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 14 JUNE 2021

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 you’re not eligible for a loan. Many lenders now have automated systems that score your application and your credit history. If you fall below a set figure that they feel comfortable with to make a loan, they’ll automatically reject your application.

Why do I have a bad credit score? 

Your credit score will be affected if you’ve: 

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

Whether you have bad credit, or little or no credit history, you can do something about it.

See how to build your credit score

What types of loans can I get with bad credit?

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

  • Unsecured personal loan
    If you don’t have any assets, like a house, to use as security, then one option is an unsecured personal loan. This allows you to borrow money at a fixed interest rate and pay it back over an agreed length of time. 
  • Secured loan
    If you’ve been refused an unsecured personal loan in the past, you might be more successful applying for a secured loan. Secured loans are guaranteed against one of your valuable assets, which acts 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 that asset repossessed. No guarantor is needed 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 involves borrowing money from other individuals, rather than through a bank or building society. This type of loan can offer lower interest rates for borrowers, while the person lending the money treats your loan as an investment.  Peer to peer lending is regulated by the Financial Conduct Authority (FCA).

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 loans. This is because you’re considered to be a higher risk. To get an idea of the loan rates to expect, here’s a representative example:

  • Loan amount: £2,000
  • Representative APR (Annual Percentage Rate): 59.9%
  • Loan term: three years (36 months)
  • Monthly repayment amount: £120.74
  • Total amount repaid: £4,346.62
  • Credit available subject to status

This is just a representative example. To find a loan that’s right for you, start by comparing bad credit loans with us.

How much can I borrow with a bad credit loan?

The amount will vary among lenders and the risk you present. Some lenders may have rules about how much they’re willing to lend over particular time periods too. For example, you might be able to borrow £2,000 over one or three years, but not over 10 years.

If you have a particular sum that you need to borrow, use our eligibility checker to see what loans you could be eligible for. It’s a soft search and won’t impact your credit score.

See how much you could borrow

What are the pros and cons of bad credit loans 

There are pros and cons of bad credit loans, so consider carefully whether 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 can be quicker than a normal loan if you have bad credit.
  • If you make your payments in full and on time, a bad credit loan can help build your credit score. 

The cons of bad credit loans

  • Interest rates can be high as you’re seen as a higher risk .
  • If you secure your loan against an asset, like your car or house, it could be repossessed if you can’t keep up with the repayments.
  • Some lenders have minimum lending amounts and minimum time periods.
  • Lenders could charge a fee if you make late payments or have payments returned.

What should I consider before I apply for a loan?

Here are the most important things to consider to help you find the best loan for you:

The amount you’re borrowing – borrowing a larger amount can sometimes be rewarded with lower interest rates, but you need to be sure that you’ll be able to 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. But don’t just go for the maximum term length, as you’ll end up paying more overall with the interest added.

The interest rate – lower interest rates are often reserved for longer terms or higher borrowing amounts, but it’s good to compare rates from different providers. Our comparison service allows you to compare loan rates quickly and easily.

Your monthly repayment amount – the amount you’re borrowing, the term and the interest rate combine to determine the amount you’ll be expected to repay each month. How much you can afford will be unique to your own financial situation, so it’s important to find the best loan for you. The last thing you want is to miss or make a late repayment, and potentially damage your credit score further.

Frequently asked questions

What is bad credit?

Someone with bad credit is a person who has found it difficult to pay their bills on time or failed to pay back what they’ve borrowed. It can also be someone with no history of borrowing money.

Banks don’t want to take risks with lending so they use a system of credit scoring, where information about non-payers and bad payers is shared with credit reference agencies (CRAs). They use this and other information to give you a credit score.

A bad credit score differs between credit reference agencies. 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 (including its online brand Credit Karma) and Equifax are the three largest CRAs in the UK. Here’s a breakdown of what each of them class as a poor credit score:

  • Experian: 720 or below (out of 999)
  • Equifax: 580 or below (out of 850)
  • TransUnion: 565 or below (out of 710)

Accurate as of 15 March 2021.

Will I qualify for a bad credit loan?

Some lenders offer bad credit loans specially designed for people with credit issues. To qualify for a bad credit loan, you must:

  • be a UK resident
  • be at least 18 years old
  • have a current bank account.

These are the basic minimum requirements. The lender you’re applying to will run a credit check, which will look at your credit history, including your previous loan or credit applications, and any outstanding debts. They’ll want to check whether you’ll be able to repay the loan, before lending you the amount you’re applying for.

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

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

There are steps you can take to increase the likelihood of being approved for a loan, most of which will also help you improve your credit score.

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. Ask them to 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 our eligibility calculator 
When you apply for a loan or other credit, lenders carry out a ‘hard credit search’, which leaves a ‘footprint’ on your credit file. If you’re rejected, this will be visible to other lenders and they could be less likely to approve any application you make. Use our eligibility checker and you can find out which loans you might be eligible for without any impact on your credit score.

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 lending to you as it could be a sign that money is tight. 

Consider closing any credit cards you don’t use
If you have access to large amounts of unused credit, potential lenders may be wary as there’s a chance you’ll use it all at once and be unable to pay it back. However, closing unused cards can negatively impact your credit score as it could affect your credit utilisation ratio – the percentage of the credit available to you that you’re using.

Read more about the pros and cons of cancelling credit cards.

