Loans for bad credit are offered to those who have trouble getting credit due to a poor credit history. Instead of basing the eligibility for a loan primarily on a credit check, lenders look at each borrower’s individual financial circumstances and assess whether they can afford the loan they are applying for.

So even if you have bad credit, have missed payments on your debt in the past, you may still be able to get a loan.

What is bad credit?

If you have a history if missing repayments on credit cards or loans, or have had trouble keeping up with bills, it affects your credit score, which is referred to as having bad credit.

People with bad credit find it difficult to borrow money from lenders, whether it's a loan, credit card, or mortgage. That's because lenders consider people with bad credit to be at a higher risk of defaulting on repayments.

What different types of loans for bad credit can you get?

Personal loans: These are loans which don’t require you to put up an asset as security for the loan. If you have bad credit, you may have limited options on who will lend to you and interest rates on unsecured personal loans for bad credit tend to be high.

Guarantor loans: These are loans which require you to appoint a guarantor. This is a family relative or friend who agrees to repay the loan if you are unable to. With a guarantor, you are more likely to be accepted for a loan.

Secured loans: These are loans, often known as homeowner loans, in which you are required to put up an asset such as your home as security for the loan. If you are unable to repay the loan, the lender can repossess your home to recoup the loan. These give a better chance to be approved for loan, but they do put your home at risk.

Peer to peer loans: These are loans in which you borrow from an individual instead of borrowing from a bank or building society. Find out more about how peer to peer loans work here.

Can you get a bad credit loan?

Although having bad credit can limit your options it is still possible to get a loan with bad credit.

To be eligible for poor credit loans you must:

  • be at least 18 years old

  • have a current account

  • be a legal resident of the UK

  • be able to show how you’ll repay the loan.

When you have bad credit, banks and lenders consider you to be a high risk borrower. This means that they think you are more likely to default on your loan. This is why bad credit lenders tend to charge high interest rates for their loans.

However, the good news is that if you get a loan with bad credit, and keep up with repayments, you can improve your credit score and eventually be eligible for better loan products.

How to find the best loans for bad credit

Finding loans for bad credit, uk wide, which suit your circumstances is just like comparing any type of loan. You should consider these things every time you compare loans.

  • Secured or personal loans: If you have bad credit, you may be more likely to be accepted for a secured loan. It’s also likely that you’ll be able to borrow more. The downside is that your home could be at risk if you’re unable to keep up with repayments.

  • Interest: Bad credit loans typically charge high interest rates, so they’re an expensive form of borrowing. But it is still possible to get a loan with bad credit at a lower interest rate.

  • Loan term: How long you take to repay your loan will affect your monthly payments. The longer the term, the lower your monthly repayment will be. However that also means you’ll end up paying more in interest overall. Choose a loan term that gives the highest repayment that you can afford.

  • Loan amount: How much you need to borrow can affect whether your loan application will be accepted, especially if you have bad credit. This is why it’s better to only borrow as much as you need.

How you can get a bad credit loan

Before you apply for a bad credit loan, you can help your chances of approval by doing some preparation.

  • Know your credit score: When you apply for a loan for bad credit, the lender usually runs a credit check. Checking your credit score beforehand will let you know where you stand. Then you can make an informed decision on whether its worth applying for a loan.

  • Improve your credit before applying: If you don't need the money right away, it might be worth your time to take steps to improve your credit score, before applying for a loan.

  • Consider a guarantor: If you're having trouble getting a loan because of your credit history, you can get a guarantor to back the loan to improve your chances of getting approved for a loan. Find out more about how to get a guarantor loan here.

  • Avoid payday loans: Payday loans are extremely expensive with APRs often going well over 100%. These can get you caught up in a cycle of debt.

    They are often targeted at people who have a poor credit record who need money quickly, but are generally the most expensive type of borrowing on the market.

    You can read more about why you should avoid payday loans here, including information on what to do if you are struggling to repay your payday loan.

Anytime you apply for a loan for bad credit, it's important to think about the following:

  • How much you need to borrow: The amount you need to borrow can have an impact on whether you're accepted for credit. It can also determine the interest rate you get. Typically, the larger the amount, the lower the interest rate. But it's important to only borrow the amount you need, because you will need to pay it back with interest.

  • How long you want to borrow the money over: Although a longer loan term will result in lower monthly payments, it'll also cost you more over as you'll end up paying more in interest. Pick a term that allows you to repay the loans as quickly as possible, while also keeping monthly repayments affordable.

  • What you can afford to pay each month: Keeping monthly repayments affordable is especially important if you have bad credit, because a missed payment can hurt your credit score even further and make it even more difficult to get credit in the future.

What are the drawbacks of loans for poor credit?

  • High interest rates: Loans for bad credit have much higher interest rates than standard loans as borrowers represent a higher risk to lenders. This tends to happen with unsecured loans where there is no security or guarantor.

  • Risk of repossession: If you put up an asset, such as your car or home, as security for your loan, you may lose it if you fail to repay the loan.

  • Fees: Poor credit loans come with several fees attached, such as arrangement fees, bounced payment fees or early repayment fees.

If you are rejected for a poor credit loan, don't panic. Although it will be noted on your credit report, one failed application isn't as bad as multiple rejections.

This is why it's important not to make several applications for credit at once. If you've been rejected for a loan, wait at least three to six months before applying again. In the mean time, work on improving your financial circumstances by paying your bills on time, and possibly increasing your income.

What are the alternatives to taking out a bad credit loan?

It’s possible the depending on what you’re borrowing for and how much you intend to borrow, you could consider other forms credit.

Bad credit loans vs credit cards

Credit building cards may be an option for you, as these credit cards are designed with people who have poor credit in mind.

While a loan may allow you to borrow a larger amount, with a credit card you can apply for a smaller amount to improve your chances of being accepted. Then make sure you keep up with repayments and eventually you can have your credit limit increased. If you think this might be a good option, you can compare credit building cards here.

Overdrafts vs loans for bad credit

If you’re looking to borrow a small amount of money, then an overdraft may be a more suitable option. If you feel the need for some extra cushion to cover your regular expenses on occasion, you can apply for an overdraft with your current account provider.

Other ways to get poor credit loans

Try these alternatives before applying for a bad credit loan:

Budgeting loans are available from the government if you receive benefits.

Credit union loans are offered by community-run cooperatives.