Bad credit loans can be a costly way to borrow but on the other hand, they can be a lifeline for the millions of people who would otherwise struggle to find a loan. Loans of this nature generally include payday, short-term and guarantor loans.
In this article, we are going to look into the following:
- Why loans for bad credit can be costly
- What credit scores are
- The different types of loans available
- How to improve a poor credit score
- Applying for a loan online.
Why Are Loans for Bad Credit Costly?
Loans offered to people with a poor credit history generally come with a lot higher rate of interest than loans offered to people with a good credit score.
In some cases, borrowers with poor credit ratings have to pay out thousands of pounds more for loans and credit cards than people with good credit ratings. Many people do not realise that they are paying a higher interest rate solely because of their poor credit rating.
There is a Risk to Lenders
The reason interest rates are higher for people with poor credit ratings is down to the fact that the lender sees the person as being a risk.
If someone has CCJs, missed payments, continually late paying or who maxes out their credit cards, the lender is going to think twice about offering a loan. This is because there is a higher risk of the person failing to repay the loan or being late with repayments compared to someone with a good credit rating.
The Bigger the Risk the Higher the APR
The bigger the risk you are seen to be the higher the rate of interest on the loan offered. Therefore it can pay to check your own credit score before applying for a loan to see what the lender sees when they make a credit check when you apply for a loan.
What Are Credit Scores?
You might not realise it but there are three credit reference agencies in the UK. This means you do not have a single credit score. Along with this, lenders have their own way of calculating credit scores to determine how big a risk you are.
Different agencies calculate your credit score based on different factors. Credit scores and ratings are extremely difficult to work out as what on agency might consider something negative, another might think of it in a more positive light.
What are Bad Credit Loans?
There are no special types of loans available for people with poor credit rating can apply for but some types may come with easier approval ratings than others.
It makes sense that if you have a poor credit rating you are going to struggle to find a lender who is willing to offer you a loan for many thousands of pounds. When considering this your chances of approval may improve if you are only asking to borrow a smaller sum of money.
So let’s look at the types of loans that may be available and what they offer.
One of the smallest types of loans available is the payday loan also known as a quick loan.
Payday loans are one of the most helpful loans for people who have come across a financial outlay that they had not anticipated. When a financial outlay rears its ugly head and payday is some time away life can suddenly become very stressful.
Payday Loans Help You Get Out of Tight Spots
Payday loans may be one way of being able to get out of a tight spot and providing the loan is repaid on time, it can help to improve your credit stance.
While you can take out a payday loan for any reason they are generally taken out to pay for something unexpected that has cropped up. For instance,
- A large unexpected bill comes in that needs paying before your payday;
- The breakdown of an appliance that you cannot manage without until next payday;
- Paying for repairs to your vehicle after it breaks down unexpectedly;
- Putting the car through its MOT and you forgot it was due;
- Paying for a new tire after you get a flat.
Repay on Your Next Payday or Over Three Months
Lenders generally offer between £100 and £500 with payday loans. The loan is either repaid on your next payday in full or spread for up to three paydays. While spreading it over three means you do not have to pay the full amount and interest out of one payment, it does mean you pay more interest. Of course, this also means the loan costs more in total.
Interest is Calculated Daily
The payday loan does not attract interest over the year as does the personal loan and guarantor loan. Instead, interest is calculated on a daily basis. Therefore, the longer the loan is taken over the more interest is added on.
Lenders are more likely to offer payday loans to people with a poor credit rating because only small sums of money are involved and the loan is repaid back quickly.
Short-term loans are another type of loan popular with people who have poor credit ratings as approval is easier to find but the loans offer more than payday loans and can be spread out over longer.
Lenders usually allow you to borrow up to £1,000 with short-term loans and spread out the repayments for up to 12 months.
Look for the Lowest APR Possible
As with loans offered to people with poor credit ratings, you can expect to pay a higher rate of interest than someone might with a good credit rating. Usually, the lower the APR the less you will pay in interest. If comparing loans it is generally wise to choose the lower APR but you will also have to factor in any additional fees that might boost the cost of borrowing.
