A personal loan is defined as a loan offered by a lender for personal use. In essence, you can use the funds from the loan to pay for anything. For instance, you can use the money to purchase to splash out on new clothes, pay for a holiday or even purchase a used car. If you are looking for personal loans for bad credit continue reading to find out what they entail.
What Is A Personal Loan?
A personal loan is usually unsecured. This means that you do not have to put anything up against the loan to borrow.
You ask the lender for a specific sum of money and tell them how long you need to repay the loan. The lender will look into certain aspects of your life, such as your income, outgoings and credit rating and tell you yes or no.
All UK lenders will want to make sure that the loan you are applying for is affordable. This above anything else will be considered. Even if someone has a perfect credit rating, but the lender does not believe they have enough disposable income, they may not approve the loan.
With personal loans, you can generally borrow more than with other types of loans and spread out the cost of the loan over a longer period.
How Much Can I Borrow With Personal Loans for Bad Credit?
How much you might be able to borrow with a personal loan would depend on several factors.
Factors that lenders take into account include:
- Loan affordability;
- Your monthly income and outgoings;
- Your credit score and file.
The exact amount of money will vary between lenders. Some might offer up to £5,000 while others may offer more.
Borrowing with a Poor Credit Rating
There is no getting away from the fact that the poorer your credit rating the less chance there is of you being able to borrow huge sums of money.
Lenders will look at your credit file before offering a loan. The good news is that not all lenders will base their decision about whether to approve a loan based solely on your credit file.
Some lenders, such as the ones we work alongside, will also factor in your ability to repay the loan. They realise that your circumstances might have altered from when you earned a bad credit rating and you might now be in a position to repay a loan and be more responsible financially.
Your Income and Outgoings Are Calculated
When you are applying for personal loans for bad credit lenders will want to know your income and outgoings.
This is the amount of monthly income after tax that your outgoings include such things as food, electricity, gas, internet and phone bills and more.
Lenders will calculate the difference between the two to find out how much money you have left each month. This amount of money is called disposable income. It provides the lender with a good idea as to how affordable the loan is. Providing they think you can repay it, the better chance there is of them offering you a loan.
How the Loan Works
When you apply for a personal loan you tell the lender how long a term you want to repay the loan over. The term is the number of years you want to take to make the monthly repayments to clear the loan along with any interest.
Lenders may allow you to spread the loan out for many years, while with others it may be for up to 36 months.
The lender will add on interest to the loan. This is noted on the loan as the APR, the annual percentage rate. They will work out the monthly repayments based on the amount you want to borrow, including any interest and divide this over the term.
Each month you have to pay the agreed amount on the loan, this is known as the monthly repayment.
Lenders will want your bank account details when signing up for the loan and a direct debit will be set up so the lender can take the repayments from your bank account.
How Much Is the APR?
The APR on personal loans can vary greatly. One of the factors that determine the APR is your credit rating. Another is the amount of money you want to borrow. Usually, the more you borrow the lower the rate of interest.
If your credit rating is poor, you can expect the APR to be higher than for someone with an excellent credit score.
This is to reflect the fact that the lender sees you as being a bigger risk when it comes to repaying the loan. Of course, this might not be so and you should not take it too personally.
Fixed or Variable APR
When considering APR it can be either fixed or variable. With a fixed APR, you are going to know exactly how much interest is going to be added onto the loan. This means you know exactly how much you are repaying in total.
For instance, if you apply for a loan and it has a 32% APR you know that even if the Bank of England base rate rises you are not going to have to pay more than 32% for the term of the loan. This can work to your advantage if the rate rises; however, you lose out if the rate drops.
Regardless of this, you will know how much the monthly loan repayments are going to be each month and they will not change. This is great for budgeting.
If you take out a loan with a variable rate of interest, the interest rate can fluctuate in line with the Bank of England base rate. It can benefit you if the rate drops as you would pay less in interest. On the other hand, if the rate rises you would pay more.
