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Last updated
December 6, 2023

What is a bad credit loan?

If you've got a low credit score or have missed payments in the past, it can be difficult to get approved for a new loan. Bad credit loans are meant for people who are less likely to be approved for credit by traditional lenders.

How do bad credit loans work?

Loans for bad credit are typically offered by specialist lenders, which instead of basing the eligibility for a loan primarily on a credit check, look at each borrower’s individual financial circumstances to decide whether they can afford the loan they are applying for.

So if you have a poor credit history or even a County Court Judgement (CCJ) on your record, you may still be able to get a loan.

What are the eligibility requirements for a bad credit loan? 

To get a bad credit loan you need to be:

  • A UK resident over the age of 18

  • A current account holder

  • Able to prove you can pay back the loan

What is a bad credit score?

There are three credit reference agencies in the UK, and each one has its own scoring system.

They each track people's history of paying back loans and bills on time over the past few years, along with public information such as county court judgements and whether they're on the electoral roll at their current address.

All of this information is rolled up into a single credit score - with points available for things like making payments on time and not maxing out your credit cards, while points are taken away for things like missing payments or defaulting on debts.

Currently, the three agencies define a poor credit score as follows:

  • Experian: 0-720 points

  • TransUnion: 0-565 points

  • Equifax: 0-438 points

You have a right to check your credit score with each of them for free to see how you're doing, as well as to ensure there aren't any mistakes that could negatively impact your rating.

Credit agencies track people's history of paying back loans and bills on time over the past few years"

Types of bad credit loans

Personal loan

With personal loans you don’t need to put up an asset as security, which is why they are sometimes referred to as "unsecured loans". If you have bad credit, you'll likely be limited to a small number of specialist providers that offer bad credit loans. You'll also find that the interest rates offered on personal loans for people with bad credit may be much higher than on standard loans.

Secured loan

With secured loans, sometimes called "homeowner loans", you need to offer an asset (e.g. a house or car) as security, which the lender can claim if you cannot repay the loan. You are more likely to be offered a secured loan with bad credit, and you may be able to borrow a larger amount, but you need to weigh up the risks carefully. You could lose your possessions if you're unable to repay the loan.

Guarantor loan

To get this type of loan, you need to appoint a guarantor – a parent, relative or friend who is financially stable and willing to repay the loan if you cannot. Some mortgage providers insist that guarantors put up their own property as surety, meaning that they could lose their home if the debt is not repaid on time. It's important that guarantors understand the risk they are taking before getting involved.


Types of bad credit loans

Personal loan

With personal loans you don’t need to put up an asset as security, which is why they are sometimes referred to as "unsecured loans". If you have bad credit, you'll likely be limited to a small number of specialist providers that offer bad credit loans. You'll also find that the interest rates offered on personal loans for people with bad credit may be much higher than on standard loans.

Secured loan

With secured loans, sometimes called "homeowner loans", you need to offer an asset (e.g. a house or car) as security, which the lender can claim if you cannot repay the loan. You are more likely to be offered a secured loan with bad credit, and you may be able to borrow a larger amount, but you need to weigh up the risks carefully. You could lose your possessions if you're unable to repay the loan.

Guarantor loan

To get this type of loan, you need to appoint a guarantor – a parent, relative or friend who is financially stable and willing to repay the loan if you cannot. Some mortgage providers insist that guarantors put up their own property as surety, meaning that they could lose their home if the debt is not repaid on time. It's important that guarantors understand the risk they are taking before getting involved.


How to choose a loan for bad credit

Comparing secured loans is important if you would like to find the best terms and rates - here are the steps you need to take during the application process...

Compare loans

Consider the APR, monthly repayments and total amount you need to pay back.

Choose a deal

Pick a deal and provider that offers you the best combination of APR, term length and monthly payments. Make sure that you choose a loan that is affordable.

Fill out the application form

Enter your name, address and bank details, as well as a summary of your monthly incomings and outgoings. Double-check that everything is accurate.

Start using the funds

Once your application has been approved, the provider will deposit the funds in your account. This usually takes a day or two, but it can sometimes take up to a week.

Pros and cons

Pros

Loan can be used for many different purposes
Money can be sent quickly if application is successful
Helps people who might not be able to get a loan
Improve credit score with successful repayments

Cons

High interest rates
Risk of repossession
Several fees for repayment
Further damage to credit score if you can’t keep up with repayments
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What do I need to consider before applying for a bad credit loan?

