Bad Credit Loans
Depending on your financial circumstances, you might find yourself needing to take out a personal loan to make purchases or to assist with paying off current debt. Unfortunately, if you have a bad credit rating it can increase the chances of you being rejected when you apply.
An alternative is to apply for a bad credit loan, which is designed for those who already have a bad credit score but still need to borrow money. It also gives the borrower the opportunity to improve their credit score if they can afford to make the monthly repayments.
What is a bad credit loan?
A bad credit loan is a personal loan but with a higher interest rate and sometimes a lower credit limit. This is to reflect the risk the lender takes by supplying a loan to someone with a poor financial history.
Whilst a bad credit loan might be expensive to repay, it does mean that if you have a low credit rating, you are more likely to be accepted when compared with standard loans. This can be handy if you have previously struggled to repay financial products but would like the opportunity to borrow money and try to improve your credit rating.
Types of loan taken out by those with bad credit include:
- Secured loan – these loans are secured against an asset you own such as your house or car. You can borrow a much larger amount, but it means that if you fail to repay the loan, the lender can repossess the asset
- Short-term loan – these loans are a small amount over a very short period, but come with a high interest rate so shouldn’t be taken for longer than 30 days
- Guarantor loan – nominate another person with a good credit rating to act as a guarantor. If you fail to repay the loan it will be up to them to pay it on your behalf
How can I spend my bad credit loan?
Once you have been accepted for your bad credit loan you are welcome to spend the money as you please, but the lender still has the right to ask how you’re planning to spend it.
Depending on the type of bad credit loan you have been accepted for, you will have a large or small credit limit to use on whatever you want. A short-term loan will only have a small credit limit to spend so is usually used for covering regular monthly payments (household bills, food shopping, childcare costs) or unexpected payments (fixing a broken boiler, car repair costs).
On the other hand, if you have borrowed a larger amount through a secured loan or guarantor loan, it’s normally for a significant purchase, or to consolidate existing debts.
Is a bad credit loan right for me?
It can be an expensive way to borrow, but a bad credit loan can come in handy, especially if you only plan on taking it out for a short period, in the case of a short-term loan.
If you plan on improving your credit rating it can also help, but since you can only take the loan out for a short time, it might not help in the long term.
If you have a good credit rating and are found to be eligible for standard personal loans, a bad credit loan isn’t the best option for you. Getting a lower interest rate on a personal loan will mean you can take out a larger amount over a longer period and be more flexible with how you repay it.
Advantages of a bad credit loan
- You can still borrow if you have a bad credit rating
- Normally receive a quick decision
- Can help improve your credit rating over time
Disadvantages of a bad credit loan
- High interest rates can make repayments expensive
- They can come with a lot more risk compared to standard loans