The only thing that you can be certain of is that the interest on a bad credit loan will be significantly higher than what you’d get on other types of regular loans.
When it comes to bad credit loans not everything is clear cut as some would think. Interest rates will vary from one lender to the next and there are indeed “better” and “worse” deals available.
Limited options because of a bad credit record
It may be easy and even tempting to fall into one of the many traps that bad credit lenders have set. These lenders aggressively advertise their services and target those with a bad credit history by promising a solution to all the debt problems you have but the reality is that taking out another loan when you already have a long list of creditors hounding you from all angles will most likely make your situation worse.
The best solution to cash emergencies is always a long term solution – quick fixes tend to fail more often than not.
What important to remember is that if you’ve applied for – and have been denied any form credit in the last six months you're probably going to be denied again because of it. When you apply for any form of credit the micro lender will run a credit check that will show up on your credit report – so you can see how this will only worsen a bad situation.
The more you apply and are denied, the more likely you are to be denied again in which case you simply have to wait at least 6 months for the credit checks to fall away, during which time you can take some additional measures to improve your credit score and increase your chances of accessing credit. You are legally entitled to obtain a free copy of your credit report if at any time you are denied credit but this only applies for 60 days after you’ve been denied.
We suggest you take the opportunity to review your credit report and ensure that you're being denied for valid reasons as well as to help you work on improving it.
Get a free credit report once a year
You can also obtain a free credit report once a year by default or if you're unemployed and intend on finding a job within the next 2 months, currently receiving any form of benefit or have been a victim of fraud. The most important thing for anyone with bad credit is to try and avoid getting into more debt by any means possible.
If you need help with a serious debt problem you should always seek advice from one of three major debt counselling agencies in the UK. These are the Citizens Advice Bureaux, the National Debt Line and the StepChange Debt Charity.
6 years for Bad Credit to clear by itself
Any negative information on your credit report can only be eliminated once a certain time period has expired. For example in the case of a County Court Judgement (CCJ), it will take 6 years for it to clear from your credit report by default.
The same time period also applies to a DRO, IVA or in the case of someone who has been declared bankrupt by the High Court.
There are hundreds of credit repair agencies that make misleading and inaccurate claims that they can magically fix your bad credit or remove some bad information and you should be aware that legally speaking, no negative information can be removed from your credit report. In the case of certain errors, unfair judgements and fraud – it won’t cost you a single penny to dispute these on your own anyway so don't bother paying someone else to do it.
If you're not registered on your local electoral roll – this is as good a time as any to do so. This is important for your credit report because it helps lenders verify your address and personal information. Not being registered on the electoral loan could indeed cause a lender to turn down your application. If you’ve moved and haven’t yet informed the council in your old and new areas – you need to update this as soon as possible.
Secured vs Unsecured loans
As with regular loans, bad credit loans also come in two forms; secured and unsecured.
If you're looking for a smaller amount of money you're best is to apply for an unsecured bad credit loan. If you're looking for a larger sum of money you will probably have to go for a secured loan.
1. Secured loan
A secured loan is one where you have to put up collateral, usually in the form of your home, to be granted a loan. You are also much more likely to be approved for a secured loan when you have bad credit – so this may be your most viable option. Since putting up your home or some form of collateral gives the lender satisfaction that regardless of whether you keep up with payments or not, they will be able to recover their money they will be able to offer you a better interest rate and a more flexible repayment term.
This means that you can choose a longer loan term – of up to 25 years which means that you will have smaller monthly repayments but it will obviously take you a very long time to pay the debt off. When you decide to get a secured loan against your home you have to ensure that you follow a very strict budget that will not allow you to miss payments. This will ensure you protect your home but will also give you the opportunity to repair a bad credit report over time.
2. Unsecured loan
An unsecured loan will always have a higher interest rate attached than a secured loan – but it may be better than putting your home and possessions at risk so you have to weigh the pros and cons carefully and be honest about what you can afford.
Consider a Guarantor loan.
If you're not interested in putting your home at risk to get a loan you may want to consider a guarantor loan. A guarantor loan is a form of unsecured loan that can be taken out by people with poor credit scores. The guarantor which can be a family member, friend or work college will have to agree to make the repayments on your behalf should you fail to do so. Since the guarantor provide assurance to the lender that they will receive their money you will naturally find better deals than other types of bad credit loans.
