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Bad credit loans

Bad credit loans

A poor 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?

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. 
  • Poor credit rating – 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.  

 

Why do I have a poor 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. 

How can I improve my chances of getting credit? 

  • 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  – Lenders 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 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 30% below your credit limit  – Lenders 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 can be put off too. 
  • Repay on time  – Repay regularly and 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. 

Can I get a loan with bad credit? 

While your options may be reduced, there are still loans available which many people take advantage of, that are also suitable for those with poor credit. 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. 

A  secured homeowner loan  uses your home as a guarantee. If you don’t keep up with repayments, you could lose your house. 

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

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 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 runs an enquiry on 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 account. 

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