In a perfect world, applying for credit would be simple. You’d make an application to a lender, which would be scored on your prior financial history and your current circumstances. If there were a problem with the application or it was denied, you would be able to challenge it. You could make your case, and explain why you would make a good borrower on this occasion.
Unfortunately, we don’t live in a perfect world. It used to be that you could prove your credit worthiness by talking to your bank manager, who had likely known you for years. This vital relationship has been eroded over the years. Now, banks are faceless monoliths, and applying for credit is about nothing but the numbers. This has lead to a rise of so-called “bad credit loans”. That’s a topic we’re going to focus on, and explain in detail, in the guide below.
What is a bad credit loan?
Loans for bad credit are designed to fill a gap in the market. Conventional lenders — such as banks and building societies — don’t like to lend money to people with adverse credit ratings. However, this doesn’t remove the fact that, sometimes, people with adverse credit ratings need a loan. It’s these people that bad credit loans are designed for.
Loans for bad credit are loans specifically designed for people who have had borrowing problems in the past. The terms and conditions for borrowing are generally more open-minded and the acceptance threshold is lower.
How are bad credit loans differentiated from standard loans?
In some ways, bad credit loans are identical to standard loans. Both types of loan involve borrowing a lump sum of money. You pay interest on this money; are given a set period of time in which to repay the funds, and payments are usually made monthly.
Bad credit loans, however, have one key difference: the interest rate, or APR, is usually far higher than it would be for standard loans. The reason for the higher interest rate is to compensate the lender for providing funds to a borrower with an adverse credit record. The higher interest rate helps them to mitigate the risk.
Why are bad credit loans necessary?
When it comes to standard lenders such as banks and building societies, loans can be hard to come by. Most of these institutions expect a customer to have a flawless credit record and a high income before they will even consider lending to them. This is somewhat odd. Essentially, standard lenders want to see that you don’t actually need the money before they are willing to provide it. When you put it that way, it sounds more than a little strange.
Bad credit loan providers seek to redress this oddity. They accept applications from people who don’t have incomes or perfect credit records. There are reasons why someone who is otherwise financially stable may struggle to obtain funding from a lender. For example, mistakes in someone’s financial past will stay on a credit record for six years. This means that even when a person has resolved any previous issues with their financial management, they are stuck with a bad reputation. In the meantime, bad credit loans are often the only way they will be able to access lending opportunities.
There are countless other reasons people may have a poor credit record, too. This kind of issue is incredibly common among the general populace. Bad credit loan providers seek to offer borrowing to anyone with adverse credit. They acknowledge a poor credit score alone is not the be-all and end-all when it comes to deciding if someone should have access to borrowing. These companies are more open-minded about who can apply. Often, they will grant applications to customers that more standard lenders have consistently refused
What are the advantages of a bad credit loan?
- The ability to source a funds when all traditional methods of borrowing are unavailable. While life would be simpler if we all had excellent financial histories, the reality is that life is never perfect and mistakes can be made. However, it is patently unfair that mistakes you may have made five or six years ago can terribly damage your credit rating. Bad credit loan providers seek to redress this balance. They ensure that there is still a route to financing to those struggling with a poor credit rating.
- An opportunity to improve your credit score in future by repaying the loan on time and in full. This helps to improve your credit rating by demonstrating that you are a responsible borrower.
- Bad credit loans can be used to help transform your personal circumstances, especially if you use them to consolidate other debts. This can help to ease your budget and set you on the right road to better financial management in the future.
What are the disadvantages of a bad credit loan?
- Most loans for bad credit borrowers have very high APRs. This can mean that you will pay back more in fees and interest than you actually borrowed in the first instance. As a result of this, it’s vital that you take the time to carefully study the literature of any loan you apply for. You have to be sure you’re completely happy with the repayment terms when you sign for the loan, as these cannot be renegotiated at a later rate.
- Depending on your circumstances and credit score, there is no outright guarantee that you will be granted a loan from a bad credit loan provider. It is more likely, but not far from certain…
- … which can be problematic in terms of your credit score. If you apply for a bad credit loan and are denied, this will still leave an application mark on your credit score. This can put you in the unfortunate position of struggling further to obtain one in future due to the new application mark on your credit file.
Can the disadvantages be mitigated?
Somewhat, and particularly in terms of the last point regarding a scenario where your credit report is further harmed by a failed application. To help reduce this risk, carefully read the terms and conditions of each provider so as to assess the likelihood of acceptance. Some lenders will even allow you to perform a ‘soft search’ which isn’t stored as an application on your credit file. That will give you a strong indication as to whether a full application will succeed or not.
In terms of APRs, unfortunately, there is relatively little you can do to fight back against this. Most bad credit loans will have far higher APRs than you will find with traditional loan products from standard lenders. However, you can compare different loan products right here at Bonsai Finance, and only proceed with application to companies with APR rates you consider to be affordable.
What should I do before I apply for a bad credit loan?
If you have made the decision to apply for a bad credit loan, then you will need to examine your personal circumstances. This will help you see how viable the application is. If you make an application without going through these steps, you may actually worsen your financial outlook. The application process will leave a mark on your credit file. This mark can temporarily negatively affect your credit rating. Therefore, when you make an application, you have to be sure it’s worthwhile.
- If you have any active CCJs or defaults on your credit file, it is usually better not to apply for a bad credit loan. If a provider explicitly states that applications from people with CCJs/defaults are acceptable, then that’s fine, but don’t risk it otherwise.
- If you are not in need of a loan immediately, it’s worth doing what you can to improve your credit score prior to an application. This is possible even if you can’t pay off debts. Instead, look to the basics, such as ensuring you make payments on time and checking you are on the electoral role at your current address.
- Collect together all the information you will need to make an application. This includes information regarding your income, your expenditure, and potentially contact information for your employer.
- Finally, make sure you do your research when looking for a suitable bad credit loan provider. Here are Bonsai Finance, you can search a number of providers relatively quickly. Using our search functions ensures that you have more time available to you. You can carefully study the results and ensure that the provider you choose to apply with is offering the right loan product for you.
If you have bad credit, loans can be tough to find, but not outright impossible. Having read through our in-depth guide to finding loans for bad credit, you should have an idea of the next steps you need to take to find the loan you need. We recommend that you compare different lenders right here on Bespoke Finance. Read the terms and conditions for each individual lender, and carefully consider which loan product may be right for you.