You will also be able to take out a larger loan with a guarantor so this may indeed be a good replacement for a loan secured against your home.
Before starting to compare the various micro lenders and deals you must first decide on how much you need to borrow. If you're looking for a loan to pay off, or consolidate other smaller loans, you should always remember to factor in any early repayment charges or other fees in addition to the balance and interest you owe each creditor. If you pay off these smaller loans and keep up the repayment on the larger loan you’ve taken out you will definitely improve your credit score and therefore increase your chances of accessing the cheaper mainstream credit in future.
Perhaps a Debt consolidation loan.
If this is you're reason for looking to get a bad credit loan you may want to consider one of the many debt consolidation loans available.
A debt consolidation loan is usually a good option for those who have accumulated a mass of various short term, unsecured debts and are struggling to keep up with repayments simply because it’s became a hassle to keep track of what is owed. A debt consolidation loan will usually be an unsecured loan so is an option open to those who do not own their homes. Do not assume that a debt consolidation loan will solve all of your debt problems because there are many cases where it can actually worsen the situation particularly when people try to consolidate relatively low interest debts like that of purchase credit cards.
You may also not be able to consolidate all of your debts with this kind of loan so be sure to seek professional advice before attempting to apply for one.
If you’ve considered all your options and have decided that you indeed want to proceed with taking out a bad credit loan in the form of a secured bad credit loan, guarantor loan or even a small unsecured loan, you should start by using one of the many online comparison tools to find the best deals.
They are really simply to use and don't require too much information although some will request your personal contact information.
Calculate the total cost of the loan.
The comparison tool will show you the best deals by order of monthly repayment, the lenders name and information, the Annual Percentage Rate (APR) and the loan term. Some will also the total cost of the loan as well. The total cost of the loan will be a good way to start comparing the different loan options but the APR and monthly repayment for each will inevitably be the deciding factors.
The APR will show you what you will have to repay in the course of one year and includes both interest and additional fees that lenders charge. Be aware that this may very well be a Representative Annual Percentage Rate. This is the APR what was offered to more than half of the people who have applied for that particular loan and you are not guaranteed to receive that APR.
Only once you’ve applied and a credit check has been conducted will you find out what APR the lender is willing to offer you and this may be a much higher APR – particularly if you have a bad credit score.
If you know that you will not be able to make repayments on a short term loan with a low APR – go for the loan with the longer loan term. This will prevent a bad debt situation from getting even worse.
The maximum loan term for a secured loan is about 25 years – this is obviously a very serious financial commitment. In addition to the critical points mentioned above you should also find out if there are any early repayments fees and penalties associated with the loan – even if you don't intend on repaying the loan back early.
So now let’s take a brief look at some other type of loans you could get even with a poor credit history starting with another secured loan.
Alternative loans for people with bad credit.
A logbook loan is a loan that is secured against your vehicle and can certainly be obtained by someone with bad credit.
You will risk losing your car if you do not make the required repayments to the lender but I think we can agree it’s a better alternative to losing your family home. This will be the largest alternative loan that a person with bad credit will be able to take out and as can be expected interest rates are going to be high.
Another option available is to pawn an item of value – it’s also a secured loan since you’re handing over you possession(s) in return for the loan but will not fetch nearly as much as a loan secured on your home of vehicle. Pawnbrokers will only allow you to borrow 50% of the value of the item – so you can obviously see where the limitations with this lie. The item is valued by the pawnbroker so you're not necessarily going to get a fair price and if you don't repay the loan as agreed your item will be sold to recover the money. Don't be tempted to pawn items that have a sentimental value to you unless you are 100% certain that you can repay the loan on time to recover it.
Many people have lost highly valuable pieces of art and jewellery that have been passed down from generation to generation many times over only to regret it terribly later on.
Finally, almost anyone with bad credit can find a payday micro lender willing to borrow to them; you may even be surprised to find that students can borrow from a payday lender and repay it once their student loan is credited. This will come with a very high interest and will only multiply should you fail to repay in time.
Most payday lenders will not borrow you more that £1,000 (£1,500 if you’ve borrowed and repaid them previously, so this is only going to be useful if you have a very small and very temporary cash flow problem.