Whether you want to consolidate your debts, make a one-off purchase, or pay for a special event, many of us will need a personal loan at some point in our lives. However, if your credit history has seen better days, then you might worry about getting approved. After all, bad credit is one of the main barriers to borrowing from most providers.
Thankfully, there is hope, as many companies will consider customers with a poor credit score under certain circumstances. In this guide, we’ll look at your available options for getting a loan if you have bad credit. We’ll detail how the process works and what you can do to give yourself the best chance of securing the money you need.
When people talk about bad credit, they are usually referring to your credit score. This is a numbered rating that Credit Reference Agencies (CRA) give you, based on the information they hold on your credit file.
Generally, the higher the rating, the more likely you are to be approved for credit. In the UK, there are three main CRAs – Experian, Equifax, and TransUnion. Everyone has a credit rating and a file dating back to when you first took out credit, usually by opening your first bank account as a teenager.
CRAs create, update, and hold our credit files, sharing them with potential lenders and other parties, such as landlords and employers.
When you apply to borrow money, you’ll need to complete an application which usually includes giving the lender permission to perform a credit check. This lets them view your score and information held in your credit file.
While bad credit often refers to a poor credit score, it also describes your financial behaviour. This behaviour determines the numbered score, causing it to rise or fall depending on your credit history.
Examples include consistently making late payments or missing them altogether, right through to defaults, County Court Judgements (CCJs), and bankruptcy in the most challenging situations. However, it can also mean you simply have no credit. For instance, an 18-year-old opening their first bank account will not have good credit yet. They have no history and have likely never paid a bill before, so they might struggle to get a credit card or loan.
Your credit history is built up over time based on your behaviour – for better or worse. Things like missing payments will usually lead to bad credit.
There is good news, however. It’s possible to repair your credit history and improve your score over time. And you’re still eligible to apply for a loan. In fact, that’s precisely where bad credit loans come in.
Before applying for a bad credit loan, you should get a clear picture of your financial situation. One of the best ways to do this is by checking your own credit score.
You can find out your current credit score at any time for free by applying to any of the UK’s main CRAs and requesting a Statutory Credit Report. The data is updated monthly and goes back 6 years in your credit history. There are also online companies offering free credit checks and paid services, offering regular updates as part of a subscription.
If you’re planning to apply for a loan – bad credit or otherwise – it’s a good idea to stay as up-to-date as you can with your credit rating. Especially if you’re unsure if your application will be successful because of your rating.
As we’ve explained, you can repair and improve your credit score over time. It is not set in stone just because of bad decisions in the past. Your credit file also covers your last 6 years of financial history; even if you’ve had the worst happen in the past, you can come back from it.
These are the best ways to improve your credit rating if you’re hoping to apply for a loan:
You need credit to build your score, as it’s the only way to show a lender you can borrow responsibly. An interest-free credit card is an excellent place to start, but make sure you pay it off in full every month.
Whether it’s loans, credit cards, utility bills, or mortgage payments, be sure to pay on time and don’t miss payments. For credit cards, always pay off the total amount if you can, rather than the minimum payment, which can negatively impact your score.
Our how to use your credit card page can give you more advice on good practice.
Multiple applications, close together, can affect your credit rating.
This may seem like a strange suggestion, but you need to be on the electoral roll to successfully apply for credit, including a bad credit loan.
County Court Judgements or defaults from more than 6 years ago don’t need to be considered. If you spot something like this that you don’t think needs to be listed, you can ask to have these removed from your file. While it should happen automatically, it’s best to check.
While bankruptcy is hard to hide on your file, it should be removed after 6 years.
Also, If you’ve had joint accounts with anyone with bad credit, such as a former partner, for example, it’s vital to end this financial association by closing the bank account and asking the CRA to add a notice of disassociation.
Of course, this can take a while – up to 6 years – and it might be that you need a loan faster than the time it will take to repair your credit rating. If that’s the case, you might prefer to go ahead with an application sooner. On a positive note, many companies in the UK specialise in loans for people with bad credit.
Bad credit loans are designed for people with less-than-perfect credit ratings. They’re essentially the same as any other kind of personal loan but usually with higher interest rates and other terms left out. This is because the lender anticipates you have a poor credit rating.
To compensate for this and the assumed risk of you missing payments or defaulting altogether, they will offer you a loan where they stand to make more money from you.
However, there are still good deals out there if you have a lower credit score, so don’t despair. The eligibility criteria for bad credit loans is less strict, so you have more of a chance of getting an application accepted.
In short, even if you would get refused a personal loan from a high street bank, you might still be able to get a bad credit loan.
