Bad credit loans: options if you've been refused credit
If you have been refused credit or know you have some blemishes on your credit file, then a bad credit loan might be the only way you can get finance.
Whether you consider a bad credit loan will depend on your ability to make your new repayments on time. If you are unsure you will be able to manage them, you may be better looking for debt help and avoiding further borrowing.
Bad credit loans are loans for individuals who are struggling to get credit because they have negative marks on their credit file or are too indebted to get standard loans available from high street lenders.
What constitutes a negative mark on your credit file
If you have CCJs, have missed payments, previously defaulted or have previously had applications declined these will show up on your credit file. These marks will be seen by other lenders when you apply for future credit and may cause them to decline your application.
If your existing borrowing is already perceived to be too high as a percentage of your salary or available credit on credit cards this may also mean that you can only access bad credit loans.
What are the advantages of bad credit loans
If your circumstances have improved and you can now afford new borrowing, taking out a bad credit loan can help to rebuild your credit score, provided you pay off your debts on time.
If you already have a range of expensive debts, it is possible that debt consolidation could reduce your costs
It could simply provide some financial breathing space to allow you get yourself back on a better financial footing
What are the disadvantages of bad credit loans
If you default on any sort of secured loan, the asset that is being put up as collateral will
be at risk if you default
If you default on a bad credit loan, the chances of you getting future credit will be reduced further
If you are already struggling with your repayments, taking on additional debt could make your problems worse
Types of bad credit loans
If you have had financial difficulties and now need to take out a loan, There are a few different options that may be available to you:
Car finance - Hire Purchase (HP) and Personal Contract Purchase (PCP)
With both HP and PCP, the borrowing you take out will be ‘secured’ against the vehicle and if you don’t keep up your payments, the lender can easily repossess it.
The upside of this is that the rates you are offered may be much lower than you’d find on an unsecured loan, making the finance more affordable.
Often referred to as homeowner loans, you are putting your property up as collateral against the debt and in the same way as car finance, if you do not keep up your repayments, the lender can easily repossess your home.
Guarantor loans can provide access to loans with APR’s starting at around 50%, even if your credit is very impaired. Lenders can offer these rates as they will be outsourcing the risk of you missing payments or defaulting to the individual ‘guaranteeing’ the loan and so will be basing their decision on that person’s credit history.
What are the alternatives to bad credit loans
If you have bad credit and the options above are not suitable, there are other options that may be available to you:
Credit builder credit cards
If you are looking to rebuild your credit and need to borrow less than £1200, a credit card may be a good option for you. If you consistently make your payments on time, this will be recorded on your credit file and mean that you may be offered more, cheaper credit by your card provider and other lenders too. Click to go Credit building credit cards
Debt help and Debt Management Plans
If you have unsecured debts and are looking for new borrowing to help you keep up your payments on them, a debt management plan may be appropriate. However, before choosing a DMP, it may be wise to get free impartial advice from the government’s Money Advice Service moneyadviceservice.org.uk/ or from one of the debt charities: Citizens Advice Bureau https://www.stepchange.org/ or stepchange https://www.stepchange.org/.