How Do Bad Credit Loans Work?
Loans for bad credit are specifically aimed at people who have a poor credit score. Someone may have a credit report that is less than perfect for different reasons. For example, it could be due to something as simple as having never taken out credit in the past, which means they have no credit history.
A bad credit loan will usually be a little different than normal loans. They often have higher levels of interest, and it can also be common for there to be greater restrictions too.
Lenders impose these terms and conditions in order to mitigate the risk in lending you money and you not repaying the loan back.
Getting a bad credit loan can be useful, providing that you use them responsibly. It can be an excellent way to build credit if you pay the loan back promptly, and this can help you to improve your credit score.
By making your credit score better, you can benefit from access to loans with more favourable rates in the future, should you need to obtain one.
Types of Bad Credit Loans
- Payday loans
- Guarantor loans
- Secured Loans
Payday loans are often used for people with bad credit, however, they require a stable income and proof that you can make repayments on time.
Guarantor loans allow you to leverage the good credit score of someone you know to act as your ‘guarantor’ and co-sign your loan agreement. This is for larger amounts of up to £15,000 and is repaying online can help you build up your credit score over time.
Secured loans help you use any valuable asset such as your home or car and borrow money based on its value. This can be useful to get some much needed funds, but any missed payments can result in your security being repossessed by the lender.
How to Get a Bad Credit Loan
- Comparing rates and terms on conditions online through broker or direct lender
- Check beforehand your financial circumstances
- Limit loan applications
- Always check eligibility criteria
There are lenders for bad credit that you can compare online to find a loan with the right terms for you. However, before applying always make sure you have checked what you can comfortably afford to pay back each month.
It is only once you have verified you can afford to take out a bad credit loan that you should start researching with brokers or lenders themselves.
When applying, make sure you are limiting the number of applications you make as it could negatively impact your credit score. A hard search is usually recorded on your credit report every time you apply for credit, and too many of these hard searches make your credit score lower.
A way of reducing your bad credit loan applications is to check eligibility criteria beforehand. This is very important, as it means you are then only applying for loans you are likely to get and avoid wasting time.
What is Bad Credit and How Do I know if I Have it?
Bad credit means that your credit history so far means you are viewed negatively by companies to lend to. You will find that getting approved for loans is difficult or getting access to certain services isn’t possible due to bad credit.
The best way of verifying if you have bad credit is by checking your credit report. It is possible to do this for free by obtaining it via one of the main credit reference agencies. It is recommended you check the report twice a year, to keep updated with changes and see if there are ways to improve your score.
Why do I have bad credit?
If you have bad credit (you have a low credit score) it could be due to things such as:
- Loan defaults
- Late payments for credit
- Bankruptcy
- Too many hard searches
- County Court Judgements
- IVA, DMP or DRO
- You are a young adult and haven’t built up credit yet
- You have recently moved to the UK
- You have not opened a bank account
- You have never taken out credit before
How to get the best bad credit loan
If you are looking to get a lower interest rate or need to borrow a large amount but have bad credit, it may still be possible to get a good interest rate. However, it usually means you need to accept more risk. For example:
- Guarantor loans – are a popular option amongst those with bad credit. You will need a guarantor (typically a relative) to promise to make repayments on your behalf if you default on the loan.
- Secured loans – providing collateral for the loan in the form of an asset like your home or car can be another way to get a better rate. It does mean that if you default on payments the lender has the legal right to sell off your assets to recuperate the money.
