Bad Credit Loans – Loans for People With Low Credit Score

How Can I Tell If I Have Bad Credit?

The term bad credit’ typically refers to how an individual has a history (or repeated history) of failing to keep up with instalments/payments on credit agreements. In practice, however, you are said to have bad credit when you have a low credit score.

Credit score, on the other hand, is the score given in your credit report that is compiled by a credit reference agency. In the UK, there are three main credit reference agencies: TransUnion (used to be Callcredit), Equifax, and Experian. They each have their own scoring system, and when your score is lower than a certain standard (i.e. 560 with Experian), then you currently have a bad credit status.

What Affects My Credit Score?

Your credit score, as briefly discussed, is ultimately determined by how responsible you are in paying back your credit and in using your credit facilities in general. If you fail to pay a bill on time, for example, you’ll lose points, but you will gain points when you use 30% or less of your credit card limit.

There are various reasons why you might have a low credit score, including but not limited to:

  • Bankruptcy
  • Too many occurrences of hard credit checks on your profile. A hard credit check occurs when a potential lender checks your credit history when you apply for a loan (including credit card)
  • Payment defaults
  • A ruling by County Court
  • A debt relief order (DRO), individual voluntary arrangement (IVA), and debt management plan (DMP)

Another common case is when your credit score is too low because you haven’t had the opportunity to build a significant credit history (i.e. you are still in school, you are moving from another country, etc.)

How Will Bad Credit Affect You?

Simply put, lenders will look at your credit score and will use it to determine whether they are going to lend money for you. If you have bad credit, then it’s going to be difficult to borrow from lenders, including applying for a mortgage or getting a credit card.

The lower your credit score, the riskier’ your profile is as a borrower, and lenders would think that you are potentially a risky investment: they would assume that the chances of them getting repayments from you are low.

That’s not saying there aren’t any options available to you for taking out a loan, just your options will be severely limited, as we will discuss below:

What Types of Loans Can I Get with Bad Credit?

Even with bad credit, you should be able to take consider these following credit options:

  1. Personal loans: characterised with you not having to put any collateral so you can get it without any asset, but this type of loan tends to have a higher interest rate. In the case of a low credit score, the interest rate might be even higher and you might not have too many options regarding lenders.
  2. Guarantor loans: a type of loan when another person acts as a guarantor’, which basically agrees to pay the loan back if you miss the repayments. The guarantor is typically a family member or friend with a high credit score. If you have someone who trusts you and is willing to help, then this can be a great option.
  3. Secured loans: in this type of loan you have to use the assets you own as collateral. Most commonly the collateral is your home or your car, but depending on the lender, other types of assets might be accepted as collateral. In a secured loan, if you regularly miss repayments, the lender will be able to seize the collateral, so you might end up losing your asset.
  4. Peer-to-peer (P2P) loans: peer-to-peer lending is a relatively new type of loan that is made possible by digital technologies. In this type, you are not borrowing money from banks, building society, or other institutions, but from other individuals. Typically done via apps, you’ll be matched up with people who are willing to lend you money at a specific interest rate. Typically you’ll still need to pass a credit check in a P2P loan, although the qualification might be more lenient.

What Are The Pros and Cons of Taking a Loan with Bad Credit?

As discussed, your lender options might be (severely) limited when you have bad credit, and often you’ll be limited to options with very high interest rates. So, it’s important to carefully weigh up your options, their advantages, disadvantages, and potential risks before making your decision.

Pros:

  • Quick access to fresh money. In cases when you are desperately in need of cash, some lenders would transfer funds to your account in 24 hours.
  • No credit check. Some lenders would lend you money without any credit check at all, which is often the only option in a bad credit situation.
  • A chance to improve your credit score. If you end up taking a bad credit loan and you can keep up with the repayment, it can help in building a better credit score. Little by little, this can help n the future should you plan to get a mortgage, credit card, or other loan agreements.

Cons:

  • Higher interest rates. If you apply for a loan with bad credit, expect lenders to charge you with a (much) higher interest rate. They think that you are a riskier investment, and this high interest rate is to offset that risk. This means that the total amount of the loan will cost you more.
  • Risky. If you miss repayments, you can risk damaging your credit score further. Also, if you are using the secured loan option, missing too many repayments can lead to your lender seizing your collateral.
  • Hidden fees. Some lenders of bad credit loans might incur hidden and extra fees like late repayment fees, returned payment fees, and so on. Carefully check the terms and conditions of the loan agreement before taking the loan.

Qualifications for a Bad Credit Loan

If you are planning to apply for a bad credit loan in the UK, then the qualification criteria are pretty typical:

  • You’ll need to be at least 18 years old
  • You are a registered UK resident
  • You are a current bank account owner
  • You can demonstrate the ability to repay the loan (via credit score, proof of income, etc.)

If you plan to check how likely you are to qualify for a loan before applying, you can use various online eligibility checker (i’m not sure whether you offer one, you can add here if yes) that won’t affect your credit score as a hard credit check.

Will Applying for a Bad Credit Loan Affect My Credit Score?

A successful loan application will not affect your credit score, but the important thing here is not to make multiple applications simultaneously). You can run a soft search’ to check for your loan eligibility with various online eligibility checker – as discussed above, and check how likely lenders are going to lend money for you without actually applying. This won’t affect your credit score.

What Should I Consider Before Applying for a Loan?

Before you apply for a loan, you might want to consider the following:

  • How much would you need? Borrowing larger amounts might lead to lower interest rates from some lenders, but you have to be careful since it would also translate into bigger repayments.
  • How long would you want to borrow the money over? Longer terms would translate into smaller repayments, but in the long run, you’ll pay more in interests. Aim to find the right balance according to your repayment ability.
  • How much can you afford to pay back monthly? This one is very important. You are already on bad credit, so you’d want to make sure you’ll be able to make all your repayments on time so you can fix your credit score in the long run. As a general rule of thumb, the total amount or repayment every month shouldn’t exceed 30% of your monthly earnings.
  • What’s your credit score is like. The higher your credit score, the more lender options and loan type options you can have.

What Happens If My Loan Application is Refused?

If a loan application is refused, it will show up on your credit report. While a single failed loan application won’t really affect your credit score, multiple failed applications will. So, if your initial application is rejected, don’t make any more applications for the same type of loan right away. It’s best to improve your circumstances first or find a type of loan you are more likely to get to improve your credit score ever so slightly.

You might be rejected for a loan because:

  • Too low credit score. Bad credit is the most common reason for rejected loan applications
  • Limited credit history. You can try getting some easy’ loans to first build your history
  • Unstable employment history. If you change jobs often, it can contribute to your credit score.
  • Low/irregular income. Lenders might assume you can’t pay the repayments.
  • No/not enough assets. For secured loans, if you don’t have enough to offer up as collateral, it’s likely you will get rejected
  • Wrong information on the application. Mistakes on your loan application might lead to rejection

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