What is bad credit?
Bad credit is where the information on your credit report means you are rejected when you apply to borrow money.
You could have bad credit if:
You have missed payments
You have been bankrupt in the past
You have had CCJs or an IVA
You have defaulted on an account
If you have active CCJs, are still in an IVA or have yet to be discharged from bankruptcy then you will not qualify for a bad credit loan.
CCJ stands for County Court Judgement and it is a court order normally obtained by a lender instructing you to pay back the money you owe. You can find out more about CCJs and how they work on the Money Advice Service website.
An Individual Voluntary Arrangement (IVA) is a formal agreement between you and your lenders where you agree to pay back all or some of your debts over a specified amount of time. At the end of your IVA you will be debt free. Here is more about how IVAs work on the StepChange website.
Why is it important?
Almost all lenders check your credit record when you apply for a loan, and use it to help decide whether to lend to you and how much it will cost.
If you have a good credit rating, you have more choice and access to cheaper loan rates
If you have a bad credit rating, you have less choice and it costs more to borrow money
If you have never had credit, you may not get the best deals as you have no track record
There are some simple things you can do to improve your credit rating like:
Checking all the information on your report is accurate and there are no mistakes
Registering to vote on the electoral role
Paying your bills on time
Loans for bad credit
Some lenders are more willing to consider your application to borrow money than others and often advertise loans for bad credit. These bad credit loans are similar to other personal loans or secured loans, but more expensive.
For example, here are the cheapest loan rates for unsecured personal and bad credit loans from December 2016:
Lowest personal loan rate: 3% APR from Ikano Loans (£7,500 loan over 3 years)
Lowest bad credit loan rate: 14.9% APR from Moneyway (£7,500 loan over 3 years)
The difference in the total cost in this example is £1,376.64 over the three years.
The pros and cons of a bad credit loan include:
More likely to accept you
May help improve your credit score
Higher interest rates
Less choice of lender
APR stands for Annual Percentage Rate and it is the cost of borrowing over 12 months. For example, a 1 year loan with an APR of 10% would cost £100 in interest, so you would have to pay back £1,100 in total.
What are the alternatives?
You have several alternatives to applying for a bad credit loan if you have poor credit, including:
If you qualify, you could get an interest free government loan of up to £812 to pay for certain expenses.
To get one you must have been receiving one of these benefits for at least 26 weeks:
Income based Jobseeker Allowance
Income related Employment and Support Allowance
If you are already being paid Universal Credit instead of these benefits then you may be able to get a Budgeting Advance instead. There are more details on the Citizens Advice website.
For more information on how to apply for a budgeting loan, visit the Gov.UK website.
If there is a credit union in your area they could be a good option if you have bad credit. This is because the most a credit union can charge on a loan is 3% a month, which works out at around 42.6% APR.
However, to borrow from a credit union you will need to become a member, and some may need you to start saving with them first.
You can find out more about credit unions and how you could borrow from them on the Money Advice Service website .
Some other ways you could borrow the money you need if you have bad credit include:
Guarantor loans: These loans mitigate the risk of lending by asking for someone to guarantee your loan payments. The rates may be lower because of this extra security, but you need a willing guarantor to apply. Here is how guarantor loans works.
Peer to peer loans: Some peer to peer lenders are more willing to consider applications if you have poor credit and the rates could be cheaper as well. Here is a closer look at how they work.
Bad credit credit cards: You could avoid interest and improve your credit record with these cards if you repay them each month. However, credit limits are usually under £1,000 and rates are high if you need longer to repay them. Here is how they work.
Applying for a bad credit loan
If you have chosen to apply for a bad credit loan, before you apply you should:
Check if you will be accepted
As well as your credit record there are several other factors that will influence whether or not your application will be accepted by the lender, including:
Your existing debts
Your other financial commitments
Each lender will set different application criteria, so check you meet each factor before you apply.
To get a better idea whether you will be accepted for a loan, look for lenders that offer an eligibility check before you apply, sometimes called a soft search quote.
This tells you if they are likely to accept your application and how much the loan will cost, without affecting your credit rating.
While you may have less choice if you have bad credit it is still worth shopping around for the cheapest loan possible.
Bad credit lenders need to quote a representative APR with their loans. This is the rate that at least 51% of people get when they apply, giving you an idea of the likely cost.
Bad credit loan FAQs
Will a bad credit loan affect my credit rating?
Yes, it is added to your record when you apply. Manage your loan well and it will improve your rating, miss payments and it will damage it further.
Can I get an unsecured bad credit loan?
Yes, you can check the latest bad credit unsecured loan rates here.