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personal loans for bad credit guide
23 Jul 2018

How Do Personal Loans For Bad Credit Work: A Complete Guide

In the past, your credit score was the number one factor that dictated whether or not you could get a loan. Most traditional lenders, like banks, look at it first and foremost. As a result, many people who need a personal loan and are able to pay it off are still denied access to the funds they need. With new options like Bonsai Finance, that is no longer the case. Personal loans for bad credit are now a totally feasible option and here we’re going to look at how you get one and how they work.

What are personal loans for bad credit?

First of all, let’s start with the basics. Many people might wonder what personal loans for bad credit are, exactly, and what differentiates them from traditional loans from more mainstream providers like banks. There are some differences, so we will define it from the start.

Essentially, personal loans for bad credit operate like most other personal loans. You make an application and, if you’re approved, you agree to repay the loan in full with interest and some fees on top. These repayments are split amongst an agreed-upon period, by which you have to repay in full.

Personal loans for bad credit are especially tailored for those who have been rejected by other lenders in the past or may have no credit history. The majority of lenders look at the credit score and report, but not providers of personal loans for bad credit. As a result, the interest rates on personal loans for bad credit tend to be higher, but approvals also tend to be a lot faster.

What is credit and why is it so important?

If you have been rejected by lenders in the past or you have recently looked up your credit score for the first time to see that it’s low, it can be a shocking experience. Credit does not play a major role in the day-to-day lives of many, so it’s no surprise that there is a significant proportion of people who aren’t fully aware of what credit is.

To put it simply, your credit report is a detailed account of your past financial dealings. Mostly, it relates to credit, such as borrowing money, but there may also be details about rent payments, missed bills, and the like. If you miss payments, go into arrears, or have a CCJ against you, this shows on the credit report. The more “black marks” on your credit report, the lower your credit score will be.

Banks and other lenders use credit reports to gauge how financially reliable you are. If you have gone into arrears in the past, they can see this and think it would be too risky to lend to you. It’s a system that helps them make more reasonable loans, but it does have it’s disadvantages for you, the borrower. Your financial situation may have changed a lot since you last borrowed, and you might be much more able to manage repayments, but you could still have a low credit score and be discounted from loans on the basis alone.

Similarly, you may have never borrowed any money or gotten into a credit agreement in the past. Even if you have the income to make repayments, you may be rejected simply because you are an “unknown quantity.” Banks can’t vouch for your reliability, so you may be rejected for a loan.

Advantages and disadvantages of personal loans for bad credit

The first and most important advantage of personal loans for bad credit is that it offers an option to those who may be refused from banks. These loans do not take your credit into account. They may still need some details, such as proof that you can meet the repayments.

What many see as a disadvantage is the higher interest rates. Some lenders, like the ones Bonsai Finance works with, craft loans specifically for those with bad credit, keeping interest as low as possible, but it still tends to be higher than loans you would get after a credit check from a bank. That said, there is an interest cap on these loans where there wasn’t in the past, so personal loans for bad credit have become much safer.

As well as safer, they are much easier to obtain and approve in a short time period. The better lenders on the market do not need a guarantor or collateral to help you secure a loan. The application process is simple, and it takes a much shorter period of time to approve and have the cash you need in the bank.

That said, one final disadvantage is that there are still disreputable lenders on the market who attach hefty hidden fees. Make sure you ask about these fees, as they are obligated to tell you upon being asked. Where possible, try to stick to more reputable lenders.

The last advantage we will state for now is that personal loans for bad credit offer the borrower a little more flexibility in their agreement. You might be able to borrow smaller amounts from lenders like Bonsai Finance than you would be able to from a bank. This can be important if you need cash in an emergency, but you don’t want to be saddled down with a large debt and even larger interest payments. There’s a lot more variety offered in repayment terms, too. You can be given more time to split up repayments into smaller chunks if you need it.

When you might need personal loans for bad credit

There are all kinds of borrowers and all kinds of reasons to take personal loans for bad credit. You have your own reasons, but here are a few circumstances in which borrowers have found personal loans for bad credit very useful:

  • There are unexpected bills or expenses outside your budget that you need cash to pay
  • Your vehicle needs emergency repairs
  • You have no credit history and you need a loan to start building your credit score
  • You have been turned down by banks in the past but you need a loan
  • You are selling your house but you need help covering legal fees and other expenses

A comprehensive list of all the reasons that you could use personal loans for bad credit would simply be too long for any post so, hopefully, these examples serve as enough of an idea of just why such loans can be so useful.

When you shouldn’t take out personal loans for bad credit

Responsible lenders want to make sure that they are lending to responsible borrowers. While we want to make loans available and accessible to all, we should urge you to make sure that you’re borrowing for the right reasons. There are some cases in which personal loans for bad credit might not be the solution you’re looking for. Here are a few examples of circumstances in which you might want to reconsider:

  • The repayments are more than you can reliably afford
  • Using the loan for non-essential reasons, like financing a holiday
  • If a lender has a bad reputation for both their lending and their collection practices
  • If a lender has high hidden fees that they don’t tell you about until asked.

New rules on personal loans for bad credit, including interest caps, are making the industry much more trustworthy, but there are still cases that you, the borrower, should take caution.

What you should know before applying for personal loans for bad credit

Even if you’re certain that you’re able to repay a loan, it’s a good idea to have some details laid out for you and to make plans so that you know you can use it responsibly. As mentioned, you should ask about any hidden fees, regardless of how reputable the lender is, and learn the APR. The APR is the annual percentage rate, which shows you how much the loan will cost over a year, including interest and any essential fees. For instance, a £1000 loan over a term of two years at an APR of 200% will cost you £1000 in repayments a year.

At the same time, make sure that you work out with the lender how much that translates to paying each month. A high APR might not seem quite as high when it’s stretched out across the year. Finally, understand the eligibility criteria of the lender you’re considering. Getting rejected because you don’t meet those criteria will further hurt your credit score.

Getting approved

The application process for personal loans for bad credit is much simpler than applying to a loan from a bank. However, it’s a good idea to prepare some details in advance to make it go even quicker.

First of all, we and other lenders will ask how much money you need and for what purpose. This is to help you find the right option amongst different loans. Lenders may also ask for other details including your income and other expenses and debts you might have. Your credit score will still be checked, but it doesn’t play as large a role as the other eligibility criteria.

If a lender has an eligibility checker, use it in advance to get a good idea whether or not you will be approved for a loan. Then make sure that you have the evidence on hand to show you can afford the loan. This can include past wage statements and an income and expenses sheet.

Bonsai Finance provides personal loans for bad credit with no need for a guarantor or collateral. Applications are easy, approvals are fast, and the repayment process is transparent. If you’re in need of a personal loan for bad credit, take a closer look at what we offer and apply now.