Late payments, county court judgements, defaults, bankruptcies or even just a short track record of managing debt all reduce your credit score. This makes it harder to get a loan but not impossible.
Taking out a bad credit loan can help you access finance and build up your credit score at the same time.
Bad credit loan benefits
Access to finance: A low credit score doesn’t necessarily mean you can’t afford to repay a loan but lenders will be more wary so while you won’t get the best rates, a bad credit loan will still provide some sort of funding if you need to borrow money.
Restore your credit score: You need a history of meeting repayments to build up your profile but can’t get that without having access to credit. Repaying a bad credit loan on time will eventually rebuild your credit report and boost your score, giving you better rates in the future.
Bad credit loan risks
Higher rates: You will pay more than the best buys for a bad credit loan to reflect the extra risk a lender is taking.
Your assets: Some providers will take a security on assets such as a car or your home. This helps borrow more but also puts these items at risk of repossession if you fail to keep up repayments.
Can you afford it? You need to be able to afford the monthly repayments or face paying penalties and potentially harming your credit report even more.
How to choose bad credit loans
There are different types of bad credit loans.
Guarantor loans require someone to effectively underwrite the borrowing by being held liable for any missed payments or defaults.
You could also take a secured loan against your own assets such as a home or car.
Peer-to-peer lenders may be a good option as they won’t operate an instant computer says no policy that the legacy systems at a bank will have.
Do a soft-search initially to check loans you are most likely to be approved for as even just making several applications can reduce your credit score further.
Top bad credit loans available now:
- JustUS: The P2P lender offers personal loans between £2,500 and £25,000 at 11.7 per cent APR for two to five years.
- My Community Bank: Personal loans from £1,500 to £25,000 for one to five years at 25.9 per cent APR.
- Suco: Guarantor loans of up to £15,000 for one to five years at 29.9 per cent APR. The guarantor must be a homeowner.
- 1st Stop: Only for homeowners with minimum age of 21, but offers loans of £2,000 to £15,000 at 30.8 per cent APR for up to six years.
- TrustTwo: Get a guarantor loan backed by a non-homeowner for 49.9 per cent APR.
Alternatives to bad credit loans
A debt consolidation loan may be better if you are struggling with managing your debts and then apply later when your credit score is better.
There are credit cards for those with bad credit that let you borrow smaller amounts but will have higher APRs if you miss payments. Your current account may have an approved overdraft but remember you will face penalties if you go beyond the limit. It is also worth checking if there is a local credit union you are eligible to join as these non-profit groups can provide finance to members.
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Marc Shoffman is a freelance journalist specialising in personal finance. His work has featured in Financial Times’ publications as well as The Times and Mail on Sunday.