If you need a loan and you have a poor credit score, a bad credit loan could be the answer. These aren’t suitable for everyone, and no one would recommend taking out a loan that puts you in even more debt. Like any financial commitment, it needs serious thought before going ahead.
Greater chance of having an application accepted
Access to money when you need it
An opportunity to rebuild your credit score
Higher interest rates
There could be a limit on how much you can borrow
Monthly payments to afford
There are many different types of bad credit loans on the market. From unsecured personal loans right through to secured loans, and finally mortgages (the most significant loan many of us will ever take on). These are some things to look out for when comparing loans:
This could be fixed or variable but will likely be higher on a bad credit loan, meaning the overall amount you pay back will cost you more.
There may be set-up fees and late repayment or returned payment fees, so always check the terms and conditions.
This can range from a few months to several years (7 years is usually the most extended term).
In other words, how soon you will receive the funds. Bad credit loans often have the advantage of paying out quicker, particularly on small loans.
While you’re less likely to see special features on bad credit loans, it is still a competitive marketplace with providers who want to get your business. So there may be built-in incentives, like payment holidays, with specific lenders.
As with any loan, it’s about shopping around and comparing deals to find the product which best suits your personal circumstances. It’s also essential to consider the benefits and drawbacks of taking out any bad credit loan before you go ahead.
A guarantor is a person – usually a family member or friend – who has good credit and is willing to share the financial risk of you taking out a bad credit loan.
If you were to miss a payment, they would be liable, and their credit score may be affected. This is a big commitment for someone, and a guarantor can therefore be hard to come by. However, if you can get one, they could help ensure you a better interest rate and terms.
Suppose you see loans for bad credit with no guarantor advertised. In that case, this means the lender is willing to offer you a loan without a guarantor’s added security.
This is simply a loan for people with poor credit arranged directly with a lender rather than a broker.
If you go through a broker who works with a range of providers, they can suggest potential loans you might be accepted for based on your circumstances. However, they aren’t loaning you any money themselves, so a successful application with a broker is not a guarantee of getting a loan. For this reason, some people may prefer to go straight to a direct lender, although brokers may have access to a broader range of deals and rates.
A personal loan – whether for bad credit or otherwise – is often considered an unsecured loan. That’s because you aren’t expected to put up collateral, like your home, to get approved. These loans come with fixed and variable interest rates and repayment terms that range from a few months up to seven years.
Secured loans, on the other hand, are guaranteed against collateral. While you may get better rates and terms, your property or car could be at risk if you fail to meet your payments.
These usually refer to loans for smaller sums of money. Generally speaking, they are the same as personal loans, except you’re borrowing a smaller amount. Sometimes, the loan is also over a shorter period.
The process for applying for a bad credit loan is the same as any other loan. Once you’ve found a product that meets your needs, you’ll need to go through a formal application which will include the following:
Your personal details, including name, address, and employment
Your income and expenditure, including financial commitments
A credit check
How much you want to borrow
How long you want to borrow it for
How you plan to use the money
Try to apply for bad credit loans you’re more likely to get. Unsuccessful applications can harm your credit score further and lessen your chances of being approved by other lenders.
If your application for a bad credit loan is refused because of your credit rating, the lender should tell you this and inform you which CRA they used. You have the right to ask the lender why they rejected your application and what information they based this on. However, legally they don’t need to give you an answer.
Finally, you could also request a copy of your credit file from the CRA they used to better understand why your application was unsuccessful. If you happen to notice a mistake in the file, you can ask the agency to correct this, and they have 28 days to do so.
One of the main things to avoid if your bad credit loan is refused is to keep applying or make multiple applications with different lenders. This can adversely affect your credit rating even if they are successful. The same goes for using certain types of loans – such as payday loans, home credit, or doorstep lending.
The most important thing to do if your application is refused is to rebuild your credit rating.
Naturally, the last thing you want to do after taking out a loan for bad credit is to get into a situation where you can’t pay it back. If the worst happens, it’s essential to discuss your lender’s options as soon as possible. Honest, open communication goes a long way. Taking this step could encourage your lender not to report a late payment to the CRAs and agree on a repayment plan with you instead.
Going forward, you might also want to get independent financial advice to help you manage your money better. Organisations such as Citizens Advice, National Debtline and StepChange can all help with this.
Just because your credit score is less than perfect, it doesn’t mean you should be banned from getting a loan when you need one. Many companies believe that everyone should have access to credit if they can afford the repayments and meet the eligibility criteria.
While they aren’t suitable for everyone, a bad credit loan could be used to pay off debts and rebuild your credit score.