Applying for a loan should never be a rushed decision, so it's important to take the time to consider the following questions:

Do you need to borrow urgently?

Unless you need the money immediately, it may be better to spend time improving your credit score rather than applying for a loan for bad credit. Doing so will help you secure a lower rate of interest rate, which, in turn, makes you less likely to default and harm your credit score in the future.

How much do you need to borrow?

The amount you borrow plays a role in being accepted for credit. It can also determine the APR you get. Typically, the larger the sum, the lower the interest rate, but it's important to only borrow what you need.

How long do you need to repay the loan?

Although a longer loan term will result in lower monthly payments, it also costs more in the long term because you pay more in interest overall. Choose a term that allows you to repay the loans as quickly as possible, while keeping monthly repayments affordable.

How much can you afford to pay each month?

Keeping monthly repayments affordable is crucial if you already have a poor credit history. Not only can a missed payment lead to extra charges, but it can also further damage your credit score, making it even more difficult to get credit in the future.

Loans for bad credit are expensive, so make sure you run a comparison to get the best deal. Only borrow the amount you need, and choose a term that allows you to pay it off as soon possible, while keeping monthly repayments affordable.

Alternatives to a bad credit loan

Before taking out a bad credit loan, consider if another type of credit might be more appropriate. This depends on how much you need to borrow and what you’re borrowing it for.

Credit cards

If you only need to borrow a small amount, consider a credit building card instead of a bad credit loan. Not only are you more likely to be accepted, but if you make your repayments on time, you can improve your credit score over time.

Overdrafts

Another option for those with modest borrowing needs is to contact your bank and apply for an overdraft on your current account. This is a particularly good option if you need the security of being able to cover regular expenses every now and then.

Take a look at our detailed guide to borrowing with bad credit to find out more.

FAQs

Are bad credit loans a good idea?

In terms of whether bad credit loans are a good idea - it depends on your circumstances. Bad credit loans are a costly way to borrow money, but they can be useful if you have a poor credit history and need to get a loan. Paying off a bad credit loan in full and on time can also improve your credit score.

How much can I borrow with a bad credit loan?

You could borrow up to £50,000 with an unsecured bad credit loan, but the exact terms will depend on the loan type and the lender.

Will my credit history be checked when I apply?

Yes, your credit history will be checked when you apply. However, bad credit loan providers are more willing to lend to you even if you have had trouble managing your finances in the past.

Will a bad credit loan affect my credit rating?

Yes, the loan application will appear on your report. You could improve your credit rating if you make your payments on time it, but if you miss any, you risk damaging it further.

Can I get a guaranteed loan?

No, you cannot get a guaranteed loan because lenders check your finances and credit record before they decide if they can offer you a loan.

Do I need a guarantor to get a bad credit loan?

You don't always need a guarantor to get a bad credit loan, but you may be able to borrow more at a better rate if you have one.

What is the longest loan term I can get with a bad credit loan?

The longest term you can get with a bad credit loan is usually between one month and 15 years. The longer you take to pay off the loan, the more interest you pay overall.

Can I use a bad credit loan for paying off debt?

Yes, you can use a bad credit loan for paying off debt. Indeed, some bad credit loan providers will only offer this type of loan explicitly to pay off debts.

What happens if I cannot make my repayments?

If you cannot make the repayments, your credit record will be damaged and you may incur an additional fee. Find out what to do if you’re unable to pay back your loan.

What does APR mean?

APR (Annual Percentage Rate) is the amount of interest you would pay across your loan’s total value over a year. This typically includes arrangement fees. Lower rates of APR mean lower monthly payments. 

What’s the easiest loan to get with ‘bad credit’?

Different loan providers have different criteria for loans, so the easiest loan to get will depend on your circumstances.

If you’re a homeowner, for example, a secured loan for bad credit might be simplest. On the other hand, if you have little or no credit history, then a guarantor loan might be your best option. However both of these sorts of loans come with their own risks attached. The simplest thing to do is to use and eligibility checker on a comparison site to see what you qualify for first, then check a different sort of loan if you don't find something you qualify for. Just make sure you understand all the terms and conditions before applying.

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About the author

Lucinda O'Brien
Lucinda O'Brien has spent the past 10 years writing and editing content for regional and national titles. She applies her industry knowledge to ensure readers can make confident financial decisions.

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