Your essential guide to borrowing with bad credit
Introduction
At one time or another, many of us will turn to short term lending to get us through a difficult financial period. Maybe you need a cash injection to tide you over to your next payday because your car needs a new tyre and you use it to get to work. Or, perhaps, your washing machine has gone on the blink and with a big family, you need to keep on top of the laundry and get your machine repaired as soon as possible.
Getting hold of the money you need might be easy if you already have a source of ready credit or an unblemished credit record, but what happens if you need to borrow money and you have a poor credit history?
Although you're unlikely to qualify for regular credit products at the best interest rates, the good news is that there are reputable providers who offer loans for people with less than perfect credit.
This guide explains what bad credit loans are, whom they are suitable for, and where to find them; helping you make an informed decision to as whether this type of loan may be appropriate for you.
What are bad credit loans?
Bad credit loans are a specialist form of borrowing, aimed at people who have a poor credit rating. A poor credit rating might be due to historic repayment problems (resulting in late or missed payments, defaults, CCJ’s, IVA’s etc. on your file) or it could simply be a case of not having enough history on your file to satisfy regular lenders.
There are many different types of loans for bad credit, which can either be secured or unsecured:
- Secured loans: require that you use your assets as security. Typically, the value of assets will need to be much higher than the loan, so should you default, the lender has a fair chance of recouping their money through resale.
- Guarantor loans: are unsecured, but the lender has some security in that your guarantor will make the payments if you can't. Your guarantor will, of course, need to have good credit themselves.
- Unsecured loans: don't require security and no guarantor is needed, but the upshot is that they pose a greater risk for the lender and thus are usually more expensive than secured or guarantor equivalents.
Who are bad credit loans suitable for?
It is likely that you will find it difficult to get approved for a regular loan if you:
That is where high-acceptance loan providers come in. These are specialist brokers and lenders who are sympathetic to people who may have experienced financial difficulties in the past and who are willing to consider their application for a loan.
However, it is important to understand that no loan is ever guaranteed. If a lender feels it is not in your best interests to take on new credit, they will decline your application.
What you should be aware of is that every lender has different scoring criteria. As such, you may not necessarily qualify for all bad credit loans, but on the other hand, if you get declined by one lender, it doesn't mean you can't get credit somewhere else.
Pros and cons
So, what are the benefits of a bad credit loan? Apart from the obvious benefit of being able to access cash in a financial emergency, if you make your repayments on time, it will be recorded on your credit file and could help rebuild your credit score.
But you should note that these providers typically charge a higher interest rate than similar providers of good credit loans. This is because they are taking more of a risk in lending to you (based on your financial history), so need to charge more to cover the risk.
Your credit file and bad credit
A credit file (or credit report) is one of the main tools used by potential loan providers to assess whether they should approve an application for credit. They look at your personal and employment details, but your credit file usually provides the main source of financial information.
Credit reports are maintained by organisations called credit reference agencies. In the UK, there are three main agencies — so you actually have several credit files, not just one. Furthermore, lenders don't always share the same information with all three agencies, so there's a strong likelihood that the information held on each report is slightly different.
Main UK credit reference agencies
Your credit file contains your past financial history (going back 6 years) as well as your current financial status.
By carrying out a credit check and looking at your credit history, a lender can see things such as:
- your personal details such as date of birth, current address etc.;
- how much credit you have available and how much you have outstanding;
- how likely you are to repay any new borrowing (based on your past history);
- if you have experienced financial difficulties before and have an IVA or CCJ;
- recent searches of your file (soft searches are only visible to you);
- and so on.
Potential lenders use this information to calculate your credit score and, typically, the higher your credit score, the better your credit rating.
The good news is that credit scores can be improved upon. This won’t happen overnight, but by taking out some form of credit, and — most importantly — paying it back on time, could help improve your credit rating.
Of course, we aren't suggesting that you take out a loan solely to help improve your credit score – this is just a potential benefit of having one.
What to consider when choosing a bad credit loan product
You can find a bad credit loan provider online. When choosing a lender to apply with, however, do note that different lenders have different lending criteria as well as different product features and benefits. If you don't meet the lender's requirements, you could still get refused for credit — even if they promote themselves as bad credit lenders.
Using a specialist bad credit loan broker to help find you the most suitable product may be easier. They can shop around on your behalf and instantly match you with the right products from loan providers whose criteria you meet.
Furthermore, using a broker won't leave a visible mark on your credit file unless you go on to accept an offer. Whereas, making an application directly with a lender could involve a hard credit check — even if you're not accepted.
Too many hard credit checks in short succession may lower your credit score and affect your ability to get approved for credit in future. But, by only applying for credit you're eligible for, you can ensure the applications you do make have the best chance of acceptance.
Summary
We hope this brief guide to bad credit loans has helped you understand a bit more about the product and what you need to consider when applying for this type of loan.
If your financial problems are behind you, bad credit loans, used responsibly, can provide interim financial support until your credit score improves. But, if you're experiencing ongoing financial difficulties, taking on more debt is probably not a good idea.