Getting a loan when you have bad credit or no credit history can be tough. Like most financial products, borrowers have to submit an application listing their income information and agree to a credit check before getting approved for a loan.
Lenders prefer to work with customers who have a proven track record of paying their bills on time and earning enough money to stay on top of their debt while honoring all terms and agreements.
If your credit score is less than 670, you may feel like your score is a roadblock to getting access to good financial products, as this guide will show you, there are options for you even if your credit isn’t 100% up-to-scratch!
- Obtaining a loan with bad credit is usually more difficult than if your credit score is higher (around 670+).
- However, you can still obtain a loan if your credit isn’t quite up-to-scratch!
- In fact, one of the advantages of a bad credit loan is that you’re often more likely to be accepted!
- However, you should be aware that lenders may charge a higher interest rate on the loan as you’ll be considered a slightly less reliable candidate than someone with a good or excellent credit score.
What is a Bad Credit Loan?
Bad credit loans are designed for people with a poor credit record, or who have little or no credit history.
These loans typically charge higher interest rates than other loans, and the amounts lent will normally be lower. This helps lenders reduce the risk of you not paying the money back.
Instead of basing the eligibility for a loan simply on a credit check, bad credit lenders look at an individual’s financial circumstances to assess whether they can afford the loan they are applying for.
So even if you have bad credit or have missed debt payments in the past, you may still be able to get a loan.
What are the Pros and Cons of Bad Credit Loans?
There are pros and cons of bad credit loans, so consider carefully whether this is the right form of borrowing for you:
Pros of Bad Credit Loans
- You’re more likely to be accepted.
- The application process can be quicker than a normal loan if you have bad credit.
- If you make your payments in full and on time, a bad credit loan can help build your credit score.
Cons of Bad Credit Loans
- Interest rates can be high as you’re seen as a higher risk .
- If you secure your loan against an asset, like your car or house, it could be repossessed if you can’t keep up with the repayments.
- Some lenders have minimum lending amounts and minimum time periods.
- Lenders could charge a fee if you make late payments or have payments returned.
What are the different types of Bad Credit Loans?
This is the most common type of loan and usually involves borrowing between $1,000 and $35,000, repayable 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.
These work in the same way as personal loans, but also involve an agreement with a third party, usually a family member or friend (guarantor), to ensure the loan is repaid. If you don’t make repayments, the guarantor can be held responsible and chased for the debt. If you have a bad credit history, this may be the only way you can borrow.
These are different to personal loans as they are secured on your home. This means you can often borrow a much larger sum of money. But it also means the lender can repossess your home if you can’t afford to pay it back – so this type of loan is much more risky. Interest rates are normally variable and the repayment period can be up to 25 years.
Personal or guarantor loans can also be referred to as ‘instalment loans,’ because you repay the money in instalments over a certain period of time.
With this type of loan you secure the borrowing against your car. In fact, you hand over temporary ownership of your car to the lender, although you can still use it.
Logbook loans can be very expensive with APRs up to 400%. You risk losing your car if you can’t repay the loan as agreed.
What to consider before applying for a Bad Credit Loan?
The amount you’re borrowing – borrowing a larger amount can sometimes be rewarded with lower interest rates, but you need to be sure that you’ll be able to meet your repayments. And the more you borrow, the more you’ll need to pay back… with interest.
The period you’re borrowing over – this is known as the term. Borrowing over a longer term will normally lower your monthly repayments. But don’t just go for the maximum term length, as you’ll end up paying more overall with the interest added.
The interest rate – lower interest rates are often reserved for longer terms or higher borrowing amounts, but it’s good to compare rates from different providers.
Your monthly repayment amount – the amount you’re borrowing, the term and the interest rate combine to determine the amount you’ll be expected to repay each month. How much you can afford will be unique to your own financial situation, so it’s important to find the best loan for you. The last thing you want is to miss or make a late repayment, and potentially damage your credit score further.
What are the alternatives to taking out a Bad Credit Loan?
A credit building credit card could be a good alternative option to a bad credit loan. This type of credit card is designed for people who have poor credit.
While a loan might allow you to borrow a larger amount, with a credit card you can apply for a smaller amount to improve your chances of being accepted.