If you find yourself in this situation, first have an honest conversation with yourself. Can you afford to pay back a new loan? If you’re regularly struggling to stay on top of your outgoings- as may be the case if you have a bad credit rating- borrowing more money is unlikely to solve the problem.
Finding a loan when you have bad credit can be challenging. If you’ve fallen behind on loan repayments in the past, your credit rating is likely to have taken a hit and lenders may think twice before lending you cash.
On the other hand, you could simply be haunted by a low credit rating from slip-ups you made in the past, but feel confident your finances are in better shape now.
If this is the case, read on to find out how you can still secure a loan despite having a patchy credit report.
What Is Bad Credit?
Having bad credit means that you have a low score on your credit report. Your credit report is a history of all your financial accounts, loans and repayments over the last six years. It also contains other basic information about you, such as your address and national insurance number.
In the UK, there are three main Credit Reference Agencies (CRAs) which collect information on consumers to build credit reports and assign ‘credit scores’ to people.
A credit report is a detailed financial history, whereas a credit score is just a number indicating how reliable someone is at paying their debts. Each CRA has a slightly different method of scoring; however, in all cases, a higher score means that someone is better at managing their credit than someone with a lower score.
Banks use credit scores and credit reports to decide whether to give someone a loan. If you have ‘bad credit’, it means that your credit score or report shows you have a history of not managing your debts very well. Some lenders find this off-putting, and you could have trouble getting a loan as a result.
How Do I Know if I Have Bad Credit?
You can check your credit score for free with each of the UK’s main CRAs: Experian, Equifax and TransUnion. Some banks just use one agency, but many use all three so it could be useful to look up your score with each of them.
Each of the agencies uses a slightly different scoring system, but if your credit score is ‘poor’ or below with any one of the CRAs, you could find yourself struggling to get approved for credit.
Getting a Loan With Bad Credit
Step 1: Work Out How Much You Can Afford.
If you have bad credit, it’s very important to make sure than you can afford to keep up with your repayments. Failing to do so will wreak further damage on your credit rating and could result in your belongings being repossessed if you take out a secured loan.
Before you start shopping for loans, determine how much you can dedicate from your monthly budget to your new loan. As a rough guide, experts recommend that you try to keep your total monthly debt repayments below 35% of your monthly income before tax.
Once you have decided on your budget, think about how much you need to borrow. You should always borrow as little as you can. It can be tempting to take more if you’re offered it, but this will only keep you in debt for longer and increase the risk of you falling behind.
After settling on your budget and how much you need to borrow, you can use an online loan calculator to see how long it would take you to pay back.
Remember that when you shop for loans, you may be offered different interest rates, some of them quite high- which will affect how long it takes for you to pay back the loan and how much you will pay in interest overall.
let’s imagine someone with an income of £1500 per month wants to borrow £2000. They should aim to keep their loan repayments under 35% of their monthly income, which is £525 per month.
The average APR (interest rate + fees) of a bad credit loan is about 49%, so we can use this information to see how much it would cost them to borrow over different periods:
|Length of Loan (Months)||Monthly Payments||Total Interest Paid|
By making this comparison, we can see that this person should borrow over five months to keep their loan payments within budget while minimizing the interest they pay on the loan.
Step 2: Borrowing Options With Bad Credit
After you have worked out how much you can afford to borrow and have a rough idea of how long it will take to pay back, it is time to start investigating your options.
The choice of loans for people with bad credit is more limited than for people with higher credit ratings. However, there are still a variety of options on the market:
Bad Credit Loan
Bad credit loans are offered by specialist lenders and geared towards people with poor credit ratings. They tend to have high-interest rates and last for between 1-6 months, meaning you don’t have long to pay back the money you borrowed.
Unlike mainstream lenders, lenders specializing in bad credit loans will use your credit file and application to check whether you can afford the loan, but don’t put as much emphasis on your borrowing track record.
Because of this, you need to have a regular, steady income to be considered for a bad credit loan.
Bad Credit Card
If you only need to borrow a small amount, a bad credit credit card could be a good option. These are special cards offered by some mainstream lenders which are designed to help people with bad credit repair their credit score.
The credit limit available to you depends on your income and how bad your credit rating is, but most offer something in the range of £250-£1000. To avoid charges and improve your score, you need to pay off your balance in full every month.
However, if you’re disciplined, a bad credit credit card can be a great tool for long-term, flexible borrowing and for improving your credit score.
If you hold a mortgage or own your own home, you could be eligible for a homeowners loan. The money you borrow gets secured against your property, which means lenders have the assurance that they will be repaid even if you have bad credit.
However, if you don’t pay back your loan, your home could be repossessed and sold to pay you creditors, so it’s important to think seriously about affordability before looking at this option.
Another version of this is a logbook loan, in which your vehicle is used as security against your borrowing.
You can continue to use your car while you pay off the loan, but if you fall behind on repayments, the lender can take possession of your vehicle and sell it to clear your debts.
We have written extensively about secured loans where you can read up on the detailed information.
A guarantor loan uses someone else with income or property who agrees to pay the loan on your behalf if you don’t keep up with repayments. A guarantor can be anyone over the age of 21 with regular income or assets they are willing to use as security.
As with secured loans, if you don’t keep up with repayments, the lender can claim credit from the guarantor or may repossess their possessions to clear the debt.
However, by using a guarantor, you may be able to access lower interest rates or larger sums of money than you would be able to by yourself.
Peer-to-peer lending websites pair up people who are looking to borrow money with from individuals who are willing to lend it. Unlike traditional lenders and banks, peer-to-peer lenders are relatively simple organizations and often don’t have physical premises, which saves money and allows them to offer relatively competitive prices.
Many peer-to-peer websites also accept bad credit customers. If you have poor credit, you are still likely to be charged quite a high-interest rate.
However, you may find it cheaper than borrowing from a bank and be able to get more flexible repayment terms than with many traditional lenders.
Step 3: Compare
Once you have completed your initial research, compare your options. You should consider the pros and cons of each loan, rather than focusing just on one aspect, such as the interest rate.
Think about the overall cost, monthly repayments, flexibility and potential pitfalls if you fall behind on your repayments.
Step 4: Apply
Applying for the loan is the easy part!
Each lender should specify the information they require from you.
Most lenders will need the following:
- Proof of ids such as a passport or driving license
- Proof of address
- Details about your income
- Proof of ownership if you are securing your loan against assets
- Contact details and proof of ID for your guarantor, if you are using one
What Happens, if I Am Refused?
It is possible that you could be turned down for a loan, even after seeking out a bad credit lender. If this happens, it is important to try and work out why you were rejected before rushing on to another application with a different lender.
Without identifying and fixing the problem, you risk getting rejected again. Every time you are turned down for credit, it appears on your credit report.
Having a long string of failed credit applications on your file can make you appear desperate for cash and may cause lenders to hesitate before giving you a loan in future.
Common reasons for credit applications to get rejected include:
- Bad credit
- Having too much debt already
- Wrong information and mistakes on your credit file
- Unstable source of income
- Low income
- Assets which aren’t valuable enough to secure your debt
- Mistakes on your application form
If you can work out why your application has been refused, you may be able to take steps to fix it.
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 questions