It can be tough to get a loan when you’ve got poor credit. Whether you’ve fallen behind on repayments in the past or don’t have much of a credit history at all, a less-than-perfect credit rating can make lenders more wary of lending you cash.
While this isn’t always a bad thing – it can prevent people from falling into more debt than they can afford – it can make getting a cash injection when you have the funds difficult.
This guide looks at what poor credit means for your borrowing options, which poor credit loans are available and what to do if you have poor credit and need a loan.
What Causes Poor Credit?
Poor credit can happen to anyone. With a third of Brits having less that £600 in savings, an unexpected life event can put many of us in a situation where we need to borrow money. Whether not we can do that sometimes depends on our credit score.
A poor credit score typically means one of two things:
- You owe a large amount of money or have a history of not keeping up with payments on credit agreements such as loans, credit cards or mobile phone contracts.
- You haven’t had the chance to build a credit history yet, for example, if you’re young, haven’t had a bank account or credit card before or if you’ve just moved to the UK.
What Does Having a Low Credit Score Mean?
Poor credit shows up in your credit report. Your credit report is a file that contains lots of information about your financial history – all bank and credit card accounts you have, any money you owe and the details of any late or missed repayments over the last six years.
Credit reference agencies such as Experian, Equifax or TransUnion use data from your credit report to give you a credit score. This table compares their credit scores and ratings.
|Very Poor||0 – 560||0 – 279||0 – 555|
|Poor||561 – 720||280 – 379||561 – 565|
|Fair||721 – 880||380 – 419||566 – 603|
|Good||881 – 960||420 – 465||604 – 627|
|Excellent||961 – 999||466 – 700||628 – 710|
Each agency uses a slightly different method of scoring, but the number is always a measure of how reliable you are at paying your debts. The higher your credit score, the better. Lenders use this data to help them decide whether to loan you money or not.
Can You Get a Loan With Poor Credit?
In short, yes. You can still get a loan if you have poor credit, but your options will be more limited. Lenders will likely see you as a riskier borrower than someone who has historically made all of their payments in full and on time.
Some lenders find this off-putting. Unfortunately, this means you’ll likely see worse interest rates and repayment schedules, meaning you may have to pay back more money overall.
Which Loan Is Best for Poor Credit?
Everyone’s financial situation, ingoings and outgoings are different. So there is no clear answer for which loan is best if you have a poor credit rating. There is only which loan is best for you and your personal circumstances. It’s possible to have a poor credit rating from financial mishaps in the past that you’ve since recovered from.
So before you apply for any form of borrowing, ask yourself three questions:
- How much do you need to borrow?
- How long to do you want to borrow the money for?
- How much can you afford to pay back every month?
There are plenty of budget calculators and loan affordability checkers available online to help you accurately calculate what you can afford. Remember that a borrowing agreement that works well for one person might not necessarily suit you.
What Kinds of Loans Can You Get With Poor Credit?
While your borrowing options will likely be limited if you have poor credit, there are still a number of routes you could go down.
Bad Credit Loans
Some specialist lenders offer what are known in the industry as ‘bad credit loans. Instead of just relying on a credit check, these lenders look at your financial circumstances as a whole when assessing whether you can afford the loan you’re applying for. This means that you may still be able to get a loan with a poor credit history if you have a regular, stable income.
The downside of bad credit loans is that they typically come with higher interest rates and greater restrictions than regular loans. This makes them more expensive. But, if you make the repayments on time, they can help you build your credit rating back up again.
If you have poor credit, a lender may look favourably on you having a guarantor who agrees that they will make your repayments for you if you can’t. A guarantor is another person, typically a close friend or family member, who acts as your safety net. They typically must be over the age of 21 with regular income or valuable assets they are willing to use as security.
Some lenders offer better deals if you secure the loan against a valuable asset. Cars and houses are often put forward as security but can be repossessed if you miss repayments.
This gives the lender peace of mind that they have something they can take to recoup their losses if you can’t repay them in cash. Logbook loans and homeowner loans are the two most common forms of secured loans.
Payday loans are a fast but incredibly risky form of borrowing. Some lenders will consider benefits, student loans or other non-traditional forms of income in their affordability checks which can make them seem an appealing option if you’re unemployed or need cash fast.
