What is a bad-credit loan?
When you apply for a loan - or any other credit agreement - the lender will take into consideration your credit history and your overall financial behaviour. They will find out this information from your credit file with one or more of the main credit reference agencies: Experian, Equifax and TransUnion. These agencies assess your track record on repaying debt in the past, as well as any history of debt problems or financial mismanagement to formulate a credit score. If you have a very low credit score, you are likely to be refused loans from many mainstream lenders.
The good news is that you don’t need an excellent credit score in order to get a loan, but the worse your score is, the more limited you will be by the number of lenders willing to lend you money. Indeed, if you have a substantially impaired credit score, you will probably have to use a specialist lender, typically resulting in having to pay a higher interest rate and, perhaps, being limited in the amount you can borrow.
Can I get a bad-credit loan without a credit check?
The short answer is, no. It is a legal requirement in the UK for lenders to run a full credit check on applicants for credit agreements, including loans, credit cards, mortgages and car finance. This serves two purposes: it assesses the potential risk the lender would be taking on if they lend to you, and it looks at whether the loan is affordable for the applicant.
A good thing to do if you are nervous about being approved for a loan is to use an online eligibility checker. This gives you a good idea of how likely it is for your application to be accepted, without leaving a hard footprint on your credit file, which would then be visible to other lenders for future credit checks.
What are the best loans for bad credit?
The type of loan that is best for your circumstances will largely depend on how much you need to borrow, how much you can afford to pay back on a monthly basis and how bad your credit rating is. There is a full breakdown in our article “Which is the best type of loan for you?”, there is also a detailed analysis of the relative benefits of secured versus unsecured (personal) loans and an overview of guarantor loans.
Bad-credit secured loans
A secured loan is, as the name suggests, borrowing that is secured against an asset - typically your home. This reduces the risk posed to the lender and, therefore, means it is more likely they will lend to people with poor credit ratings.
There are various pros and cons of taking out a secured loan, including:
- Secured loans are more readily available to those with adverse credit, as long as the applicant owns a property or has another valuable asset to leverage the debt against.
- The monthly payments are typically lower than for a personal loan as the term of the loan is often spread over a longer period.
- You can generally borrow a larger amount than with an unsecured personal loan, which makes it a good option for those needing a big sum of money, perhaps for home renovations or debt consolidation.
- While the APR tends to be lower with a secured loan, you will likely end up paying more over the lifetime of the loan, as you will be paying the interest over a longer time span.
- The very nature of the loan means you risk losing the asset it is secured against if you don’t keep up with the repayments. This could have devastating consequences if you end up losing your family home.
Bad-credit personal loans
A personal - also known as unsecured - loan can be difficult to obtain if you have a seriously impaired credit rating, including if you have recent CCJs, IVAs or bankruptcy. There are, however, some lenders who are willing to consider providing personal loans to sub-prime borrowers.
There are various pros and cons of taking out a bad-credit unsecured loan, including:
- Unlike with a secured loan, there is much less risk of losing your home - or other important assets - if you don’t keep up with repayments on a personal loan.
- As the term of the loan will generally be shorter, you will pay less in interest over the lifetime of the loan.
- You will be limited to how much you are allowed to borrow, particularly if you have bad credit.
- You will have to pay a significantly higher APR than an applicant with good credit
A guarantor loan is where a friend or family member agrees to take on responsibility for the debt if the original borrower defaults on the loan. While it does serve as a way for people with seriously impaired credit to be able to access finance, it is a product that requires a lot of thought and consideration, with most providers insisting the prospective guarantor takes independent financial advice before making the commitment.
There are various pros and cons of taking out a guarantor loan, including:
- It can facilitate you borrowing money if you have been turned down elsewhere
- You may be able to borrow more than you would with a standard personal loan
- The loan will often be more expensive than alternative options
- There is a risk to the person acting as guarantor if the borrower doesn't keep up with the repayments. This could potentially harm their credit rating if they too struggle to service the debt. There is also the potential for the arrangement to damage the relationship between the guarantor and the borrower if it doesn't work out.
How to apply for a bad-credit loan
The application process for a loan is the same for all prospective borrowers, irrespective of their financial history. In all cases, you complete an application with the lender, who will assess the information you provide, run a credit check and then either approve or decline your application. In the case of secured and guarantor loans, there will be extra steps in the process, including either a valuation of the asset you are securing the loan against or the financial status of the guarantor.
With a personal loan, using an eligibility checker, which runs a soft search on your credit file, will give you an accurate idea of whether you are likely to be approved for the loan. This removes much of the risk associated with being turned down, which could in itself further harm your credit rating. It is also worth looking through the criteria outlined in the lender’s terms and conditions. Some, for example, don’t accept self-employed borrowers or those earning less than a certain amount, so you know you are unlikely to be approved if you fall outside of their rules.
Will a bad-credit loan improve my credit rating?
Many credit products, including loans and credit cards, are marketed as being “credit building”. While it’s true to say that if you make all the repayments on time, your credit score will be elevated, there are other considerations to factor in before you decide to take out a bad-credit loan. These include:
It isn’t a good idea to take out a loan solely to improve your credit score and, even if you have a need for the loan, you need to properly assess whether you can afford the monthly repayments. This involves thinking about how you would meet the repayments if your financial circumstances change, which is particularly important for those taking out a secured loan over an extended period of many years.
You also need to consider whether you are likely to be getting a mortgage or looking to remortgage during the lifetime of the loan. While repaying the loan responsibly should improve your credit score, having the loan in the first place could impact the affordability assessments used by mortgage lenders. Put simply, if you're committed to paying back several hundred pounds a month on a loan, a mortgage lender will factor that in when deciding how much further borrowing you can do.
Mismanagement will be highly detrimental
If you already have an impaired credit score, missing or making late payments would be hugely damaging to your file and significantly limit your ability to borrow money in the future. This could have a real impact on your life choices, including your ability to get a mortgage, remortgage from your current mortgage, secure car finance or even open a current account.
With a secured loan, you run the risk of losing your home, while for a guarantor loan you will leave your friend or family member liable for the debt.
You could get a better deal if you improve your credit score first
While it can be tempting to take out a loan straight away, particularly if you think it will help bolster your credit worthiness, it can work out to be costly. As well as possibly not being able to borrow as much as you want, the higher interest charges will make the repayments more expensive.
The extent to which your credit file is impaired will directly affect the deal you are likely to be given, so taking steps to improve your score before you take out a loan is definitely worth doing. This could include using the services of a company like LOQBOX*, which builds your credit worthiness over time by creating a "loan" that, in effect, acts as a savings account, with the end result that you get back the money you paid in. Alternatively, Experian Boost uses your history of paying for subscription services such as Netflix and Amazon Prime, as well as paying council tax and putting money into savings and investments to give an immediate increase in your Experian credit score.
For more advice on how to improve your credit score before applying for a loan, read our article "How to improve your credit score quickly".
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