Best Bad Credit Loans – UK Lenders Compared
If you have a poor or even terrible credit history, then you could still get a loan from a bad credit provider.
What makes the best bad credit loan?
Check the conditions of the provider to ensure that:
- There are no early repayment fees.
- There is no / a small late fee.
- You have a high chance of being accepted.
- They are the lowest possible APR%.
- They have good customer reviews.
And most importantly make sure you can afford it.
About Bad Credit Loans
How to get a loan with a bad credit score
Your credit score is what tells lenders how reliable you are at handling money. If your score is high, lenders will be very keen to lend to you; if it is low, however, it can be difficult to secure credit at all.
A low credit score does not necessarily mean you’ve done something wrong. Often, especially for younger people or new immigrants, the problem is simply that there is no track record of using credit. Without some indication of how you would handle money, lenders don’t know if you are a good bet, or a risky one. For this reason, no credit history results in a low credit score.
Why is it so hard to get a loan with a bad credit history?
Lenders decide on whether or not to give out a loan, and what rates to charge for it, based on the amount of risk they will be accepting. Higher loan amounts increase risk, and so they may charge higher rates. Likewise, if there is some damage to your credit score, or if you haven’t developed one yet, there is more risk involved for the lender. In other words, the riskier you are to lend money to, the more a loan will cost you, and the less you’ll be able to get.
This isn’t just a risk versus profit situation either. Lenders in the UK are under an obligation to only lend money if they think the borrower has reasonable ability and intention of paying it back. If they think you can’t afford the payments, they are not allowed to lend you money.
The top factor they will use in determining your ability to pay back a loan, is your credit score.
What types of bad credit loans are there?
Just because you have a bad credit score doesn’t mean you can’t get credit. In fact, many lenders offer products specifically designed for people who have a damaged credit score. Some of these require security (secured loans), or a guarantor (guarantor loans), but many are unsecured (see best small loans here).
It is important to shop around, too, as some lenders pay more attention to credit scores than others. They will all check your score, but if you have a good income, and your expenses aren’t too high, a lender may offer you a loan even if your credit score is poor. It will help also if the lender knows why your score was damaged, and it was for one-off or unusual reasons. For example, if you or a family member were ill, if you were made redundant at work, or something happened that was beyond your control but is unlikely to happen again – any of these might be discounted by your lender as less risky than they appear.
Best alternatives to bad credit loans:
Credit lines are an excellent alternative to a loan, for the main reason that you will only pay money on what you spend. For example, rather than taking out a loan for £10,000 and paying interest on the full amount, you could secure a line of credit for £10,000, and only pay interest on the amount you’ve used. This means you would have the full £10,000 available, but if you only spend £5,000, you only pay interest on the £5,000. That’s a savings of 50% right there.
Other loans are available, like credit cards with higher-than-normal interest rates (APRs). These are sometimes called “credit builder” cards because they are often taken out by people with poor credit, and are used to build up a better score over time.
If you abuse either of these loans, your score will be damaged further, but if you are responsible with them, they are each a good way to improve and repair your score.
Bad credit loan FAQs
Here are some of the most common questions around bad credit loans, answered in simple English.
What is a bad credit loan?
These are loans designed specifically for people with bad credit scores. They are often more expensive than regular loans, but may be the only credit available to someone with blemishes on their credit history, or no credit history at all.
Can I get a loan with a bad credit rating?
Yes, in theory you can. It will primarily depend on your income and expenses, the amount you are willing to pay in interest, and the lender’s confidence that you are reasonably able to pay it back.
What are the pros of bad credit loans?
Most bad credit loans are for shorter periods and lower amounts, so there is less responsibility taken on by the borrower. If there have been problems in the past, or there is inexperience in handling money, this can be an advantage. The primary advantage though, is that these loans may be available to someone with a poor credit rating, whereas regular loans will not.
What are the cons of bad credit loans?
