How to find the best loans for bad credit
HAVING bad credit can make it harder to access finance but it's not impossible.
Here is how to find the best loans for bad credit.
What is bad credit?
Your credit report is one of the most important documents when it comes to applying for a loan or credit card.
A history of missed payments, defaults on debt, county court judgements (CCJs) or bankruptcies can all give you bad credit, as they negatively impact your credit score.
Each credit rating agency has its own scoring system, but ultimately the lower your score the more likely you are to be in bad credit.
Lenders will see you as a risky borrower if you have a bad credit score, which makes it harder to get finance such as a loan, credit card or mortgage.
But it's not impossible.
What is a bad credit loan?
A bad credit loan is aimed at people who struggle to get credit.
Passing a credit check is crucial for a standard personal loan.
Negative marks such as unpaid credit cards or CCJs stay on your credit file for six years, making it hard to boost your score and get finance even if your financial circumstances have improved.
However, a bad credit loan will use additional methods to help someone with a poor credit history to access finance.
Can I get a loan for bad credit?
It is possible to get a loan for bad credit, but the choice is more limited and pricing tends to be higher compared with standard credit products.
You usually need to be a UK resident, at least 18 and have a current account.
The lender will still want evidence that you can repay the loan, so they will want to known about your income and will do a credit check.
It may be worth doing a soft search for bad credit loans first to check which loans you are most likely to be approved for before applying.
A comparison website and some loan providers should let you do this.
Successive loan rejections can make your credit score worse, so it is best to only apply for finance that you know you have a good chance of getting.
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Types of loans for bad credit
It is possible to get unsecured personal loans for bad credit.
However, the best rates are reserved for those with excellent credit ratings.
There may not be as many providers who will lend to you if your rating is really poor - and you are likely to be charged a high rate of interest.
An alternative is a secured loan.
It is secured against an asset, which is usually your home but could be another item such as your car.
These types of loans can be easier to be approved for, as there is a secured asset involved which gives lenders more comfort even if your credit score is low.
That is an added risk though as your home or another asset you have secured it against could be repossessed if you fail to repay.
If you don't have a home or other assets, you could ask a family member or friend to help through a guarantor loan.
This requires someone else to agree to pay the loan if you are unable to.
It puts their credit rating at risk though if you fall behind and if they can't meet the repayments.
A guarantor may have to put their home or other assets up as a security against your loan and these may be repossessed if the loan isn't repaid on time.
Some lenders offer loans for bad credit and no guarantor, but the rates can be very high.
You could also see if you are eligible for a peer-to-peer loan, as these are funded by individuals rather than banks so the criteria may be more flexible.
What are the benefits to bad credit loans?
A bad credit loan can be an effective way to access finance if you are unable to elsewhere due to a poor credit rating.
You are more likely to be accepted for a bad credit loan if you have a history of bad debts.
As long as you make all the repayments on time, a bad credit loan can also improve your credit score as it demonstrates your money management skills.
This should help you access cheaper credit in the future.
What are the disadvantages of loans for bad credit?
Unfortunately, those with bad credit are often charged higher rates as lenders believe that someone with a history of bad debts is more likely to fall behind again.
Your home or other assets may be at risk if you fall behind on repayments with a secured loan, plus your credit rating could get worse if you don't make the monthly repayments on time.
Lenders may also have minimum amounts for lending and loan terms which could be more restrictive than standard products.
How to get a loan with poor credit
As with any loan application, a lender will want to know your income and how much you spend each month so they can work out whether you can afford a loan.
You will also need to provide your name, address and bank details.
Your credit report will still be checked so it is important to ensure it is up to date even if you know you have a low score.
Use an eligibility checker, either with a comparison website or directly through a provider, to do a soft search of your report that will tell you how likely you are to be accepted for a loan.
This will give you an indication of the type of loan you should be applying for and ensures you don't waste time and your credit rating on failed applications.
How much can I borrow with a bad credit loan?
The amount you can borrow will depend on your income and credit rating.
You can typically borrow up to £35,000 with an unsecured personal loan and more than £50,000 with a secured loan.
Personal loan pricing tends to be most competitive at around £7,500 to £25,000, but you won't be able to access the best rates if you have bad credit.
Guarantor loans are usually lower at between £1,000 to £10,000.
What is the longest loan I can get?
When you apply for a loan you are usually given an option to choose the term, although some lenders may have a minimum timeframe.
Loan terms usually range from one to five years.
Quite a few go up to eight years and banks such as Natwest offer as high as 10 years for unsecured loans.
The longer you borrow for the cheaper your monthly repayments will be, as they are spread over more years.
However, you will end up paying more overall as you will be paying interest each month for a longer period.
How to find a bad credit loan
You can search for bad credit loans online but make sure you do not get caught out by scammers adverting on search engines.
