The good news is that you don’t need an excellent credit score in order to get a loan. However, the worse your score is, the more limited your options will be. The number of lenders willing to lend money to someone with a poor credit history is going to be lower than the number of lenders happy to accept a borrower with a strong credit history. If you have a substantially impaired credit score, you will probably have to use a specialist lender. This can mean having to pay a higher interest rate and not being able to borrow as much as you want. In this article we take a look at the type of loans you may be able to get if you have a bad credit history, plus how you can give your credit score a boost.
What is a bad credit loan?
A bad credit loan is a financial product that is targeted at prospective borrowers with poor credit histories. They are generally offered by specialist lenders.
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 UK's 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.
This is where bad credit loans come in. You can still get a loan, but you may find that it costs more in interest payments and that you are unable to borrow the full amount you hoped for.
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. These include 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 will give you a good idea of how likely it is for your application to be accepted, without leaving a 'hard' check footprint on your credit file. Any hard credit check would be visible to other lenders for future credit checks, which could make it more difficult for you to borrow money in the future.
What are the best loans for bad credit?
The type of loan that suits you will depend on how much you need to borrow, how much you can afford to pay back per month and how good your credit rating is. You can find out more by reading our article 'Which is the best type of loan for you?'.
You will also need to decide if you want an unsecured loan or a secured loan.
Bad credit secured loans
A secured loan is a type of borrowing that is secured against an asset, typically your home. This reduces the risk for the lender and makes it more likely people with poor credit ratings will be accepted. You can read more in our article 'What is a secured loan?'.
There are various pros and cons of taking out a secured loan, including:
Advantages
- 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.
Disadvantages
- 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 do not keep up with the repayments. This could have devastating consequences if you end up losing your home.
Bad credit personal loans
A personal loan – also referred to as an unsecured loan – can be difficult to obtain if you have a seriously impaired credit rating. This could be because you have recent CCJs, IVAs or bankruptcy. However, there are some lenders that will provide personal loans to bad-credit borrowers. We have more information on unsecured loans in our article 'What is an unsecured loan?'.
There are various pros and cons of taking out a bad-credit unsecured loan, including:
Advantages
- 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.
- You will pay less in interest over the lifetime of the loan as the term will generally be shorter than with a secured loan.
Disadvantages
- 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.
You can read more about how to choose between an unsecured loan and a secured loan in our article 'Secured vs unsecured loans: Which is best for me?'.
Guarantor loans
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. Many providers insist the prospective guarantor takes independent financial advice before making the commitment.
There are various pros and cons of taking out a guarantor loan, including:
Advantages
- 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.
Disadvantages
- The loan will often be more expensive than alternative options.
- There is a risk to the person acting as guarantor if the borrower fails to keep up with the repayments. They will have to repay the loan instead. 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.
We have more information on guarantor loans in our article 'What is a guarantor loan – should you take one 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.
You can read more in our article 'How to apply for a loan'.
With a personal loan, using an eligibility checker that runs a soft search on your credit file will give you an idea of whether you are likely to be approved for the loan. This removes some of the risk associated with being turned down, which could 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. You will know you are unlikely to be approved if you fall outside of the lender's 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 is 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:
Affordability
It isn’t a good idea to take out a loan solely to improve your credit score. Even if you need the loan, you must 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. For a guarantor loan, you will leave your friend or family member liable for the debt.
You can find out how to give your credit score a quick boost by reading our article 'How to improve your credit score quickly'.
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.
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