How to Get a Loan With Bad Credit
If you have bad credit, it's easy to think you won’t be able to get a loan. But some lenders will allow you to borrow money with bad credit, and you can also find ways to boost your credit score.
Lots of people in the UK have a poor credit record. This can be for all sorts of different reasons, from late payment of a mobile phone bill to a high rate of credit utilisation. While a bad credit score is far from ideal, it doesn't need to stop you from getting a loan or other type of credit.
Even though you are more likely to be approved for a loan and access the best interest rates if you have a good credit score, there are options if you have a bad or limited credit history and need to borrow money.
Can you get a loan with bad credit?
Having a bad credit score will make it harder to apply for a loan or another form of credit, but it is still possible to get approved. Your credit score isn’t the only factor lenders will look at when deciding whether to offer you a loan, so poor marks on your credit history won’t necessarily stop you from accessing credit.
As well as your credit score, lenders also consider factors such as employment status, income and expenditure, and whether you are providing any security in the form of property or a guarantor.
However, not all lenders are willing to lend to individuals with patchy credit, so your choices will be more limited and you are likely to face higher interest rates than someone with a good credit history. This is to compensate for the increased risk that lenders think you pose.
Your credit score shows lenders how you have handled credit agreements in the past, so if you’ve made any late payments or indeed missed payments, lenders will be able to see this. As a result, lenders are likely to view someone with a poor credit history as a higher risk than someone with a good credit score who has proven that they can manage repayments.
Individuals who have a county court judgement (CCJ), an individual voluntary arrangement (IVA), a Debt Relief Order (DRO) or been made bankrupt, for example, may find it even more difficult to get a loan.
What type of loan can I get with bad credit?
There are several types of loan that are specifically designed for borrowers with poor credit histories.
Bad credit personal loans
There are a number of lenders that specialise in providing unsecured personal loans to people with bad credit histories. These loans will typically come with high interest rates, but they are an option if you need to borrow a relatively small amount of money and don’t want to resort to a payday loan.
Unsecured loans of up to £25,000 are usually available to borrow over terms of up to around seven years, although details will vary between lenders. Your credit score may also affect the size of the loan available, as lenders may limit the amount you can borrow.
As bad credit loans can be expensive, make sure you look at the APR of different deals so you can see how much it will cost you to borrow in total, taking into account the interest rate and any fees.
Bear in mind that, when you apply for a loan, lenders will conduct a hard credit check which will leave a mark on your credit file and could cause your score to drop.
Too many credit applications can harm your credit score, so only apply for a bad credit loan if you are confident of being approved. If your loan application is declined, you should find out why this has happened and wait before trying to apply for another loan.
» COMPARE: Loans for borrowers with bad credit
For larger sums, you may need to take out a secured loan. As the name suggests, this form of credit needs to be secured against an asset you own, such as your home. It means that, should you fail to keep up your loan repayments, the lender can repossess that asset to get back what you owe.
Because lenders have the security of your home or another asset in case you fail to repay the loan, they may be more willing to approve loan applications from people with bad credit scores.
Secured loans will also typically have lower interest rates than unsecured loans.
However, even though secured loans can offer greater chances of approval and lower interest rates, you need to weigh up the risks of using your property as collateral. You need to be confident that you can repay the loan in full and on-time, as defaulting could result in you losing your property.
» COMPARE: Secured loans for bad credit
Guarantor loans are another option for those with poor credit scores. This is where you get a friend or family member to act as a guarantor on your loan, meaning they will step in and make repayments if you fail to do so.
Having the backing of a guarantor means that lenders may be more willing to offer loans to people with poor credit scores. Lenders will usually require guarantors to be over 21 years old with a secure income and a good credit score, and many will prefer the guarantor to be a homeowner too.
Lenders will consider the guarantor’s financial situation and the borrower’s, so guarantor loans can help people with bad credit access sums at interest rates that they otherwise may have been excluded from.
» COMPARE: Guarantor loan options
Credit cards for bad credit
As well as loans, you can also get credit cards for people with bad credit or no credit history at all. These can be called different names, including credit building cards.
These cards tend to come with small credit limits, allowing you to spend responsibly and either rebuild your score or start building your credit from scratch.
If you make your repayments on time, your credit score should start to improve.
Bear in mind that credit cards designed for people with poor or limited credit histories may come with high interest rates, so it’s important to try to clear your balance so you don’t face expensive charges and risk falling into debt.
Credit builder loans
If you’re trying to rebuild your credit history, it may be worth considering a credit builder loan.
These loans are only available from certain providers, such as credit unions, and come with different criteria so not everyone will be eligible to apply.
If you are eligible, you can typically borrow a small sum of money, but there may be restrictions on how you use and when you receive it. It’s worth checking with individual providers how their credit builder loans work.
» MORE: Guide to credit builder loans
Credit union loan
You may be able to borrow money from a credit union if you have a poor credit score. Credit unions are community organisations that can offer loans, as well as other financial services, to its members.
To borrow from a credit union, you usually need to be a member. And, to be a member of a credit union you typically need to meet certain requirements such as living in a certain area or working in a particular industry. There are many different credit unions across the UK, so it is worth researching any relevant organisations to see if you are eligible to join and take out a loan.
Individual credit unions will offer loans of varying amounts which can be used for a range of purposes, including buying a car, home improvements, paying for a holiday, and more.
What do I need to take out a bad credit loan?
In general, to qualify for a loan, you will need to be at least 18 years of age and a UK resident, and have a bank account from which you can make repayments.
As well as running a credit check, lenders will also check your affordability by looking at your employment status, income and expenditure. This will help them to see if you could afford the repayments each month.
Before applying for a loan, it’s worth checking your credit score to see if there is anything you can do to improve it. You can do this for free, without affecting your rating.
From registering on the electoral roll to correcting any mistakes, there are several ways you may be able to boost your score and increase your chances of getting a loan at a competitive interest rate.
John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more
Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more