Loans for Bad Credit

Lenders won’t just base a decision on your credit score. They’ll look at other factors too, such as your income and employment status, as well as carrying out an affordability check.

Some of the loans you can choose from if you have poor credit include unsecured personal loans, guarantor loans, secured loans, and more.

You will have a more limited selection of loans to choose from than someone with a better credit score, and they will typically come with higher interest rates, so it’s important to compare providers to find the most suitable loan.

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What is a bad credit loan?

Bad credit loans are meant for people who have a poor credit score, due either to past money troubles or a limited credit history. Because people with bad credit are viewed as a higher risk by lenders, they can find it more difficult to access loans and other types of credit. This is where specialist products such as bad credit loans could help.

You can use bad credit loans for many different reasons, such as car repairs, emergency expenses, or to consolidate your debts into one single repayment, which can make it easier to repay them and keep track. Some people take out a bad credit loan, or a credit builder loan, to try to improve their credit score by showing they can manage debt responsibly.

Taking out a loan when you already have a poor credit rating isn’t an easy decision to make. Anyone who has struggled with debt problems in the past will be aware of how easy it is for debt to pile up and get out of control. However, sometimes the right loan can help people in such circumstances, providing it is affordable for the borrower.

What is bad credit?

If you have bad credit, it means credit reference agencies (CRAs) view your credit history more negatively.

Having bad credit may mean you have made late payments, missed payments, or defaulted on credit in the past. You may also have an individual voluntary agreement (IVA), a debt relief order (DRO), or a county court judgment (CCJ).

You may also be judged to have bad credit if you haven’t been able to build up a credit history, if you are young or you’ve recently moved to the UK, for example.

The three main CRAs have different scoring systems, so there is no single figure to indicate you have bad credit. Equifax judges someone to have poor credit if their score is 438 or below (out of a possible 1,000), Experian if it’s 720 or below (out of a possible 999), and TransUnion if it’s 565 or below (out of a possible 710). These scores and definitions are decided by the CRAs and can therefore change over time.

To further complicate this, each individual lender will also have its own criteria for what it considers to be bad credit.

» MORE: What is a bad credit score?

Types of loans for bad credit

Bad credit loans come in various forms. It’s worth spending some time researching these different loan options to make sure you choose the right one for your situation.

Personal loan

There are various lenders that will consider offering a personal loan to people with bad credit histories. Personal loans are unsecured and will often come with higher interest rates than loans that offer some form of security. To qualify for an unsecured loan, you will have to meet other eligibility criteria, such as having a steady reliable income, and be able to afford the repayments.

Secured loan

Although secured loan providers tend to offer larger sums of money over a long period of time, they are often less strict about borrowers’ credit ratings as the loan is secured against a property or other high-value asset, such as a car. If the borrower fails to repay, the lender has the option to force the sale of the property or goods to get back the money they’re owed, so there is less risk to the lender. This means interest rates can be lower than on an unsecured loan.

For borrowers, however, there is a risk that you could lose your home, so it’s vital that you are confident you can meet the repayment responsibilities before committing to a secured loan with bad credit.

Guarantor loans

Guarantor loans are a popular, unsecured method to obtain a loan despite having a poor credit history. If you have a close family member or friend who is financially stable and has a good credit score, they can opt to act as a guarantor for your loan. Although you are the borrower, your guarantor agrees to cover the cost of the repayments if you are unable to.

Debt consolidation loans

This is actually a description of what you might use a loan for. By merging different loans into a single loan, you can simplify your repayments with a bad credit consolidation loan. These loans come with a single level of interest from one lender, as opposed to maintaining multiple rates from multiple lenders on different debts. However, bear in mind that consolidating your debts may mean you pay more in interest overall. Debt consolidation loans can be secured or unsecured.

How to get a loan with bad credit

Before you think about getting a loan, you should work out a budget so you know how much you can afford to borrow and repay each month. This will help you when you start looking at different loans as you can find one that best meets your requirements and circumstances.

You may also want to check your credit score to see if there are any easy ways to improve it, as a better credit score will help you to get a more competitive loan.

Lenders will advertise the cost of their loans with a representative annual percentage rate (APR). However, it’s worth bearing in mind that the representative APR is the advertised rate that at least 51% of borrowers will be eligible for, so you may be offered a loan with a higher interest rate.

You should only formally apply for a loan if you are confident of being accepted, as loan applications will appear on your credit history and could affect your score.

Why does poor credit make it difficult to get a loan?