Bad credit loans tend to be offered by specialist providers rather than mainstream lenders, so check on the Financial Conduct Authority (FCA) register if these providers are legitimate.
A comparison website is a good place to find and check the best loans for bad credit in one place and they may also let you check your eligibility before applying.
You may have to search separately for different types of loan to see which one you are most likely to get approved for.
Which loan company is best for bad credit?
The best loan for bad credit will depend on your needs, credit rating and whether you can meet the eligibility criteria.
Bad credit loans are offered by specialist providers, known as direct lenders, rather than high street banks or building societies. So make you you know who you are dealing with and check they are regulated by the FCA.
Using a comparison website can help you find regulated providers and search for loans for bad credit with direct lenders.
But remember not all lenders will appear on comparison websites.
What is the easiest loan to get approved for?
There is no such thing as the easiest loan to get approved for.
All lenders, regardless of the type of loan, will want to do a credit check and assess your income to see if you can afford the finance you are applying for.
Depending on your circumstances, you may find it easier to get a secured loan if you are a homeowner and are struggling to find suitable personal loans.
Alternatively, if you have friends or family with decent credit ratings willing to be a guarantor, this can give you a better chance of borrowing.
You can boost your chances of application success by doing a soft search first, so you know which loans you are most likely to be approved for.
It is also worth taking steps to improve your credit score such as repaying old debts and making sure you are on the electoral register, as this can give you access to better rates.
Can I get approved for a loan online?
Most lenders will let you check your eligibility and apply online.
This could mean you can access finance faster, with some lenders approving applications within 24 hours.
Some lenders may give decisions on really bad credit loans instantly, but these are typically for relatively lower values of up to £5,000.
It may take longer if a lender wants to do extra checks or requests more information from you.
What to consider before getting a loan for bad credit
Taking on more debt can be risky, especially if your credit rating is already low.
Any further loan applications or missed payments could further damage your credit score.
Work out how much you want to borrow and whether a loan is the best method or if you could use savings.
Check the interest rates on offer are affordable.
Use a online loan interest calculator, which you may be able to find through a comparison website, to work out the monthly repayments to see what you can afford.
Will my credit score be checked when I apply?
It is a regulatory requirement that lenders do a credit check before approving a loan.
They need to be sure the loan will be repaid, plus this also protects you from getting into unnecessary debt if you are granted a loan you cannot afford.
A bad credit loan from a specialist lender gives you greater chance of being approved even once your credit score is checked, but it does mean paying higher rates.
Will a bad credit loan affect my credit score?
A bad credit loan can have positive and negative benefits to your credit score.
Keeping up with the monthly repayments on time will boost your credit rating as you are showing evidence that you can manage your debts.
However, if you fall behind your score could be reduced.
Similarly, your score will be impacted if you are rejected for a loan.
What does APR mean?
Your loan is divided into monthly payments, which is based on the amount you borrow, for how long and the interest rate of your borrowing
You need to repay the amount you borrowed, known as the capital and there is also interest to pay each month which is shown as the annual percentage rate (APR).
This is the technical term for the interest rate you pay on your loan annually.
A lender has to show the representative APR when a loan is advertised.
It represents the total cost of borrowing for a year, including interest and fees, so you can understand how much you will need to repay.
Interest is applied monthly so it reduces as you repay more of the loan.
To illustrate, a £10,000 loan over 60 months with an APR of 2.9% would cost £179.07 a month including capital and interest; meaning you would repay £10,744.20 in total during the 60 months.
Can I get a guaranteed loan?
Some lenders may claim to be able to provide guaranteed loans.
These are typically short-term payday loans that are risky and expensive forms of credit, as the APR can reach triple figures and there can be harsh default fees.
There are no guaranteed loans, as an application will depend on your credit rating and a lender's income requirements.
The FCA is monitoring the high-cost credit sector and has already introduced caps on payday loan interest.
It is best to avoid this type of loan as it can push you further into debt if you are already struggling.
A pre-approved loan that comes with guaranteed rates is not the same as a guaranteed loan. Some lenders may claim to be able to provide guaranteed loans.
What are some alternatives to loans for bad credit?
Loans for bad credit aren't the only way to access cash.
It may be possible to get a credit card instead, especially if you only need around £1,000.
You may also be able to use an authorised overdraft on your current account
But make sure you don't go over your limits and can repay your credit card bill, or you may face high interest charges.
Another alternative is to ask family or friends if they can lend you some money.
They will hopefully be more flexible than a mainstream lender.
You could also join your local credit union.
These are not-for-profit financial institutions owned by members locally to provide loans and savings.
Rates are usually better compared with traditional lenders but credit unions may have lower limits on how much they will lend.
The government also announced in its March 2021 Budget that it would trial a no-interest loan scheme to help low-income households pay off any unexpected debts.
It has promised £3.8million for the pilot programme to stop vulnerable Brits from falling further into debt.
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