Bad credit loans are expensive. The interest rates are higher than normal, there are often fees associated with the application processing, and lenders may have less patience with any problems that occur over the course of the loan.
Why do I have a bad credit history?
Each person has a credit file. This is a record of all (if any) credit you have received or applied for, any bank accounts you’ve held and for how long – it even records if you are registered for the electoral role. If this information has negative items in it, or is missing important items, then your credit score will be low.
Improving your credit means increasing the good items, and decreasing the bad items, contained in your credit file.
What is my credit score?
Your financial past is broken down into numerical amounts – positive or negative – and added together to become your credit score. Each of the items in your credit file either adds points or takes points away from this total.
Missed or late payments, if reported by the lender, decrease your score. Lack of credit history decreases your score. Low income, high expenses, or being close to the limit of your credit decreases your score. Having several recent or clustered credit checks also decreases your score.
However, having made regular payments on a credit card increases it. Showing stability by having a long-standing bank account, being on the electoral role, and living at the same address for several years will also increase your score.
This score is used by creditors (and increasingly by landlords and employers) to determine your level of reliability and responsibility.
You can easily check your credit score by asking for a copy of your credit file. There are also many credit cards on the market that include a regular “soft check” of your credit score as a perk. These are called “soft checks” because they will not damage your score.
Checking your credit score and credit history
You are entitled to check your credit score, and can often do so for free.
If you want to see your full file, you need to open an account with one of the credit reference agencies, but there are several online services that allow you to check parts of your file for free. You can always see your Statutory Credit Report from each credit reference agency for a fixed fee of £2.
Each of the three reports will be similar to the others.
What do I do if I find a mistake in my credit report?
The reports are usually quite accurate, but mistakes can occur and they can be very damaging. Usually these mistakes are fixed by contacting the original lender and asking them to amend the information. If they don’t respond, you can contact the credit agency directly and they will open an investigation into it.
One of the benefits of checking your credit rating regularly is that you can identify and may be able to fix any problems that do occur, before they have time to turn into very serious problems.
What is a thin credit file?
Just because you’ve never abused credit or missed a payment on anything doesn’t mean you have a good credit score. If you have little or no history of using credit responsibly, you will appear to have bad credit. This is because the score starts low. Having a new bank account (rather than one you’ve had for several years), no credit cards, and no history of borrowing will mean you have a low score. Not being on the electoral role will also harm your score. If the amount of information on you is very limited, you are said to have a “thin” credit file.
Does my low credit score mean I can never get a loan?
Chances are you will be offered a lower amount than if you had good credit, and the interest rates may be higher, but there are still products available to help you get a loan if you need one.
Other factors can help you as well. If you have a good income, low expenses, and are willing to contribute a substantial amount for an initial deposit when buying something like a car or a home, then the chances of you receiving credit are increased.
It is also worth taking the time to increase your credit score before attempting to get a loan. Securing a low-limit credit card and paying the balance off each month can make a substantial difference in only a few months. Likewise, registering for the electoral role, keeping your bank account steady, and not applying for credit from several sources at a time, will all help increase you score.
As you see it rise each month, you will also feel the satisfaction of financial responsibility, and you will gain an increased understanding of how credit scores and histories work.
Are bad credit cards the same as bad credit loans?
No, but there are similarities.
A bad credit loan is a single lump sum that then needs to be paid off either in one payment or in instalments over a relatively short period of time. Interest rates are high, there may be fees, and once it is paid back you would need to apply again in order to borrow again.
Bad credit cards give you a credit limit that allows you to spend up to that amount, using the card, but no more. The balance can be paid off each month (recommended) or in smaller payments each month. Interest rates are higher than those for other bad credit loans (and can be even higher if you take a cash advance using the card) and credit limits are low, but they are much easier to get than other types of loans.
Of the two, bad credit cards are usually a better method of increasing credit scores, as they show an ongoing, monthly habit of paying your dept. This depends, of course, on you paying the balance each month, and not continually using the maximum credit limit allowed.