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Bad credit loans

A bad credit history doesn’t mean you can’t access loans and credit cards. If you are having any problems getting approved for credit, here’s what you need to know.

A bad credit history doesn’t mean you can’t access loans and credit cards. If you are having any problems getting approved for credit, here’s what you need to know.

Anelda Knoesen
From the Money team
6
minute read
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Posted 19 FEBRUARY 2020

Why can’t I get approved for a loan?

Bad credit is a phrase used to describe having a poor or low credit score. When applying for a loan or credit, lenders will check your credit score to decide whether you’re a suitable and reliable borrower. Having a bad credit score can be one of the main reasons that you’re rejected for a loan or credit.

A bad credit score differs between credit rating agencies (CRAs). They each use their own credit scoring scale, so a score of 700 with one agency could be considered excellent, while it could be considered poor with another.

Experian, TransUnion and Equifax are the three largest CRAs in the UK. Here’s a breakdown of what each of them classify as a poor credit score:

Experian: 720

Equifax: 580

TransUnion: 565

These credit score ratings are accurate at the time of publishing on 15th October 2020.

Will I qualify for a bad credit loan?

To qualify for a bad credit loan, you must, at least, be:

  • A UK resident
  • At least 18 years old
  • The owner of a current account

While these are basic minimum requirements, the lender you’re applying with will run a credit check on you, which will examine your credit history, previous loan or credit applications and any outstanding debts etc. They will want to check whether you’ll be able to repay the loan reliably, before lending you the amount you’re applying for.

If you’re looking at loans for people with bad credit, and would like to find out how likely you are to qualify for a loan, you can use our loan eligibility checker.

Why have I been refused credit in the past? 

There are many reasons why you may have been rejected for a loan: 

  • Too many current loans or debts – if the potential lender discovers that you have multiple existing loans, maxed credit cards or other debts, they may deem you a risk. 
  • Bad credit rating – during your loan application, lenders will check to see if you have a good or bad credit history. Your credit rating is affected by how you’ve borrowed or handled money in the past. Lapsed repayments and other debts can impact your credit score negatively. 
  • No credit rating – you may not have a credit history at all. Lenders need confidence that you have experience with repaying a loan. Lenders may offer you a lower limit while you build your credit repayment history and increase this as their confidence grows.
  • Your employment history – lenders will often review your employment history as part of their checks. If you have regular spells of being unemployed, or have changed jobs too frequently, you may be considered too high a risk.
  • Irregular or low income – if a patchy employment history means you have an irregular income, lenders will likely view you as a higher risk, as you may be unable to consistently meet your repayments. Likewise, if your income is too low, they may also believe that you might not be able to keep up with your repayments.
  • Lack of collateral – if you’re applying for a secured loan, lenders will look for a valuable asset to act as collateral. Common examples of collateral include your home or vehicle. If you don’t possess something valuable enough to secure against the loan amount you’re applying for, you may be refused credit.
  • Mistakes or errors on your loan application – if your loan application is filled with mistakes, errors or inconsistencies, lenders will see these as a red flag. Make sure you fill out your application carefully, accurately and honestly, to avoid problems or nasty surprises.

Why do I have a bad credit score? 

Your credit score will be affected if you have: 

  • Failed to stick to a credit agreement 
  • Made late or missed repayments   
  • Been declared bankrupt   
  • Have County Court Judgements (CCJs) against you 
  • Entered into an Individual Voluntary Arrangement (IVA) 
  • Never borrowed money before

A poor credit score doesn’t mean you can’t get a loan – it just means you’ll likely have fewer lenders to choose from. 

What should I consider before I apply for a loan?

When looking at loan options, it can be hard to know which one is right for you. To help you find the best fit, here are the most important things to consider:

The amount you’re borrowing – obviously this is the first place to start. Carefully consider how much you need. Borrowing a larger amount can sometimes be rewarded with lower interest rates, but don’t borrow more unnecessarily. You need to be sure that you’ll be able to consistently meet your repayments, and the more you borrow, the more you’ll need to pay back… with interest.

The period you’re borrowing over – this is known as the term. Borrowing over a longer term will normally lower your monthly repayments, as you’re spreading the amount owed more thinly. However, don’t just go for the maximum term length, as you’ll end up paying more overall with the interest added.

The interest rate – you should always keep a close eye on the interest rates available, as even small changes can lead to big differences over a lengthy loan term. Lower interest rates are often reserved for longer terms or higher borrowing amounts, but it’s good to compare rates from multiple providers. That’s where we come in. Our comparison services allows you to compare loan rates quickly and easily.

Your monthly repayment amount – the three previous points all combine to determine the amount you’ll be expected to repay each month. Use a loan calculator to play around with these three variables to find a monthly repayment amount that you’re comfortable and confident in repaying. Your affordability will be unique to your own financial situation, so it’s important that you take the time to find the best loan for you. The last thing you want is to miss or make a late repayment, as these can have significant consequences.

How can I improve my chances of getting a bad credit loan?  

Check your credit report  – Get in touch with Experian, Equifax or TransUnion (formally CallCredit) – the three main credit reference agencies – and make sure all the information held about you is correct. Amend anything that’s wrong. 

Get on the electoral register  – Loan providers tend to use this to confirm your identity and your address, so registering to vote can help your application. 

Use an eligibility calculator  – Applying for a loan or credit means lenders have to undertake a hard credit search, which leaves a ‘footprint’ on your credit file. So, if you’ve been rejected, this will be visible to other lenders and they could be less likely to approve you. Check your eligibility before you apply. Many lenders allow you to do this. 

Try to stay 25% below your credit limit  – Loan and credit providers will check how much credit you still have available. If you’re constantly at the limit of your overdraft or credit card they may be put off. 

