Loans for people with bad credit have been around for many years. Essentially these loans often come with higher APR’s to allow for the increased risk credit providers may have to undertake in order to provide finance to consumers.
No matter how bad your credit score, the modern UK lending market is such that even someone with a serious adverse credit history on their record may still be able to find an affordable loan. Loans for bad credit are normally available as both secured and unsecured loans products
Secured loans may be offered at a more competitive interest rate, but this is due to the secured asset against the loan (usually a house or car) so if you are considering a secured loan, be aware that you may lose the asset you have secured your borrowing against.
Many people who have had problems with credit in the past or are currently experiencing financial difficulties assume they will not be approved for a personal or a secured loan. This is not always the case.
There is an increasing number of mainstream and specialist lenders offering bad credit loans for people just like you.
What is a bad credit loan?
A bad credit loan is a loan product designed to help people who have a low credit score and a poor credit history. These loans were created to serve a need in the marketplace for people unable to qualify for mainstream finance.
There are many reasons as to why a person’s credit history could have been adversely affected, ranging from missed direct debit obligations to more serious County Court Judgments (CCJ’s)
Plenty of people have found themselves with a less-than-perfect credit score at one time or another and unfortunately, this can prevent them from accessing certain loan products and lead to more expensive credit agreements.
What does a ‘credit score’ mean?
A credit score is an often used term to describe a numeric expression of a person’s creditworthiness.The credit score itself will come from at least one of the UK’s 3 main credit reference agencies. These are:
- Call Credit
Your ‘credit history’ with a credit reference agency like Experian will be scored on a sliding scale of 0-999. The score allocated signifies the level of potential risk you represent, with 999 being the highest possible score.
As you move down this sliding numeric scale, there will be a point where the mainstream lenders consider you too high a risk. If this is the case, it may mean you have to turn to more specialist loan providers that are more comfortable lending to those with lower credit scores.
As a result of the extra risk you present, you may be offered less attractive loan terms, but it does not mean you will not be able to find the funding you need. This is particularly the case if you have worked diligently to get your finances back on track.
To find out more about rebuilding your credit rating, take a look at our series of articles about this important topic.
How to choose the right bad credit loan
If you have a bad credit score and taking out a loan is the only way you can access the funds you need, it is essential that you choose both your lender and the loan product wisely.
You should only apply for a bad credit loan you are 100 percent sure you can repay in full and on time, as any late or missed payments will only further limit your options in the future.
When researching the most appropriate loan type for your needs carefully consider:
- Loan duration
- Terms of the credit agreement,
- Total repayment amount,
- Total cost of credit
You may also take into account any other requirements such as security or a guarantor.
You should also look at each lender’s minimum eligibility criteria before you apply as applying for loans from multiple lenders can damage your credit score.
If you want to apply for a short-term loan without leaving multiple footprints on your credit file, you can use an FCA regulated credit broker like CashLady to save both time and money.
Having an adverse credit history should change the way you research a bad credit personal loan.
You need to look carefully at your present financial circumstances and draw up a comprehensive list of your income and expenditure to make sure you can afford to repay it.
There are bad credit loans you can repay in a single month with one large repayment and instalment loans you can repay over a period of 3-12 months.
All FCA regulated loan providers have to take affordability into account when issuing any type of loan. The more affordable a loan is, the less risk it represents to the lender.
This could mean that a lower APR is offered if the result of affordability checks are positive.
If you are unsure about how much you are able to afford, CashLady has put together a simple affordability calculator to help guide you.
Payday loans for bad credit
Payday loans are a type of credit often associated with customers who have a poor credit history. Small loans for bad credit are often needed to help people who have a temporary loss of income or an unexpected bill which they cannot repay in full. This could be anything from a car repair to household purchase. However, payday loans are not simply designed for people who have bad credit and are often used by people who have good credit scores.
The flexibility of the product and the short term commitment are often all somebody needs and especially when a larger value, long-term commitment is unsuitable for the emergency situation. This is why searches on Google for ‘quick loans for bad credit’ often result in payday loan providers.
Of course, payday loans (and other forms of unsecured loans for bad credit) are not the only solutions to an emergency situation. Credit cards and types of revolving credit can also be of great value in emergency financial situations.