If you need to borrow a large sum of money, say up to £5,000, and spread the cost of borrowing for up to 36 months you might struggle to find approval for a personal loan with a bad credit rating.
However, there may be a way of borrowing if you go for a guarantor loan. The guarantor loan is not suitable for everyone and it does need a lot of thought. When considering a guarantor loan you have to take into account:
- You need to find someone to be a guarantor;
- The guarantor has to be willing to take over the repayments if you fail;
- The guarantor should have a good credit rating;
- Both parties need to read the terms and conditions so they are aware of what is involved.
Another type of loan that might be considered if you need to borrow a large sum of money is a secured loan.
However, there are downsides to the secured loan with the biggest being that you have to put something up as collateral against the money you want to borrow. This is usually your home. If you fail to repay the loan, the lender can take your home from you. This type of loan is usually offered when you have a bad credit rating and when the sum of money is the many thousands of pounds.
Tips to Improve Your Credit Score
Before applying for bad credit loans, you might want to check your own credit rating to find out what your score is and what is on your file. Here we offer some tips to help improve your rating and better your chances of obtaining a loan.
- Pay Bills on Time
Always pay bills on time; this includes credit card, phone contracts and utility bills. By paying them on time, you come across as being reliable and careful with finances.
- Keep Payments Up to Date
Never miss a payment. This is one of the quickest ways for lenders to lose faith in you.
- Check Your Credit Score for Errors
Make a check of your own credit file to see if there are errors on it. Mistakes have been known to be made and errors can be corrected.
- Talk to Creditors if You Are Having Trouble
As soon as you realise you are having issues with repayments contact the lender to find out what can be done. The lender may be able to give you some leeway if the issue is only short-term, such as you have to take time from work due to illness.
- Start off With Small Loans
When applying for a loan if you have bad credit you might want to start small. If you borrow a small sum of money with a payday loan and pay it back quickly, it can help to improve your credit file.
Applying Online For Small Loans for Bad Credit
When considering applying for loans with bad credit consider the following:
- Never be tempted to borrow more than what you can reasonably afford to repay;
- Always do your own affordability check to make sure the loan is affordable;
- Don’t apply for a loan if it really isn’t necessary, so don’t borrow to purchase frivolous items or items you can manage without until you have saved money;
- Make sure the loan is affordable with any fees added onto the loan;
- Don’t spread the loan out for longer than necessary;
- Make sure you have checked to find out if the loan has an early repayment clause. If so, if you find you can repay the loan early it will cost you;
- If there is no early repayment clause paying off the loan early can help you to save money on interest.
To apply for any loan in the United Kingdom you do have to meet certain criteria. This applies whether you have an excellent credit rating or poor one.
You need to:
- Be 18 at least;
- Have a regular income. Some lenders will consider certain benefits as a regular income providing it is paid into the bank on a monthly basis;
- Have a UK address;
- Hold a bank account and debit card in your name;
- A direct debit can be setup on the bank account.
Lenders Consider Verifiable Income
We can help to match you with a lender as we work alongside a large panel of UK lenders who will consider verifiable income along with credit ratings.
All lenders will check your credit file, as they will want to protect themselves. However, they also consider the fact that your circumstances might have changed. They will look at your monthly income and outgoings to determine if the loan is affordable.
Best Interest Rates for Your Circumstances
We work with a panel of UK lenders who offer some of the best rates of interest on loans knowing that your credit rating is less than perfect. While you may not get an interest rate as low as someone might with a good credit rating, you will be offered the best for your circumstances.
Affordable Loan Options
The lenders we work alongside offer numerous loan options along with affordable loans based on your verifiable income. We can bridge the gap between those looking for loans and lenders willing to consider people with poor credit ratings.
We Can Bridge the Gap
If you are in the market looking for bad credit loans online, allow us to match you with a lender. Tell us how much you want to borrow, how long you need to take to repay the loan and we will search within the panel of lenders we work with. If we match you with a lender, you can check the loan over and if it is right for you then go ahead and sign up online. There is no paperwork, so depending on the lender, and how much you want to borrow, you could have money in the bank on the same day.