Need a Loan But Have Bad Credit?

Updated 11 September 2024 | Published 1 April 2019

How to Get a Loan with Bad Credit

Securing a loan with bad credit can be challenging, especially when you need funds for an urgent purchase or to buy a car, even if you’re confident you can repay the loan. Bad credit doesn’t necessarily mean you lack a good income; it simply indicates past issues with debt repayment.

Poor credit scores can arise from various factors. You might have limited credit history, missed payments on mortgages or credit cards, or other financial difficulties. However, staying on top of your debt repayments can gradually improve your credit rating.

What Are Bad Credit Loans?

Bad credit loans are designed for individuals with poor credit scores. These loans function like standard loans, but lenders offer them with the understanding that the borrower has a history of credit issues.

Typically, bad credit loans come with higher interest rates. To mitigate their risk, lenders often require a guarantee for repayment. For example, a family member or friend might act as a guarantor, promising to cover payments if you’re unable to.

A guarantor provides lenders with assurance that they will be repaid, making them more willing to lend to those with a troubled credit history.

Types of Loans for Bad Credit

Several types of loans might be more accessible for individuals with bad credit:

1. Secured Loans

Secured loans require you to use your home or another asset as collateral. This means that if you fail to make repayments, the lender can sell the asset to recover their money. If you keep up with your payments, you won’t lose your home.

How Secured Loans Work

Like other loans, secured loans require you to make monthly repayments that cover both the borrowed amount and interest. The interest rate can be fixed or variable, depending on your loan agreement.

2. Guarantor Loans

Guarantor loans involve a third party, often a friend or family member, who agrees to repay the loan if you can’t. These loans can be a good option if you’re new to credit and need to build your credit history.

How Guarantor Loans Work

You borrow money and repay it in monthly instalments. The key difference is that your guarantor is legally bound to cover your repayments if you fail to do so.

3. Peer-to-Peer Loans

Peer-to-peer loans, also known as social lending, connect borrowers with individual lenders. While these loans offer an alternative to traditional banking, they usually come with higher interest rates, particularly if your credit history is poor.

How Peer-to-Peer Loans Work

You apply for a loan on a peer-to-peer lending platform, which matches you with potential lenders. These platforms often charge a fee for arranging the loan, and you’ll need to pass both credit and background checks.

Uses for a Bad Credit Loan

A bad credit loan can be used for various purposes, similar to other personal loans. Common uses include:

• Car Purchases: Many people aged 18-24 and 45-64 search for car loans, according to MoneySuperMarket.
• Debt Consolidation: Combining multiple debts into one can simplify your finances, but ensure you can afford the new loan’s monthly payments.

Why a Bad Credit Loan Might Work for You

• Access to Funds: Provides borrowing options when other credit sources are unavailable.
• Credit Improvement: Timely repayments can help improve your credit score.
• Quick Access: Loans are often approved quickly, allowing you to make purchases or consolidate debts promptly.
• Flexible Repayment: Loans can typically be repaid over 1 to 5 years, with some extending further.

Disadvantages of Bad Credit Loans

• Repossession Risk: Failure to repay a secured loan could result in the loss of your home or vehicle.
• High Interest Rates: Lenders charge higher interest due to the increased risk.
• Approval Challenges: You may face difficulty obtaining a loan or borrowing less than desired.
• Fees: Arrangement fees might apply.
• Credit Impact: Missing repayments can further damage your credit score.

Bad Credit Loan FAQs

Can I get a loan with bad credit?

Yes, it’s possible, but expect higher interest rates.

Am I eligible for a loan with bad credit?

Typically, you need to be over 18 and employed.

What are the advantages of bad credit loans?

They provide an option when other credit sources are limited and can help improve your credit score if you keep up with repayments.

What are the disadvantages of bad credit loans?

They are generally more expensive and can cost more compared to loans for those with good credit.

What to Do If You’re Refused a Bad Credit Loan

Avoid applying for multiple loans in a short period, as this can harm your credit rating and make lenders wary. Each application appears on your credit report and can further damage your score.

Where to Get Debt Advice

If you’re struggling with debt, various free debt advice services are available across the UK. The Money Helper website offers a debt advice locator to help you find support online, in person, or by phone.