What is a Bad Credit Loan?
Bad credit loans is a catch-all term for a wide range of loans aimed at people who have a poor credit history and may struggle to get an ordinary loan at high street banks. Typically, these loans come with higher interest rates or require you to secure something (your car or your house for example) against the loan.
When Should I Consider a Bad Credit Loan?
If you need to borrow more than £1,500 and have been rejected by high street lenders. For loans of less than £1,500 a credit card will be much cheaper. Use our advanced credit matching technology to find out which cards you are likely to get.
If you do have to take out a bad credit loan, manage it well and it can help you improve your credit rating so that, in the future, you’ll be able to access better credit products. You can find out more about your credit rating in our guide.
Types of Bad Credit Loans
Personal loans: This is the most common type of loan and involves borrowing between £1,000 and £25,000 over one to seven years. The interest rate is normally fixed, meaning you know exactly what you’ll repay. For example, if you borrow £5,000 at an interest rate of 40% over three years, the monthly repayments would be £224, making a total repayment of £8,054.
Guarantor loans: These work in the same way as personal loans, but also involve an agreement with a third party, often a family member or friend (guarantor), to ensure the loan is repaid. If you fail on the repayments the guarantor is held responsible and they will have to pay it back. If you have a bad credit history, this may be the only way you can borrow.
Homeowner loans: These are different to personal loans. Your home is used to guarantee your payments, often enabling you to borrow a much larger sum of money. But it means the lender can repossess your home if you can’t afford to pay it back. Interest rates are normally variable and the repayment period can be up to 25 years.
Instalment loans: Personal or guarantor loans can also be referred to as ‘instalment loans,’ because you pay a set amount back over a certain period of time.
Logbook loans: With this type of loan you secure the borrowing against your car. So, if you fail to repay the loan the lender can take away your car to settle the debt.
Using a bad credit loan to pay off existing debts
Do you have existing debts that you want to consolidate? Instead of trying to manage multiple repayments on credit and store cards, loans and overdrafts, which may be all on different rates and paid out at different times of the month, you can tidy everything up and take out a single loan to repay them all.
However, this is only worth doing if you get a lower interest rate, which may be unlikely with a bad credit loan. Also, beware that your old loans may have early repayment penalties.
If you’re considering debt consolidation, talk to a free and independent debt charity first such as Step Change or Citizens Advice.
What interest rate will I pay?
Whatever form of bad credit loan you choose, the interest rate you are offered will still depend on your credit history. It may not be the interest rate advertised by the bank or building society. Only 51% of successful applicants are offered the ‘representative’ APR. The rest will be offered a higher interest rate, and others with really bad credit histories will be rejected. You normally don’t know what interest rate you will be offered until you apply for the loan. And applying for lots of loans can damage your credit rating, because banks don’t like to see that you’ve been rejected several times. The good news is that TotallyMoney.com’s loan comparison service will tell you if you’re likely to be accepted for a loan BEFORE applying. It carries out a ‘soft search’ of your credit data that will NOT leave a mark on your credit file. Money Match then compares a wide selection of loan providers to give you the best possible choice. This means you can only apply for loans that you know you’re likely to get.
Beware Brokers Online
Some brokers offer to find loans in return for an upfront fee. Our online comparison tool does this for free, so you don’t have to part with cash just to do a simple search.
Pros and cons
Bad credit loans are a good option if:
You have a bad credit history and need to borrow more than £1,500.
You really need the money for an important purchase.
You can definitely afford the monthly repayments.
But always remember:
Interest rates can be eye-wateringly high.
Never get a loan to buy something if you are already struggling with debt.
Always borrow the smallest amount, over the shortest period of time possible.