Repay on time
Make sure you consistently meet any monthly repayments and stay within your credit limit. Set up direct debits so you don’t miss any payments.

What happens if I get refused a loan?

Having a loan refused doesn’t mean you’ll automatically be rejected if you make another application. Before you apply, though, it’s a good idea use our eligibility checker – we’ll show you loans you’re likely to be eligible for, without any impact on your credit score.

Why might I have been refused a loan in the past?

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

  • Too many current loans or debts – if a potential lender discovers that you have multiple loans, maxed-out credit cards or other debts, they may see you as too much of a risk. 
  • Bad credit rating – your credit rating is affected by how you’ve handled money in the past. Lapsed repayments and other debts can negatively impact your credit score. 
  • No credit rating – lenders want to see that you have experience repaying loans. They may offer you a lower borrowing limit while you build your credit history, then increase it as their confidence grows.
  • Your employment history – if you have regular spells of being unemployed or have changed jobs frequently, you may be considered too high a risk.
  • Irregular or low income – if you have an irregular or low income, lenders will likely view you as a higher risk.
  • Lack of collateral – if you’re applying for a secured loan and you don’t have something valuable enough to secure against the loan amount, you may be refused credit.
  • Mistakes or errors on your loan application – lenders will see errors and inconsistencies as a red flag. Make sure you fill out your application accurately and honestly.

Can I apply for a loan without affecting my credit score?

No, you can’t apply for a loan without it being shown on your credit score. But it’s very easy to see which loans you could be eligible for without affecting your score. Doing this can help you see what amounts and rates of interest you could get for loans you’re likely to be accepted for, based on your credit history.

See what bad credit loans you might be eligible for now.

What is a soft search?

A soft search is a way of looking for loans or credit cards without affecting your credit score. Traditional credit checks will leave a mark on your credit file, which potential lenders can see when you apply for a loan. If you’ve applied for credit lots of times, other lenders can see this and may be put off lending to you. 

Soft searches will still appear on your credit file but lenders won’t be able to see them, so it won’t impact their decision to approve or reject any applications you make. 

What do I need to apply for a bad credit loan?

Use our eligibility checker to see which bad credit loans you could be eligible for. Once you’ve decided to apply for a loan, you’ll need to provide:

  • All the addresses you’ve lived at for the past three years
  • Your email address
  • Your employer’s details, including their address and phone number
  • Details of your monthly income and outgoings
  • Your bank or building society account details
  • Information about any CCJs or bankruptcy

Managing your loan repayments

It’s vital to know exactly when your payment is due every month and to pay it on time. Missing payments or making late payments could negatively affect your credit score and you might have to make late payment charges.

It’s a good idea to set up automatic payments from your bank account. You can do this by:

  • Direct debit – the lender will usually set this up. They’ll need your bank sort code and account number, and will take the money from your account on an agreed date. This is usually the simplest option.
  • Standing order – you’ll need to set this up with your bank. You pay a fixed amount every month, which you can cancel or change at any time. If you’re on a variable loan and the interest changes, you’ll have to change your standing order to match the new amount you'll owe.
  • Continuous payment authority (CPA) or recurring payments – the lender can take the money that you owe them at their discretion. You’ll need to agree to this.

You’ll need to make sure there’s enough money in your account to cover the monthly payment.

What happens if I can’t make my loan repayments?

If you can’t afford your loan repayments, you’re very likely to be charged a fee for missed and late payments. Ideally, you should get in touch with your lender as soon as possible to discuss your options – for example, a payment holiday.

Missing payments or stopping payments means there’s a strong risk of your credit score being harmed further, making it even more difficult to get a loan in future.

If you’re worried about debt, The Money Advice Service has information on where to get free debt advice.

What are the alternatives to taking out a bad credit loan?

Most loans start at £1,000. If you don’t need to borrow that much, you could consider:

  • Credit-building credit cards
    Allow you to build up your credit history by borrowing a small amount of money, between £100 and £1,000. 
  • Your overdraft
    Going overdrawn on your current account isn’t recommended, but could be helpful in the short-term. Overdraft interest rates can be around 40%, so remember to take this into your calculations when considering your options.
  • 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.

Why choose Compare the Market

Find out what loans you’re eligible for without impacting your credit score

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93.8% of users would recommend Compare the Market to friends or family***

**On average it can take less than 2 minutes to complete a loans comparison through Compare the Market based on data in November 2020.

***For the period 1st September to 30th November 2020, 12,477 people responded to the recommend question. 11,706 responded with a score of 6 or above, therefore 93.8% are likely to recommend

Anelda Knoesen

From the Money team

Provided you can make the repayments, taking out a loan when you have bad credit can be useful and can even help repair or improve your credit score. But you need to make absolutely sure that the loan is affordable – and that you’re getting the right deal for you.”

Compare bad credit loans

If you need a loan, but have a less than glowing credit report, we can help. If you compare loans with us, we’ll only show you those that you’re likely to be accepted for - without affecting your credit score.

  • Tell us how much you want to borrow and for how long.
  • We’ll show you a list of options to choose from.
  • You can adjust the loan amount or the length of the loan to see how this will affect monthly payments and overall costs.
  • You can sort your results by chance of approval if you apply (eligibility) and the interest rate (APR), so you can see which have the lowest rates.
  • Check out the details of the loan – for example, if you can pay it off early or make overpayments.

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

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