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How to Borrow Money When You Have Bad Credit

A bad credit rating can make it difficult to obtain a loan. Traditional lenders are generally hesitant to offer loans to customers with troubled credit histories. Fortunately, there are alternative lenders who specialise in providing loans to consumers with less than perfect credit scores. These specialist lenders pick up where traditional lending institutions leave off.

Bad credit loans fill an important gap in the larger finance landscape. They give consumers with poor credit histories greater financial flexibility. However, these are specialised lending products and they come at a price. In most cases a bad credit loan will feature higher interest rates than would be found in a standard personal loan from a conventional lender. But if your credit history is sketchy a bad credit loan may be the answer to your financial problems.

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Representative Example: Rates from 48.1% APR to 1721% APR. The minimum Loan Term is 1 month. The maximum Loan Term is 36 months. Representative Example: £1,000 borrowed for 18 months. Monthly Repayment of £89.22. The total amount repayable is £1605.96. Interest amounts to £605.96, an annual interest rate of 59.97% (fixed). Representative APR: 79.5% (variable).

What is Bad Credit?

As a consumer, your credit score is one of your most valuable assets. It provides leverage whenever you apply for a same day loan or a line of credit. Your credit history is a record of your past financial performance. It spotlights a variety of factors including previous applications for credit, unsettled debts, and late or missed payments.

In the UK there are three primary Credit Reporting Agencies (CRAs) that compile and store the information used to determine your credit rating. The higher the score the better your chances of securing a loan at competitive rates. The lower your score the less borrowing power, and bargaining power, you have.

The most common reasons for a bad credit score include:

• A history of missed or late payments.
• A history of county court judgements, individual voluntary agreements, or bankruptcies.
• Failing to appear on the electoral register.
• Discrepancies or mistakes in your history.
• No history of applying for or using a credit product (this is common among younger consumers who have yet to establish a pattern of credit use).

What Types of Loans are Available to Borrowers with Bad Credit?

Specialist lenders serving bad credit borrowers offer different types of personal loans depending on the applicant and their current financial situation. Bad credit loans are not a one-size-fits-all proposition and it is important to understand the differences between the lending products.

The four basic types of personal loan available to bad credit borrowers are:

• Secured Loans – A secured loan requires the borrower to pledge an asset against the value of the loan. In most cases this is the borrower’s home or another valuable asset. This acts as collateral to guarantee the loan. Borrowers can often get a better rate, and gain access to greater sums, with a secured loan. However, the assets that are used as collateral can be seized by the lender if the borrowers fails to keep up with their payments.
• Unsecured Loans – An unsecured loan does not require the borrower to pledge any personal assets as collateral. Lenders will approve the loan based on the customer’s credit history and current financial status. Unsecured loans for bad credit customers tend to involve smaller sums of money when compared with other types of lending products. Should the borrower be unable to meet the loan requirements the lender has the right to file for a County Court Judgement.
• Guarantor Loans – A guarantor loan requires the borrower to arrange for another person to act as a guarantor, or co-signer, to their loan. In most cases this is a friend or family member. The guarantor agrees to be legally responsible for the loan in the event the borrow can not meet their obligations. In order to qualify for a guarantor loan the co-signer must meet the requirements set by the lender. This typically includes being 21 years of age or older, having full-time employment, and carrying a strong credit history.
• Peer-to-Peer Loans – Peer-to-Peer lending allows consumers to bypass traditional lenders such as banks and building societies. Instead, the borrower is getting their directly from an individual or group of individuals. In some cases peer-to-peer lending can allow borrowers to secure a lower interest rate as compared to more traditional lending sources. However, peer-to-peer lenders set the rules and they tend to be overly cautious with bad credit borrowers.

3 Questions to Ask Yourself before Applying for a Loan

There are a few things every borrower should think about before applying for a loan. These questions apply to all consumers regardless of credit history. But they are especially pertinent to borrowers with poor credit scores.

1. Do You Need the Money? – There is a difference between want and need. While you may qualify for a bad credit loan the terms of your loan won’t be as favourable as they would be if you had a better credit score. Even if you can manage to pay back your loan in total and on time the cost of that loan will be significant. If you don’t need the money immediately it may be better to wait and take some time to work on your credit rating. If you can improve your score you will eventually have access to more loan options at better terms.

2. How Much do You Need to Borrow? – The more money you borrow the more you will have to pay back in interest. The life of the loan itself will be longer, so you will be taking on an extra financial burden until the loan is entirely discharged. If you need to borrow money now try to keep the sum as small as possible so you can more easily pay off your loan quickly.

3. Can You Improve Your Credit Score Before You Apply? – Your credit score can be adversely impacted by discrepancies in your report. If possible postpone applying for your loan until you can contact the credit reporting agencies and have them correct any discrepancies in your report. This will help to improve your score and will give you greater borrowing options when you finally do search for a loan.

Are Bad Credit Loans an Affordable Option?

As a borrower, your credit score is an indication of your overall creditworthiness. Lenders use it to determine your risk as a customer. Bad credit loans across 12 months help borrowers access the funds they need when they need them, but that comes at a cost.

A bad credit loan will cost more than a traditional loan for someone with a strong credit score. This is to offset the lender’s risk. The APR (Annual Percentage Rate) on the loan will be significantly higher than it would be for a loan being made to a customer with a stellar credit rating. There will also be processing fees and closing costs to consider.

Before accepting any loan offer you should step back and carefully consider the total cost of the loan over time. Remember, you will be responsible for repaying the initial sum as well as all attendant fees and interest. Review your current financial situation, including your regular income and outgoing obligations, to determine if you can afford the loan your are requesting.

Are there Alternatives to Bad Credit Loans?

If you are struggling with bad credit there are alternatives to applying for a bad credit loan. For example:

• Credit Builder Credit Cards – A credit builder credit card is much the same as any other credit card. The major difference is that the card holder is given a lower credit limit and interest rates on the card will be higher. While the high interest rates can make using a credit builder card more expensive than standard credit cards it does provide valuable purchasing power for people with poor credit scores. The responsible use of a credit builder card also allows consumers to improve their credit ratings over time.
• Arranged Overdrafts – An authorized overdraft can provide the financial flexibility consumers need without resorting to a bad credit loan. However, the nature of overdrafts means that most customers will not be able to borrow as much when compared with a loan. Interest rates are also high and that can make using an overdraft fairly expensive.
• Budgeting Loans – A budgeting loan is an interest-free government loan. These loans are available to UK residents who have been receiving pension credit, income support, or income-based employment and support allowances. Budget loans have an £812 cap and the funds must be used for specific purposes such as rent or funeral costs.

Learn How to Manage Your Finances and Improve Your Credit Rating

A bad credit loan can be a lifeline in an emergency. But any type of loan should be approached with caution and treated with respect. You are entering into a binding agreement with a lender and you should be prepared to repay your loan on time and in full.

If you would like to learn more about managing your personal finances and improving your credit score there are free UK government resources that can help:

• The National Debt Line
• Step Change
• Money Helper