Warning: Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk.
Representative Example: Amount of credit: £1,000 for 12 months at £163.94 per month. Total repayment of £1,967.19. Interest: £967.19. Interest rate: 150% pa (fixed). 311.3% APR Representative.
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First, let's talk about the name.
There's no such thing as a "bad credit loan." There are a few reasons for this, but let's start with the phrase "bad credit," an ambiguous description that doesn't provide any real information about an individual's credit. The term "bad credit" tends to be used any time an individual's credit is less than perfect, but it's important to understand that your credit report is quantified not with monikers like "good" or "bad," but with a number. While this number provides creditors or lenders with a more specific idea of your credit standing, even this isn't the whole story, as different reporting agencies have different rating scales.
"It's important to understand that your credit report is quantified not with monikers like 'good' or 'bad,' but with a number."
Another reason bad credit loans can't truly be called a loan type, is that lenders aren't really offering something called a "bad credit loan." While some lenders may target individuals with less-than-perfect credit, this doesn't mean that a bad credit loan exists nor does it mean that the lender will offer loans to everyone regardless of their credit rating, only that there are loans for individuals with less-than-ideal credit. This may seem a minor distinction, but one of the first questions a potential borrower should ask is, "What kind of loan do I need?" and the answer shouldn't be (and, as we've seen, cannot be) "A bad credit loan."
Plenty of people have found themselves at one time or another with less-than-perfect credit. Oftentimes these individuals find that their flawed credit keeps them from accessing certain loan types, or may lead to less favorable loan terms. Whether it's due to an accumulation of debt, missed utility payments or something else altogether, having an imperfect credit score is not only a common problem, but doesn't necessarily preclude an individual from finding the emergency funding they might need. Particularly if the individual has worked diligently to get their finances back on track, they may find that there are a number of options available to them.
Having flawed credit should change the way you approach a loan, and anyone with poor credit who is considering a loan needs to understand that if they don't repay on time and in full, their credit could end up worse than it was before they took the loan, depending on how exactly the lender chooses to report non-repayment. (Learn more on this in our Bad Credit Loan FAQ section below.)
"Having an imperfect credit score is not only a common problem, but doesn't necessarily preclude an individual from finding the emergency funding they might need."
If you're an individual with less-than-perfect credit, and taking on a loan is the only option you have to get the funds you need, be sure to choose your loan type and lender wisely. When determining the right loan type, you'll need to factor in considerations like typical loan duration and terms, the total cost of the credit, the repayment amounts, requirements for acquiring a certain loan, and whether or not the loan comes with any added fees. To answer these questions, you need to look at your financial circumstances and determine what you need and can afford to pay back on time. Would it make more sense with your budget and income to repay your loan in a month, or in a year? Would one large repayment work best, or would it be more practical to repay in instalments? Do you need a small loan (£100), or a bigger loan (£5,000)? (Try taking a look at our personal loan page, instalment loan page and unsecured loan page to get a better idea of each of these broad loan types.
By answering these questions, you can better target the right loan and lender for you — a hugely important consideration for anyone taking on a loan. By ensuring that your loan will work for you, you're ensuring that you'll be more likely to repay in full and on time, which is possibly the most important aspect of borrowing money.
It's important to understand that technically, there is no such thing as a "bad credit loan." Most lenders will not give out loans to individuals who have bad credit, and consumers should be wary of lenders advertising these loans.
That said, it's a good idea to understand the type of loan typically offered to individuals that may have had past credit issues, but have been working to fix them. These loans will often be short-term, for relatively smaller amounts, and with a larger interest rate. The reason for this is essentially that an individual with less-than-perfect credit represents a greater risk to the lender, and to keep it simple: The higher the risk, the higher the interest rate.
This is a common concern for individuals with poor credit, and understandably so — when your credit is not perfect, it can feel as though you're facing nothing but closed doors. That said, while no lenders are prepared to guarantee loans for customer with flawed credit, plenty of lenders will consider an individual who had previous credit problems but has worked diligently to fix them. Being taken on a case-by-case basis means that some lenders may consider you for a loan because you have been working to improve your credit.
This is a tricky question to answer, and that's thanks in part to the existence of three chief credit reference agencies in the UK — Experian, Equifax and Callcredit. While these three agencies will use similar information to compile your credit report, there is no guarantee that lenders will report the same pieces of information to all three of the agencies. This means that you can review different versions of your credit report, depending on the agency you request it from.
Similarly, the three agencies create scores based on their own unique grading systems. For instance, the range for an Experian credit score is 330 to 830; the range for Equifax is 280 to 850; and Callcredit scores are out of 1000. Past that, certain lenders may even create their own proprietary scores based on the credit reports they have pulled.
Ultimately, your credit report will be created from some combination of the following information: Your spending history, mortgages, credit cards, late or missed payments, debt, checking accounts, repossessions, overdrafts, electoral roll, court judgments, etc. While some of this information is public (electoral roll, court judgments), a majority of it will come from lenders or other credit providers, and will be reported to the three major agencies at the lender's discretion. If you have questions as to what your lender reports, be sure to ask them!
In and of itself, the act of taking out a loan won't improve your credit score. In fact, if you apply for too many loans, it can have a negative effect, as each new loan application can be documented in your credit report as an enquiry. If you have too many enquiries on your report, it can indicate to lenders that you may be desperate for funds, or are compiling loan debts that you may not be able to repay. This isn't intended to frighten you away from applying for a loan, but to serve as a reminder that a loan application is a very serious commitment, and should be treated as such.
Once a loan has been taken out, the effect it has on your credit score depends mostly on your prompt and full repayment. Whether a short-term loan or instalment loan, a £100 loan or a £1,000 loan, the main thing future lenders want to know is if you can repay the amount you're borrowing, with interest. If your credit report proves that you can, it should be reflected positively in your credit score.
Still worried about your credit options? Our sister company has additional information regarding bad credit loans in the short term lending market.
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