Having a poor credit history indicates that you’ve had problems managing your finances in the past. For example, you may have a bad credit history if you’ve missed payments or defaulted on a previous loan.

When you apply for a loan, lenders will use your credit history to help them make a decision about your application. They will look at how you have handled credit in the past and work out how likely it is that you would repay a loan, and so how much of a risk you present.

Even though lenders will consider other factors, such as your income, a poor credit history can make lenders more wary about offering you a loan as they see you as a greater risk.

Not having much of a credit history can also make it difficult to get a loan, as you have little, if any, evidence to show lenders that you are a reliable borrower.

Some lenders will only offer loans to people with a good credit history, but there are specialist lenders that offer loans to those with bad credit histories. However, these loans will usually be smaller and have higher interest rates than if you applied for a loan with a better credit score.

Pros and cons of bad credit loans

Outlined below are some of the advantages of a bad credit loan:

You can borrow a lump sum of money to use for many different purposes.
As long as you repay the loan in full and on time, and manage your other credit commitments responsibly, it could contribute to improving your credit score.
If you have bad credit, you’re more likely to be accepted for one of these loans than a standard personal loan.

However, you need to consider some of the downsides of getting a bad credit loan:

These loans typically come with higher interest rates.
You may not be able to borrow as much as someone with a good credit score.
Your loan options are more limited as not all providers offer bad credit loans.

What to consider when taking out a bad credit loan

Before applying for a bad credit loan, you should think carefully about whether it is the best option for you.

When you take out a loan, you are taking on a debt that will need to be repaid so you need to be confident that you can afford to borrow this sum of money.

To help you decide whether a bad credit loan is right for you, ask yourself:

Are there any cheaper alternatives available? For example, have you considered a bank overdraft or borrowing from a friend or family member?
Do you meet the requirements? Check that you meet the basic eligibility criteria of a lender before you apply for a loan from them.
How much can I borrow? If you have bad credit, you may not be able to borrow as much as someone with a better credit score. Consider whether you can borrow enough to meet your requirements.

Can I afford the repayments? It’s important that you only take out a loan if you can afford to repay it in full. If you miss a payment, you could face more interest charges and penalty fees, which puts you at risk of getting into unaffordable debt. It will also be recorded on your credit file. To minimise the chances of getting behind on repayments, only borrow the amount you need; don’t take out a bigger loan just because you can.
What is the loan’s APR? Bad credit loans typically come with high interest rates, which can make them an expensive form of borrowing. The APR tells you how much a loan will cost you over the course of a year, taking into account the interest on the loan and any fees.
Do you need the loan immediately? If you don’t need the loan right now, it may be worth waiting before applying. You could use this time to try to improve your credit score, which could increase the number of loans you are eligible for and help you access more competitive rates of interest.

Alternatives to bad credit loans

Before applying for a bad credit loan, it’s worth considering if there could be a more suitable option for your situation.

Credit union loans: Credit unions are not-for-profit organisations that could help people who may struggle to get approved for a loan elsewhere. You need to be a member of a credit union to apply for a loan. The interest rate that credit unions in Great Britain can charge on a loan is capped at 3% a month or 42.6% APR. The cap is 1% a month or 12.68% APR in Northern Ireland.
Peer-to-peer loans: Peer-to-peer lending platforms allow you to borrow from private investors rather than traditional lenders. Some peer-to-peer loan options may be available to borrowers with a poor credit score, but interest rates will usually be higher compared to the average unsecured loan and other lending criteria will apply.
Budgeting loans and advances: If you receive universal credit or certain benefits, you may be eligible for a budgeting loan or budgeting advance. These are loans from the Department for Work and Pensions (DWP) that don’t charge any interest. The amount you could borrow will depend on your individual situation.
Credit card: A credit card can allow you to spend only the amount you need and, if you pay it off in full each month, you won’t pay any interest. You may be eligible for a credit card with a bad credit score, such as a credit builder card, but you may face higher interest rates and lower credit limits. Bear in mind that if you don’t pay off your balance, credit cards can be an expensive way to borrow.
Friends and family: If you have close friends or family, you could think about asking them to lend you money. While this can be a cheap way to get the cash you need, you should consider your personal relationship with the individual lending the money. It may be worth drawing up a written contract, so both parties agree on how and when the money will be repaid.

Applying for a loan with bad credit

When you apply for a loan, you should always check the eligibility criteria of the lender. Every lender has different requirements, with some only accepting applications if you earn above a certain income or if you’re not currently bankrupt, for example.

