‘Bad Credit’ loans are for those with a less-than-stellar credit report, or little to no credit history at all. Ordinarily, these loans may have higher interest rates and greater restrictions compared to other loan options.
This structure helps potential lenders reduce the risk of applicants not repaying their loan. However, these loans can prove to be useful if they are managed and budgeted accurately.
You are unlikely to find companies advertising these loans under ‘bad credit’, however, this is an unofficial name for them. A loan that has a higher APR or interest rate will often cover customers with poor credit.
There are two ways a ‘bad credit’ loan can apply to you. The first is if you have a poor credit rating – which means you may be viewed unfavourably or as a risk to lenders and banks. This can make it difficult to borrow money.
The criteria for borrowing money varies between lenders. An easy way of seeing how you may be viewed is through a credit check.
If you have a low credit score, it may be because you have negative influences on your credit. This can result from:
The second way you can have credit issues is if you have little to no credit history. This can create uncertainty for companies when lending.
The most common situation for this is if you are young and haven’t had time to build up a strong credit record. Another is if you have never taken out credit previously or have never opened a bank account.
Finally, if you have recently relocated to the UK, your credit cannot transfer across borders, giving you a lower (or no) score.
There a few options that you can apply for if you have poor credit, though it is important to consider affordability.
The options available to you include guarantor loans, personal loans, payday loans and secured loans. Of those, a personal loan may be the most difficult to secure, as many are dependent on a healthy credit score.
Payday loans provide a fast, short-term finance option, making them popular among borrowers. However, these loans often come with very high APR rates and could lead to large monthly repayments.
Secured loans require an asset, such as home, to be used as collateral to secure an approval. However, failure to meet your monthly repayments may result in losing your asset.
Guarantor loans are popular among applicants with a poor credit score. They require a financial partner to meet the monthly repayments if you can’t. It is a loan option based on relationships.
It is important to only apply for loans that you’re likely to be approved for. Each application, particularly with high street banks, will record a hard search on your credit report that can lower your score.
A ‘bad credit’ loan is often accompanied by high interest rates, but it can present an opportunity to improve your credit rating.
If you’re reliable and make your monthly repayments on time and in full, you are likely to boost your credit score. This can help you secure better financial deals in future.
Coming up with a financial plan, or monthly budget is a great way to make sure you stick to your payments. This would also include avoiding adding to your debt through excessive spending. This would harm your credit rating through increased debt, as well as having debt spread across various creditors.
If the cost of the monthly repayments is a concern, speak to your lender immediately to discuss your options.
As your credit rating isn’t fixed or set in stone, your financial behaviour can shape it. Therefore, understanding how to repay your loan gives you control over how your future credit will look.