In most cases, lending options for those with a low credit rating can be somewhat limited. You’ll often be turned away for basic financial needs such as a mortgage or even a personal loan. It can be daunting approaching a bank with a low credit rating because there’s a very high chance that you’ll be turned away, but in this post, we’ll be discussing the best types of loan for those with a bad credit score.
Why Poor Credit Loans?
If you’re applying for your first loan, then you might not understand the effects that your credit rating has on your ability to get one. If you’re new to the world of finance and have yet to even learn about your credit rating, then you shouldn’t be too worried.
Simply put, your credit rating is based on your financial habits. If you’re constantly late with payments and always forget to pay your bills, then you’re going to have a poor financial record and thus a bad credit history. However, there are ways to improve your credit rating and one of the most effective methods is to look for lending options for those with bad credit. This is a quick solution to help you recover your credit rating.
Bad credit loans are designed for people with problematic credit scores, and they’re a great way to repair your credit rating if you’re having trouble.
Do You Have Bad Credit?
If you’re looking to borrow money then lenders will first check your credit rating. This can also be called a credit file and it’s actually something you can check with some services. However, it’s worth mentioning that you’re not guaranteed to be able to see your entire credit history and the score isn’t representative of the lender’s decision. In most cases, lenders will have different opinions of your credit score and will typically accept or decline your loan request based on their own criteria. However, it does give you a good idea of how likely it is for you to get a loan.
A credit rating report is a record of your behaviour, how much money you’ve spent and how much you’ve paid back. A bad credit rating indicates that you’re struggling to pay back the money you owe. This is usually evident by late payments, small payments or even missed payments. This leaves a mark on your record and doesn’t have to be through loans.
For instance, if you’ve taken out a finance plan for a smartphone and fail to pay it, or if you’re always late with paying your bills, then you’ll also have a mark on your credit rating that tells lenders you’re not very consistent at repaying the money you owe.
To summarize, here are the key reasons for people having a poor credit rating:
- Missing payments on things like bills and financing options
- Not making regular payments to your loans and other money you owe
- Declaring that you’re bankrupt
Explaining Bad Credit Loans
Bad credit loans are designed specifically to help people with poor credit ratings. Lenders often charge higher interest rates on these loans because they’re taking on a bigger risk with people that have poor credit ratings. However, these interest rates typically don’t matter as much when you have all the intention (and the financial means) to pay them back. They are, however, often misused and could incur huge interest fees on people that are using them incorrectly.
Essentially, they should be used as a way to improve your credit rating, not because you have a poor credit score and you absolutely need money. You should always improve your financial situation before taking on a loan with a poor credit rating.
Secured vs Unsecured
There are typically two types of bad credit loans; secured and unsecured.
The difference between them is simple. Secured loans typically use something in your possession as collateral. This means that should you fail to pay the loan back, they’ll take what collateral you used as a form of payment. For instance, you could use your car or even your home as collateral, meaning that if you can’t pay back the loan, you’ll lose them. This is a huge risk to take and if you’re not a hundred percent sure about making those payments, then you should never take a secured loan. It can, however, often increase your chances of getting a loan because your lender has more guarantee that they’ll get their money back.
On the other hand, unsecured loans are the opposite and require no collateral. However, these are often more difficult to find and have higher interest rates as a way to ensure the lender gets their money’s worth from you.
Before Applying for a Bad Credit Loan
There are several important points to keep in mind before you decide to apply for a bad credit loan.
Firstly, bad credit loans aren’t an ideal way to borrow money. If you absolutely need cash then you need to look at other options first. Think of poor credit loans as a way to fix your credit rating, not as a way of getting money to pay for an emergency expense or a holiday. There are other ways to get a loan if you need cash and you might want to consider something like debt consolidation.
Secondly, avoid applying for several loans at once. Lenders can see if you’re applying to multiple loans and they’ll actually be less likely to consider you for a loan if they see it. This makes it harder for you to find a loan (especially a bad credit loan) and it’s better to do a proper search and comparison before you apply for a loan. Most people apply for several loans at once because they believe it can increase their chances of getting approved. However, it has the opposite effect and will make it much harder for you to get a loan. Instead of trying to increase your chances by applying to several at once, consider using comparison sites and looking at lenders that have a high chance of accepting you instead. You can check how likely it is for a lender to accept you without first applying, and these checks won’t hurt your credit rating or your chances of being accepted.