As a minimum, most lenders will require applicants to be at least 18 or 21 years of age and a UK resident.

To apply for a loan, you will need to provide the lender with personal information and details about your finances, such as your:

name
address
date of birth
contact details
living situation, e.g. tenant, homeowner
income
employment status

Lenders will also run a hard credit check as part of your application. This will be recorded on your credit history.

You can often check your eligibility for a loan before you formally apply. Checking your eligibility won’t affect your credit score and it allows you to see how likely you are to qualify for different loans, reducing your chances of applying for an unsuitable loan.

If you have bad credit, you may stand a better chance of getting a loan if you apply to specialist bad credit lenders. Depending on your circumstances, you could also improve your chances of acceptance if you apply for a secured loan or a guarantor loan as the extra security can give the lender more reassurance that they will get their money back.

However, you should consider the risks involved with these types of loans before applying. For example, secured loans come with the risk that you could lose your property if you fail to repay the loan.

Yes, you can apply for a loan even if you have very bad credit. However, not many lenders will be able to offer you a loan, so make sure you check both eligibility and whether you qualify before applying.

You can use a bad credit loan for a variety of reasons, including to pay for a holiday, home improvements, a one-off purchase, emergency expenses, and more. Lenders will often ask what you plan to use the loan for as part of their application process.

Bad credit loans will typically come with relatively high interest rates, and you may only be able to borrow a relatively small sum. To access better rates of interest and to be able to borrow a larger amount, you could start by working to improve your credit score.

You could also consider a guarantor loan (where a guarantor agrees to repay the loan if you can’t) or a secured loan (where you put up your house or another valuable item as security). The guarantor and the security minimises the risk for the lender, so they may be more willing to lend you more money at a lower interest rate. However, these kinds of loans can come with additional risks that you should consider before deciding to apply for them. For example, if you don’t keep up with repayments on a secured loan, your home could be repossessed.

It can be risky to take out a bad credit loan if you’re unsure if you will be able to repay the loan as agreed. If you run into financial trouble while you still have an outstanding balance on a bad credit loan, interest charges and penalties can mount up quickly. You could also then see your credit rating suffer further, or you could lose your home or car.

If your loan application is declined, don’t try to apply for another loan straight away. Applying for a loan involves a hard credit check, which will appear on your credit history, and multiple applications could affect your credit score.

Instead, it’s a good idea to check your credit score and try to work out why your application was rejected. You can then take steps to improve your score, which should hopefully improve your chances of getting accepted for a loan in the future.

You won’t be able to apply for a loan without a credit check. All authorised lenders have to run credit checks as part of the application process to help make sure you can afford to take on a loan. However, you can check your eligibility for a loan without a hard credit check.

Borrowing from a family member or friend could be an option if you need money but want to avoid a credit check. However, you should consider the possible risks involved and only borrow from someone you know and trust. Never borrow money from someone that you don’t know as they could be a loan shark.

There are a number of ways to improve your credit score. Firstly, you can make sure you pay all of your existing credit commitments in full and on time. This will help to show you can manage your finances responsibly and could help to boost your score.

If you’re in a position to do so, you can also aim to reduce the amount of credit that you’re using. For example, if you have debt on one or more credit cards, you can try to pay this off so you’re not using as much of your available credit.

You may also be able to sign up to a service such as Experian Boost. This uses information about your finances that wouldn’t otherwise be recorded on your credit history, such as subscription fees, tax payments, deposits into savings accounts and even rent payments. If you pay these on time, as well as your other payments, your credit score with Experian could improve. However, bear in mind this service won’t affect your score with other credit reference agencies, and lenders may not always use Experian.

Possibly. Whenever you apply for a loan, the lender will conduct a hard credit check, which will be recorded on your credit history. This could temporarily affect your credit score, but if you make your repayments and manage your other credit commitments responsibly, your score should recover.

Making several applications for credit within a short space of time is likely to have a more significant negative impact on your credit score.

There are long-term bad credit loans with terms of up to seven years available, although whether you are eligible depends on your individual situation and the lender. Bear in mind that the longer the loan term, the more you would need to pay in interest overall. Secured loans will typically offer longer repayment terms than unsecured loans.

About the Author

Rhiannon Philps

Rhiannon has been writing about personal finance for over three years, specialising in energy, motoring, credit cards and lending. After graduating from the University of Cambridge with a degree in…

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