Online loans for bad credit
Although there are many avenues to obtain loans for people with bad credit, the online marketplace is usually the first place people turn to.
Online loans for bad credit are much like any other online loan platform, where both direct lenders and brokers like CashLady offer UK consumers a simple, quick application process which can be done through a desktop computer, tablet device or mobile phone.
Although the application process is online, with decisions often returned in a matter of minutes, there will often be cases where a manual assessment needs to take place, which can slow the process down.
This is particularly true if additional, supporting documentation is required.
If this is the case, it is usually best to cooperate with the lender in question. Bad credit loans online may require careful consideration if it looks like you have not managed your finances well in the past or have missed any recent credit obligations.
One thing to be aware of is applying for unsecured loans for bad credit and then being told that you need to put some kind of security to get the finance.
If you are in a difficult situation and need the money in your bank account quickly, it can be easy to say yes to anything. But don’t feel pushed into making a decision like this without carefully considering all of the potential outcomes.
What would happen if you lost your house or car?
If you are offered a secured loan, you should also look at the terms of the credit agreement/ offer. Is the APR more competitive because of the additional security you have provided? If not, it might be worth negotiating.
How are bad credit loans underwritten?
Loan underwriting is the process by which the lender determines whether or not your loan application is an acceptable risk to take. Depending on the details of your bad credit loan application, the underwriting process may be automated or involve manual intervention before a decision is made.
During the underwriting process, the lender will look at a number of different information sources to assess the likelihood that you will be able to afford to repay the loan based on current affordability and your financial past.
The underwriter will look at conventional sources of information, such as your credit report, bank statements, electoral roll registrations and financial associations (including people you share a financial relationship with) to build a clear picture of your financial position. This will help them ascertain:
- Your full name and address
- Your income
- A general transactional history
- Whether regular payments are made to other credit providers
- Recent unpaid or reversed transactions
- Evidence of short-term, high-cost credit usage
- Excessive online gambling
- Spending habits
- Regular outgoings
- Ongoing credit agreements
- Use of authorised credit limits
Increasingly, modern day bad credit loan providers consider a less conventional range of factors to help them build a more complete picture of the risk you present. Factors such as the type of job you have and the length of time you have had it can be used.
Even the length of time you have lived at the same address will be considered in the underwriting process. Some lenders will also look at how frequently you withdraw money from a cash machine or take a look at your social media accounts when deciding whether to accept your loan application.
How can social media be used to determine your creditworthiness?
Facebook recently obtained a patent that allowing lenders to take your social connections into account when determining whether to approve or reject a personal loan application.
When an individual applies for a bad credit loan, some lenders will look at the individual’s social network to help them ascertain their creditworthiness. If the credit rating of an individual’s friends is above a certain average score, the lender might continue with the loan application process. If the connections’ credit rating is below that score the loan application could be rejected.
This could mean if your friends online have a bad credit rating, you could might you struggle to secure a loan yourself. Alternatively, if your friends have a track record of using credit responsibly, this could reflect favourably on you.
Lenders are also using social media to verify information loan applicants have provided. Some lenders will look at LinkedIn to see whether individuals have the same job information as they do on their loan application, while others will take to Facebook and Twitter for signs of excessive spending behaviour or indications that an applicant’s job could be under threat.
Loans for bad credit – summary
Loan products designed for people with bad credit can be very valuable if you need urgent finance and cannot access the loan products offered by many of the traditional high street lenders.
You can apply for bad credit finance in a number of different ways including:
- Online applications
- Specialist high street loan providers
- Telephone application
The amount of money you can borrow will depend largely on your personal circumstances, but don’t be tempted into taking out a bigger loan than you need.
Bad credit loans will usually have a higher APR which means any unnecessary borrowing will become an expensive commitment. Be strict with what you need and make a plan for the future.
Using tools like the CashLady affordability calculator will help determine how much you can realistically afford. Don’t feel pressured into signing any type of agreement and if you have any doubts, check with a friend or family to get a second opinion.
Whatever you do, never take out a loan with a company who is not FCA registered. The FCA are there to regulate the industry and ensure best practices are followed by all authorized companies. Taking these precautions will help to protect you in the future and provide you with a loan product fully approved by the Financial Conduct Authority.