However, payday loans come at a very high price. They have incredibly high-interest rates, and you’re only given a short period of time to stump up the cash to pay them back. If you miss your repayments, the late fees are often very expensive, and debt can quickly snowball. Payday loans are notorious for landing people in recurring cycles of debt.
Peer-to-peer lending is a popular form of less traditional borrowing. A peer lending website pairs up someone looking to borrow money with someone willing to lend it. An agreement is made, and you commit to paying the money back over a certain timeframe.
Many peer-to-peer lending websites will accept customers with poor credit. However, be aware that it is likely that you will still be charged a high interest rate because of it. Regardless, you may be able to get more flexible terms than traditional lenders would allow.
Credit unions are community-run saving organisations that operate on a not-for-profit basis. This means that lending can be offered at fairly low rates, and they may accept applications from people with poor credit who may struggle to borrow from other lenders. However, the catch is you usually do need to already be a member of a credit union to borrow from one.
How Do You Get a Loan With Poor Credit?
Step 1: Work Out How Much You Can Afford To Borrow
This is the most important step to take when considering a loan. You should never borrow more than you can afford to pay back. As a rough estimate, some experts recommend that you try to keep your debt repayments below 35% of your monthly income (before tax).
If you’re regularly relying on loans to make ends meet, then borrowing more to cover outgoings is unlikely to solve the problem. If you’re falling or have fallen into debt, be honest with yourself about whether borrowing more is the right choice for you. There are other things you can do to take control of your finances.
Before taking out a loan, you may want to:
- Make a budget to track your income and essential outgoings
- Switch energy providers or downgrade TV packages to get the best deal
- Cut down on non-essential spending until you’re back on track
- Check you’re getting all of the government support you’re entitled to
- Speak to utility companies, TV and phone providers if you’re struggling to pay bills
- Get support from your local Citizens Advice centre
- Speak to debt advice charities such as StepChange or the Money Advice Service
But if poor credit is a thing of your past and you’re now confident you can make the repayments necessary, there may be a few different borrowing options open to you.
Step 2: Know Your Borrowing Options
After you’ve worked out how much you can afford to borrow and have an idea of how long it will take to pay back, you can start investigating your borrowing options. The options listed earlier – bad credit loans, secured loans and guarantor loans – may be a good place to start.
It also helps to think about what you need the money for. For example, if the loan would be used to pay off other debts that are of a higher interest, then you may want to consider looking into specific debt consolidation loans. If you want to spread the cost of a one-off purchase such as a car or holiday, a credit or store card may be a better option for you.
Also bear in mind that some banks have minimum borrowing limits. It can be tempting to take whatever you’re offered by a lender, but this just extends the amount of time you’re in debt to them and can make the loan more expensive overall. Only borrow what you need.
Step 3: Compare Different Lenders
Shop around to see what different providers are offering. Use an online comparison site or broker to see how loans compare on different factors, including:
- How much you could borrow
- The APR interest rate
- Whether interest rates are fixed or variable
- Monthly payment amount
- Length of time you’d be paying the loan off
- The total amount you would have to pay back
- Whether the loan would be secured against your home
- If there are extra charges involved (e.g. a fee for early repayment)
Longer loan terms may offer better interest rates, but remember you will be paying them off for more time. This means they often cost more in the long run.
Step 4: Check Eligibility and Apply for the Loan
After you’ve compared different deals, use an online loan eligibility checker to see your chance of being accepted before you apply. Keep in mind that it will affect your credit score if you regularly apply and are rejected for loans.
If you’re confident you’ll be accepted, it’s time to put in your application. To process your application, most lenders will need some basic information from you. This is usually proof of address, details of your annual income and general outgoings and your contact details.
How Can You Get a Better Loan Interest Rate?
You could get much better offers by improving your credit score. Building your credit score from ‘poor’ can be a long journey, but there are some small things you can do to improve it.
- Check the main credit reference agencies have up-to-date details for you.
- Register on the electoral roll with your local council to prove where you live.
- Make payments reliably and in full wherever you can – only paying the minimum amount back every month lets debt build up.
- Keep the amount of credit you use to a minimum – the more you owe overall, the less appealing it is for lenders to continue to loan you money.
Having poor credit may not stop you from getting a loan, but it will make it harder to access the amount of money you need at a good rate. But this isn’t permanent. Improving your credit score over time will make borrowing easier and can get you more reasonable rates.
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