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What are bad credit loans? Bad credit loans are simply loan products designed around the needs of people who have a poor or adverse credit history.
Bad credit loans come in many shapes and sizes, from small unsecured finance to larger secured loans.
If your credit score is quite low, it may prevent you from obtaining more mainstream financial products. Yet, a loan product designed for people with a poor credit rating can often help rebuild a credit history, if managed in the right way.
Who bad credit loans are designed for
Bad credit loans are designed specifically for people with adverse credit.
People with poor credit ratings may have struggled with debt in the past. They could have missed payments or been unable to repay what they owed. There is a chance that this could happen again.
These cash loans are often more expensive than traditional bank loans.
The higher interest rates reflect the increased level of risk that a lender must manage.
In return for agreeing to higher levels of interest, borrowers may be offered credit when other sources would turn them down.
Bad credit loans exist for people that need money but may not have managed their debt successfully in the past.
They can also be used by people that have not built up a credit file because they have never borrowed before. A lack of credit history is almost as bad as a poor one.
Bad credit loan options
The accurate definition of a payday loan is a loan that tides you over until payday.
Theoretically, this is a very short term loan, usually provided for up to 30 days. In practice, payday loans can be stretched up to 6 months and most lenders offer the flexibility of borrowing for longer.
Payday loans bridge the gap from one payday to the next. They are suitable for people that will have the spare money available in a week or two but need it immediately.
Perhaps your washing machine has broken, and you need a replacement quickly. But, if you have no spare cash this month, then payday loans could be a suitable finance option.
Short term loans
Short term loans are often described as payday loans but are usually payable over slightly longer periods of time.
Most are for loan terms between 3 and 6 months.
Short term loans are usually paid back in instalments, unlike payday loans which must all be paid back in one go.
When you agree to the loan, you are also agreeing to make part payments on specific dates. By the end of the loan term, you will have cleared your debt and any accrued interest.
Medium term loans
Often the APR is lower if the loan term is longer. But, the longer term means that the cost can be higher overall.
Medium term loans can still be available to people with poor credit. These could be suitable if you need a larger amount of money, but cannot get a loan through the bank.
Long term loans
Loans provided over terms of more than 2 years are often described as long term loans.
Most people borrow money for up to 5 years, though some loans can last longer.
Long term loans are often for significantly larger amounts of money. These are much more difficult to get if you have adverse credit, but may still be available.
Specifically, debt consolidation loans are a form of long-term borrowing that may be available.
It is important to remember that a bad credit rating may affect the amount of interest that you pay.
Most lenders charge higher interest rates to borrowers with bad credit. In turn, this means that borrowing money could be quite expensive if your credit score isn’t the best.
Over a long loan term, high-interest rates will have a particularly big impact.
A secured loan may increase your chance of getting credit with a poor credit score.
With a secured loan, you offer a possession or asset as collateral (backing) for your loan.
If you cannot afford to make repayments, your possession may be sold to clear your debt.
Pawnbrokers and logbook loans are two of the most popular types of secured loans for people with bad credit.
With a logbook loan, the money you borrow is secured against your vehicle. Usually, you will still be liable for any remaining debt after your car has been repossessed and sold if you could not keep up with repayments.
Pawnbrokers will value your items, and lend you money using your belongings as their security. You can borrow money against any item of value. Specifically, most pawnbrokers request jewellery and antiques.
Pawnbrokers are usually responsible for any loss, based on their valuation. This means that if your items are sold and do not completely clear your debt, the rest of the loan is wiped.
To apply, you will need a friend or family member that is happy to back your loan. They will need a reasonably good credit rating.
Some lenders require guarantors to own their own homes.
If you cannot repay your debt, your guarantor agrees to make repayments on your behalf.
Using a guarantor may reduce the amount of interest that you pay. It could improve your chance of approval.
Be cautious with guarantor loans. Relationships can be badly affected if guarantors are actually called upon to make debt repayments.
What are bad credit loans for?
Bad credit loans are high-interest forms of credit.
The FCA regulates the industry to ensure that your debt cannot continuously rise. Yet, you may still end up paying back double what you originally borrowed.
These loans are only intended for emergencies. They can be very expensive, so should not be used for non-essentials.
A key benefit of a payday loan is the money can be available quickly.
If it is needed in an emergency, you will probably not have to wait weeks for the cash. This can be a risk if you are the type of person to be easily tempted.
Most bad credit loans can be applied for online. This is convenient, but you should still think carefully before going through the application process.
You should not apply for a loan to fund a weekend shopping trip. The money could be in your account in time but would make your purchases much more expensive.
It is important to consider a loan carefully. Any application you make can further reduce your credit score.
By applying for a loan that you do not need, you may be limiting your credit options for even longer.
Being approved for bad credit loans
Though bad credit loans are more easily available than some other forms of credit, approval is not guaranteed.
If you are not expected to be able to afford repayments, your application will not be approved.
Most applications for very bad credit payday loans are not approved, even though their name suggests that they are given quite freely.
Lenders have a responsibility to make sure that they are not putting people into unmanageable debt.
Applications you make are marked on your credit file. They may reduce your chance of a credit application being accepted in future.
Only apply when you are sure that you want the loan. Check that you meet the lending criteria before wasting an application.
Using a loan broker or bad credit loan comparison website, you can check which lenders might approve your loan request. This is before you even go through a full application.
Repaying bad credit loans
If your application is approved and you receive a loan, then you may be able to improve your credit score by making your repayments in time.
As your creditors receive payments, they will update your credit file to show that everything is up to date. Debts that you clear are marked as being repaid in full, which can increase your credit score.
Improvements take time, and some types of bad credit loans are categorised separately. As such, they may be seen by some lenders as a sign of past financial difficulty. Do not expect that borrowing money and repaying your debt will result in a fast credit score boost.
As you borrow money and repay your debts on time, your credit score should gradually increase. This means that better loan offers will be available to you in the future.