Lastly, make sure you pay back your bad credit loans as soon as possible. As we’ve mentioned before, the interest rates are much higher than that of a typical loan and it’s always a good idea to pay it back quickly. As such, make sure you’re in a somewhat stable financial situation so that you can guarantee you pay it back as soon as possible.
Types of Bad Credit Loans
There are several different types of bad credit loans that you could qualify for if your credit rating is suffering.
First, there are payday loans. These have been falling out of favour as of recent years, but they’re designed to fill in gaps in between paydays to help you pay for your expenses. In most cases, all the borrower needs is your job and your bank account and you’ll be approved. There’s actually no credit checks involved which make it perfect for someone with a poor credit history. They can also be approved very quickly, hence why they’re called payday checks.
As a short-term solution, these are excellent because they’re easy to apply for and you can simply call up, apply online or walk into a store and get your money straight away. Unfortunately, they also have high-interest rates (higher than most bad credit loans) and you must pay them back at the time of your next payday. Payday loans can be an excellent short-term solution if you’re capable of repaying the amount in a single payment, but given how easy they are to apply to, they can often be misused.
Logbook loans are secured bad credit loans where you can borrow based off the value of your vehicle. As such, it means that you’ll need to own a vehicle and there’s the possibility of having it repossessed. The lender will examine your vehicle and tell you how much money you can expect to see based on their initial assessment. You’ll then hand over the logbook of your car to the lender, which means that the lender now owns your vehicle and can repossess it if you fail to make the agreed payments.
As long as you make the payments of your logbook loan, you’ll be able to use your vehicle. If you fail to make payments, then the lender will take your vehicle and repossess it. Since the loan is secured against your vehicle, having a poor credit rating doesn’t matter and you can usually be approved quickly. It’s a simple and quick way to borrow money and the loan limits can be fairly high if you have a nice vehicle. However, the obvious drawback is that you could lose your car and interest rates can be quite high. You also need to actually own a vehicle above a certain value, and this can be problematic. More lenders will need your car to be valued at £500 or over. Again, this will also determine how much money you can borrow, so the circumstances will be different for everyone.
Guarantor loans are another common example of a bad credit loan. The difference with guarantor loans is that you need someone to guarantee the loan for you. This can mean a close friend or family member, or even a work colleague. In most cases, the lender will require your guarantor to at least be a homeowner, but the circumstances can change depending on the lender you pick and your situation.
In some cases, the guarantor must also possess an excellent credit score in order to be approved. These loans can be paid over a long period of time (often exceeding several years) which is a huge contrast when compared to payday loans. These often come with lower interest rates, a much longer payback period and you can borrow large sums of money. Having a poor credit rating also isn’t an issue. However, if you fail to make payments back, then your guarantor will be forced to make the payments in your stead.
Most people understand that credit cards are an important part of our lives. You’ll typically carry one around with your debit card and use it when you need to pay for something but you’re unsure if you have the money in your bank account. Credit cards are typically a high-risk loan for lenders, which is why they set a credit limit and only increase it if they see that you’re capable of paying it back. Since it’s unsecured, they typically carry a high-interest rate since they can’t repossess anything you give them. However, most people with a poor credit rating will have this privilege stripped of them. Luckily, there are options for people with bad credit scores to actually apply for a credit card that specifically targets those with poor credit ratings.
Bad credit rating cards are ideal for people that want to use credit cards, but can’t apply for the advantages that big-name credit companies offer, typically because of their credit history. It’s a fantastic way to rebuild your credit rating, but they do come with high interest ratings and low credit limits. As you work to rebuild your rating, borrowers will slowly increase your credit limit and you’ll be given access to other banks as well. They’re simple to use, can be used like any other credit card and the limits set will help you deal with poor spending habits.
Poor credit loans are a brilliant way to get your credit rating back on track, but they must not be misused or else you’ll plunge further into debt. Make sure you do what you can to bolster your credit rating and only rely on these poor credit loans if absolutely necessary. If used correctly, they can quickly fix a poor credit rating and give you the financial freedom you deserve.