mainstream banks and building societies won’t consider your application
If managed responsibly, a bad credit loan can be used to improve your credit score
It’s usually best to avoid taking on extra financial commitments, you could use a bad credit loan to combine your debts into one payment, instead of paying off multiple lenders
If you decide getting a loan is what you want to do, and something you can afford, compare bad credit loans - you’re more likely to find one with the cheapest interest rate and the best terms possible.
The interest rates on the kind of loans that you’re more likely to get accepted for will be higher than average and tend to have hefty admin fees too, so you need to get the best deal you can.
The best interest rates are only available to customers that lenders judge to have the best credit scores.
Use a soft search (also known as a 'smart search') to find bad credit loans before applying.
It won’t leave a mark on your credit file and won’t damage your credit history.
When you use a smart search, you’ll only see loans you’re more likely to be accepted for. It gives you a better idea of the actual rates available to you and helps you make the right application.
If loan sharks, logbook and payday loans are tempting you with a quick cash injection, look at the interest rate (APR) - it'll be extremely high in comparison to other loans and credit.
Secured loans usually have better interest rates than unsecured personal loans and they might be the only option if you're looking to borrow a significant sum.
An unsecured loan means the money you’re borrowing isn’t backed up by any kind of collateral. So if you can’t keep up with the repayments a lender can’t automatically take your property, but it can report you or file a lawsuit to collect the money owed.
If you’ve got a poor credit history, you might struggle to get an unsecured loan, the interest rates won’t be that favourable either.
A guarantor is a person who agrees to pay your loan repayments if you can’t.
With a guarantor loan, a lender knows that your guarantor will step in to make repayments if you can’t keep up with them, so it’s a less risky option for a lender.
If you’re worried or not sure you can keep up with repayments on a loan, there are alternative options you can explore:
If you’ve got a good relationship and history with your bank speak to them first, they might be able to help
These organisations are not-for-profit and have a reputation for being more understanding and supportive if you’re in financial difficulty, but you’ll need to be a member to qualify for a loan
There are dedicated cards for people with bad credit scores, but the limits are usually low with high interest rates - it’s worth considering all your options and using a smart search
If you’ve got savings, it might be worth using it to pay off your debt - you’ll never earn more in interest then you’ll pay in interest. Selling any non-essential assets to cover costs could help too
If you receive benefits, you might be eligible for a budgeting loan from the social fund, but due to cuts and demand only those in urgent situations are likely to be approved, and it can be a slow process
While it might be uncomfortable to talk about initially, you might be able to work out a plan to manage your debt with help from your friends and family
Peer-to-peer lending means borrowing money directly from another person. P2P is worth looking into, but competitive rates are usually reserved for those with good credit history
If you’ve exhausted all the options, or you’re not sure what to do next, you can talk about your debts and credit options with organisations and charities which specialise in money and debts. Try Citizen’s Advice or StepChange
Try not to use the financial breathing space you get to take out further loans or credit cards.
Focus on meeting your repayments to avoid damaging your credit rating further and, it’s if possible and affordable, try and make overpayments to minimise your debt as quickly as possible.
If you’re struggling to meet your repayments, contact your lender as a first port of call. It won’t want you to default on the debt, so it’s likely you’ll be able to work out a solution between you.
Your credit score can be impacted by a number of factors, for example missed repayments, a credit card near its limit, or simply a short credit history. Learn how to improve your credit score.
Often those opting for this type of loan need some additional funds, but don’t have a good enough credit rating to have a regular loan. Provided you can keep up with the repayments, it may also help to improve your credit score.
If you’re struggling with your repayments, speak to your lender first.
Alternatively, contact your local Citizens Advice Bureau, National Debtline or StepChange Debt Charity for free advice.