The chances of securing bad credit loans with no guarantor have increased dramatically in recent years. Competition means that very bad credit history is no longer a barrier to securing finance. However, the interest rate will reflect the severity of the borrower’s finances and ability to pay.
In a perfect world, those with a very bad credit history looking to secure loan finance would call upon a guarantor to assist. The idea behind the guarantor is simple; in the event that the underlying borrower was to default on their repayments, then the guarantor would take over these repayments.
If the guarantor encountered financial difficulties, then the lender would take action against them. The best way to describe the guarantor is an insurance policy for the lender.
What Is the Interest Rate on Very Bad Credit Loans?
When you get down to the core issue which dictates interest rates and loan approvals, it is simple, the risk/reward ratio. Therefore, if a borrower has a very bad credit rating, then this would be reflected in the interest rate because of the perceived higher risk.
On the flip side of the coin, someone with a good credit history would be seen as less of a risk and therefore attract a lower interest rate.
While the actual interest rate charged on a very bad credit loan will vary depending on the severity of the borrower’s issues, it will be well into double digits and possibly in excess of 100% per annum.
This then brings us onto the subject of interest rates versus the annual percentage rate (APR).
Should I Concentrate on the Interest Rate or APR?
In reality, there will always be a difference between a loan interest rate and APR due to set up fees, charges, etc. However, for many people, it is unclear exactly the difference between the interest rate and the APR.
It is probably best to give an example of the interest rate compared to the APR on the loan.
Let us assume you have a loan of £2,000 with an interest rate of 50%. This equates to an annual interest payment of £1,000.
Now let’s assume there is a £100 setup fee on the £2,000 loan. Therefore, the total cost is £2,100. Using the 10% interest rate, this equates to £210 a year.
However, as a percentage of the original loan amount, the APR is actually 10.5%.
It is therefore very important that you consider not only the headline interest rate with very bad credit loans but also any associated charges. As the APR is calculated on a consistent basis across all lenders, this is the best form of comparison.
Do I Need to Provide Proof of Income?
When applying for any loan, you will need to provide proof of income, and it is no different with very bad credit loans.
Your income could come from a variety of sources such as:-
- Investment income
There is a general misconception that bad credit loan companies are prepared to take a higher risk when this is not necessarily the case. All applicants will still need to provide proof of income, a realistic household budget which clarifies the level of funding available for repayments. Indeed, it is worth remembering that not all applicants will be successful.
In some circumstances, the financial difficulties experienced by the borrower may have been some years ago. The fact that your credit history goes back six years can sometimes give a misleading impression of a borrower’s status today.
Where there is evidence that the borrower is back on track and more financially secure, they may be able to negotiate an improved interest rate.
Unfortunately, where financial difficulties have been more recent, it is unlikely that any improved rate would be possible.
Choosing a Long-Term or Short-Term Loan
Suppose you have a chequered financial history and are perhaps struggling with short-term cash flow issues you need to think very hard about applying for a long-term or short-term loan.
The natural pull is towards a short-term loan so that this can be repaired as quickly as possible. For many people with a very bad credit history, it may be more appropriate to look at a longer-term loan.
There are a number of reasons for this:-
Cash Flow Problems
While you will have to present proof of income in order to secure funding, the level of monthly payments needs to be achievable on a consistent basis.
If your budget is relatively tight to cover short-term loan repayments, it would not take much to blow your plans off course.
Accumulating Additional Debt
A sensible approach to the term of your loan will reduce the chances of accumulating additional debt. For example, in a rush to repay their short-term loan, many people will miss other financial repayments and end up building up debt elsewhere. This is effectively “robbing Peter to pay Paul”. Not a long-term solution!
Interestingly, the vast majority of lenders would prefer their customers to come forward with a more conservative approach to repayments over a longer period of time.
Yes, they would benefit from increased interest payments, but there may be the option to reduce interest rates if the buffer between income, living expenses and funds available for loan repayments is greater.
This ensures that any unexpected costs going forward would not necessarily have a major impact on your ability to cover loan repayments.
Can I Refinance My Loan When My Finances Improve?
Many people experience short-term financial difficulties and are forced to take out loans on relatively high-interest rates. This does not mean that you will need to retain that loan for the long-term if your finances were to improve.
The more secure your finances, the less risk you are to a lender which will be reflected in the loan interest rate. Therefore, for many people, there may be an opportunity to refinance relatively high-interest debt at some point in the future.
While those with very bad credit histories should expect to pay a relatively high-interest charge, their financial problems do not necessarily bar them from access to loans. They will still need to present a budget, repayment plan and take a reasonable long-term approach.
However, as we touched on above, in the event that their finances were to improve in the future, they may be able to refinance high-interest debt at much lower levels.
How Can Flexy Loans Help?
Here at Flexy Loans, we have partnered with some of the UK’s leading Lenders.
They have already helped thousands of people get loans already, and they can do the same for you.
Choosing a loan broker like us (we don’t charge any fees) means our application process matches you with the best loan available to you. All lenders we recommend are regulated by the FCA, which gives you an additional layer of protection.
To apply and see what loan is available to you, click on the below and answer the question