Close any credit cards you don’t use - If you have access to high amounts of unused credit, potential lenders may be put off. However, you need to be careful, as closing long term accounts can also negatively impact your score, as they show your credit history (hopefully a good one!). Also, by having access to credit, it suggests you can handle unexpected bills and are less likely to default. Opinions can vary between credit providers, so you may want to ask for further advice before closing accounts.

Repay on time  – Make sure you’re consistently meeting any monthly repayments and stay within your credit limit. Even mobile phone contracts are important, as these show that you can maintain a financial agreement, and it can negatively impact your credit score if you fail to make payments on time. 

What types of loans can I get with bad credit? 

While your options may be reduced, there are still loans for people with bad credit:

Unsecured personal loan
If you don’t have any assets as security, such as a house, then one option is an unsecured personal loan. With this, you can borrow money at a fixed interest rate and pay it back over an agreed length of time. 

Secured loan
If you have been refused an unsecured personal loan in the past, you may be more successful applying for a secured loan. Secured loans are guaranteed against one of your valuable assets, which act as your collateral. The asset may depend on the amount you’re borrowing, but common examples include your home or car. If you can’t meet your repayments regularly, you risk having your secured collateral repossessed. No guarantor is required with a secured loan.

Secured homeowner loan
A secured homeowner loan uses your home as a guarantee. No guarantor is required, but, if you don’t keep up with repayments, you could lose your house.

Guarantor loan
A guarantor loan is when a friend or relative promises to pay back the loan if you can’t. 

Peer to peer loan
A peer to peer loan is borrowing money from other individuals, rather than through a bank or building society. Peer to peer loaning is a service that’s regulated by the Financial Conduct Authority (FCA), and so should not be confused with loan sharks. Peer to peer loans can benefit from lower interest rates for borrowers, while the individual lending the money treats your loan as an investment for themselves. 

What types of interest rates are available to those with bad credit? 

Interest rates for bad credit loans tend to be higher than average rates for other loan types. This is because you’re considered to be a higher risk, with lenders looking to offset that risk.

To get an idea of the loan rates to expect, here’s a representative example:

  • Loan amount: £10,000
  • Representative APR (Annual Percentage Rate): 2.9%
  • Loan term: Five years (60 months)
  • Monthly repayment amount: £179.07
  • Total amount repaid: £10,744.20
  • Credit available subject to status

Of course, this is just a representative example. For the best results, you should start by comparing bad credit loans using out comparison service.

What are the pros and cons of bad credit loans 

Bad credit loans are there for those who have previously been refused credit, or struggle with a poor credit score. They’re also for those who have no credit history at all, which can be problematic on its own. 

These types of loans work similarly to standard personal loans, but they typically come with higher levels of interest, as well as stricter terms for lending. This is because the borrower is deemed a higher risk, and the lender wants to protect their investment. 

There are pros and cons of bad credit loans, so it’s important that you consider carefully that this is the right form of borrowing for you:

The pros of bad credit loans 

  • You’re more likely to be accepted 
  • The application process is normally quicker 
  • If you meet the repayment schedule, they can help raise your credit score 

The cons of bad credit loans 

  • Interest rates can be high, as you’re deemed a higher risk 
  • If you secure your loan against an asset, such as your car or house, you may lose it if you can’t keep up with the repayments 
  • Some lenders have minimum terms for lending amounts and periods

What are guarantor loans? 

A guarantor loan is a type of unsecured loan, which requires you to list a second person who will be liable to pay off your remaining debt, if you can’t keep up with the repayments yourself. They are an alternative option for money borrowing if you’ve been refused a loan through standard credit. 

What happens if I get refused a loan?  

Being refused a loan doesn’t mean you’ll automatically be rejected if you make another application. It’s a good idea to do a “soft search” for credit at this time, as soft searches do not impact your credit score, so you can safely review your other options to find the best solution for you. 

If your credit score is too low for a standard credit loan, you might want to consider other forms of secured or unsecured loans.  

Does being refused a loan affect your credit rating?  

Whenever a lender checks your credit score, it leaves a mark on your credit history. If you’ve been refused credit or a loan, and are then applying with multiple lenders in an attempt to secure credit, this can have an increasingly negative impact on your score. Lenders will review your credit score when considering whether to approve you themselves, but this doesn’t mean you’ll automatically be refused another loan. 

What is a soft search?  

A soft search is a way of looking for credit products without affecting your credit score. Traditional credit checks will leave a stamp on your credit file, which potential lenders can then see when you apply for a loan. If you have applied many times for credit, other lenders can see this on your credit report and may be put off allowing you borrow from them. 

With a soft search, you can compare and review credit and loan products through Compare the Market, without worrying about affecting your credit score. The searches will still appear on your file, but lenders will not be able to see these, and so it won’t impact their decision to approve/reject any applications you make. 

What are the other options if you have bad credit?

Most loans start at £1,000. If you don’t need to borrow that much, then consider a credit card. 

Credit-building credit cards  allow you to build up your credit history by borrowing a small amount of money – between £100 and £1,000. 

Alternatively, consider an overdraft to your current account, or compare current accounts and switch.

What are the alternatives to taking out a loan? 

If you’ve been refused credit or a loan, or simply would prefer not to, there are still options available: 

  • Credit cards – while these may still impact your credit score, you can still use a credit card to secure extra available funds 
  • Your overdraft – going overdrawn on your account isn’t recommended, but you can agree terms with your bank for any interest that may be charged to your bank account.
  • Payday loans – these should only really be considered when you have very few options. Payday loans tend to be the most expensive and often have short repayment terms. Penalty fees can be harsh and add up quickly, which can lead you to spiralling into significantly worse debt. These should be considered very carefully before applying. If you’re looking for further advice or alternatives to payday loans, the Money Advice Service may be able to help you.

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