How to borrow money with bad credit

You can get a personal loan with bad credit, but the rates will likely be high. It can be harder to get a loan with bad credit, and it may be worth trying to improve your score before you apply for a loan.

The word loan is spelt over four wooden blocs, with two male figurines placed next to them.

Bad credit loans

Bad credit loans are usually unsecured personal loans. They are designed for those with poor credit histories or none at all.

Interest rates are often much higher on bad credit loans than normal personal loans. This makes them an expensive option for borrowing money.

Your credit score indicates the state of your credit file, which dates back 6 years. While lenders do not see your score, they look at your credit file via credit reference agencies (CRAs).

Not all lenders offer loans to people with bad credit, and even those that do could reject your application.

What are the pros and cons of a bad credit loan?

  • More likely to be accepted than normal personal loans

  • Could improve your credit score if you pay on time

  • Usually quick approval process

  • Comparatively high interest

  • Less choice of lender

  • Not a good long-term borrowing option

What is the APR on bad credit loans?

The average APR on bad credit loans is around 49%. The cheapest rate on normal personal loans is about 3%.

This is why it's a good idea to try and improve your credit score.

APR stands for Annual Percentage Rate. It's the cost of borrowing over 12 months and includes the interest on the loan and any fees.

What is bad credit?

Bad credit is indicative of a poor credit history. Your credit history is stored by 3 credit reference agencies (CRAs) and dates back 6 years.

The reasons why you might have bad credit include:

  • Missed, late or defaulted payments

  • County Court Judgements (CCJs), Individual Voluntary Agreements (IVAs), or bankruptcy

  • Not being on the electoral register

  • Discrepancies or mistakes, such as accounts registered to an old address

  • No credit history because you've never had a credit product before

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.

What is a CCJ?

A CCJ, or County Court Judgement, is a type of court order. It's normally obtained by a lender instructing you to pay back money you owe.

You can find out more about CCJs and how they work on the Money Advice Service website.

What is an IVA?

An IVA, or Individual Voluntary Arrangement, is a formal agreement between you and your lender 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. But the IVA will remain on your credit file for 6 years.

Discover more about how IVAs work on the StepChange website.

What are the alternatives to bad credit loans?

There are several alternatives to bad credit loans, even if you have a bad credit score.

These include:

  1. Budgeting loans

  2. Credit unions

  3. Bad credit credit cards

  4. Guarantor loans

  5. Peer to peer loans

1. Budgeting loans

Budgeting loans are interest-free loans from the government. The maximum amount you could get is £812 and the money must be used for certain expenses, like advance rent or funeral costs.

To be eligible for a budgeting loan, you must have been receiving 1 of these benefits for at least 6 months:

  • Pension Credit

  • Income Support

  • Income-based Jobseeker Allowance

  • Income-related Employment and Support Allowance

If you're already being paid Universal Credit instead of these benefits, you may get a Budgeting Advance instead.

You can apply for a Budgeting Loan on the Gov.UK website.

2. Credit unions

Credit unions offer savings and loans to local communities. If there's one in your area, they could be a good option for a small loan (usually under £3,000).

To borrow from a credit union, you may have to become a member. Some require you to start saving with them first.

3. Bad credit credit cards

Bad credit credit cards are credit cards with low spending limits designed for those with low credit scores.

You could avoid paying high interest and build your credit record with a bad credit credit card. But you must repay them on time and in full every month. If not, you could damage your score even further.

Discover how to get a credit card if you have bad credit.

4. Guarantor loans

Guarantor loans are personal loans where a named guarantor agrees to repay the loan for you if you're unable to.

The rates may be lower than bad credit loans because the lender has added security that the loan will be repaid.

You must check with your chosen guarantor before you put them down on your application. It's a huge commitment on their part, and they'll need a good credit score and at least 50% equity in their property if they have one.

Learn more about how guarantor loans works.

5.Peer to peer loans

Peer to peer loans are unsecured personal loans from private lenders who use their savings to lend you.

These lenders may be more willing to consider your application even if you have poor credit. The rates may be cheaper than those on loans for bad credit.

Discover more about peer to peer loans.

How to apply for a bad credit loan

Before you apply for a bad credit loan, check you meet all the criteria. A rejection could result in further damage to your credit score.

Other factors that may influence your application include:

  • Your income

  • Your age

  • Your existing debts

  • Your regular outgoings

To get a better idea about whether or not you'll be accepted for a bad credit loan, look for lenders that offer an eligibility check before you formally apply. This is sometimes called a 'soft search quote'.

Soft searches do not appear on your credit file and so will not damage your score any more.

Compare the latest bad credit loan rates

Need a loan? Compare loan lenders side by side to find one that is cheap to pay back, lets you borrow what you need and has repayments you can afford.