The downside is that you would not know whether the rate was going to remain the safe, rise or fall, during the term of your loan. This means you cannot budget for the repayments as they may differ over time. You would also not know how much in total the loan would cost with interest added.
One thing you do have to take into account when considering the APR is whether the rate shown is representative.
Often loans are shown with the representative APR, which means you might not be offered the rate advertised.
The representative APR is the rate that more than half of the people who applied for the loan received or they got a lower rate. However, the other half of people got a rate that was higher.
This is something to consider. Of course, when you apply for the loan you should be given the accurate rate of interest before you sign up for it so that you know how much interest will be added to the amount borrowed.
Advantages to a Personal Loan
As with anything in life, there are advantages and disadvantages to personal loans and here we are going to consider the advantages.
- Personal loans may allow you to borrow more than you could with a credit card
- Fixed personal loans ensure you know exactly how much interest is going to be added to the loan
- You have the choice over how long you take the loan over but bear in mind the longer you take it out the more interest will accumulate
- You can use a personal loan to consolidate other debts and save money if the APR is lower than on your other debts
- You might be able to overpay on the loan to pay it off quicker but make sure there are no early repayment fees.
Early repayment fees might be put into place by the lender. This means that if you find yourself in a position to pay the loan off quicker, you can save on interest but you have to pay a fee.
Disadvantages to a Personal Loan
Now let us take a look at the disadvantages of the personal loan.
- If you want to borrow a smaller amount of money this might be an expensive way of doing so as the interest rate may be higher than with an alternative loan
- Generally, the more you borrow the lower the interest rate. This could tempt you into borrowing more than you need or can afford to repay
- With personal loans, lenders may set the minimum amount you can borrow at around £1,000 and the least amount of time for borrowing at 12 months. In this case, you might look at alternative loans.
Secured Personal Loans
If your credit rating is extremely poor, you might be offered a secured loan. This type of loan needs a great deal of thought as the lenders ask that you put something up as security against the loan. In the case of borrowing a large sum of money, this is usually your home.
In the event you fail to repay the loan, the lender can then take you to court to seek possession to get their money back.
Borrowing Small Amounts of Money
If you only need to borrow a small sum of money, you might be better off applying for what is called a short-term loan.
With a short-term loan, lenders might allow you to borrow up to £1,000 and spread the cost of the loan over up to 12 months.
You will know exactly how much you have to pay over the term of the loan, as the interest rate is fixed.
Applying for a Personal Loan
One of the easiest ways to apply for a personal loan is to do so online. The loan application becomes even easier if you allow us to search with a lender from our large panel of lenders.
One of the biggest advantages of this is that you need to make one single loan application. This means you do not have to make multiple applications with different lenders if a lender should turn you down. When you apply this way with multiple lenders, the applications are noted on your credit file and this can have a negative effect.
When you apply with our help you only fill in your details once and leave us to search with a panel of ethical UK lenders. We simply move onto the next lender if one turns down your application. This can also save a great deal of time and stress as you get an instant decision.
To begin your application ensure that:
- You are at least aged 18 years;
- You have an address in the United Kingdom;
- You have a regular monthly income coming in;
- The loan is affordable;
- You have a bank account in the UK;
- A debit card is attached to the loan;
- A direct debit can be set up on the bank account.
If you meet all of the above criteria, you can tell us how much you would like to borrow and how long you would like to take to repay the loan.
We search with a panel of ethical lenders who offer some of the most competitive rates and affordable loan options.
If we match you with a lender, you can take the time to visit the lender’s website and check over the details of the loan. If you are happy to go ahead, you can usually sign up for the loan there and then without waiting for paperwork.
Depending on the lender and the sum of money you have asked to borrow, the money may be paid into the bank on the same day, often within hours of your application.
Apply for personal loans for bad credit today to get an instant decision and affordable loan options.