Loans designed for people who don't qualify for traditional credit
If you have poor credit history then you've probably heard of an unsecured loan for people with bad credit. This basically refers to any loan scheme created specifically for people that have, for one reason or another, fallen behind on repayments to their creditors or have had a County Court Judgment imposed on them for failing to pay creditors.
You may also be experiencing difficulty accessing credit if you don’t have any credit history but, in this case, you’ll be better off taking out a credit builder credit card then looking for a bad credit loan or any alternatives. This will give you the opportunity to access mainstream credit by proving to lenders that you are a responsible borrower.
I couldn't pay my debts, now what?
If you've failed to keep up with repayments, the most important thing for you to do would be to catch up on these missed payments and avoid falling in arrears again.
This may be easier said than done but, it’s the best way to repair and rebuild a damaged credit so that you may once again have access to the mainstream lenders and top offers for credit.
Obtain a copy of your credit report
You should obtain a copy of your credit report and, review it for any errors such as inaccurate numbers and, even fraud. When you get a copy of your credit report you can see exactly what potential creditors are seeing and, why they’re refusing you credit so, it will put you in the position to do something about it.
You would be surprised if you knew just how many people have absolutely no idea what’s in their credit reports or, why they’re being denied credit time and time again, it's your credit report so you should know exactly what’s in it.
I have a judgement against me, now what?
In the second case of having a Count Court Judgment against you, your options are very limited and it will have a very serious impact on your credit score and subsequently, your ability to access credit even if you’ve paid the money you owed in full.
Generally speaking you will never be able to get a loan from a high street bank or, even most other lenders, if you have a CCJ but, your options are not entirely closed.
There are some lenders that will issue you credit provided that the CCJ has been paid and you’ve been issued a certificate of satisfaction and have no other major problems in your credit report.
A certificate of satisfaction is what you’ll receive once you’ve paid the debt off and will show up on your credit report indicating that you’ve paid the debt.
A CCJ will show up on your credit file for six years-so if you have one, it may be worth checking your credit report to ensure that the details of the CCJ are correct and updated, sometimes errors such as an incorrect number or a failure to mention payment has been the cause of a poor record.
What exactly is an IVA?
Having an Individual Voluntary Agreement (IVA) will definitely have a serious and negative effect on your ability to access credit too. An IVA is mostly taken as a last resort by someone who has accumulated a mass of debt (totalling more than £10,000), does not want to file for bankruptcy and simply cannot manage their debt.
Since an IVA is an alternative to bankruptcy, creditors will immediately note that you're unlikely to repay your debts responsibly and, will refuse you credit.
If you’re curious about IVA’s the most important thing to note is that unlike filing for bankruptcy an IVA will allow you to keep your home in certain cases.
You may also get the chance to keep your car – if you need it to get to work. To get to the point, if you currently have an active IVA your chances of getting a short term loan are very limited – almost impossible.
An IVA will be active for a period of 5 years. If you keep up the repayments and clear the debt the IVA will appear on your credit history for only one year after the last payment.
Once this 6 year period is over you will be clear of debt and may once again be able to apply to mainstream lenders should you wish to do so.
Secured loans for people with bad credit
Most bad credit loans are secured loans because lenders want to know that since they are risking lending money to someone that has a history of not paying – they’ll have a way to recover their money.
Anytime you hear the word “secured”, you can be sure that it is in reference to a loan that has been taken up through collateral.
Collateral can be in the form of a house, a vehicle or any other asset that has a high value and as mentioned, this is generally the only kind of loan someone with bad credit can obtain.
If you miss payments on the secured loan the lender will then have the right to repossess your home or vehicle and put it up for auction to recover their money.
Loans for bad credit have a higher interest rate
On top of this, they also have additional fees because lenders perceive the greater risk in borrowing money to someone who has a long history on not repaying their debts or who has a bad credit history for whatever reason.
As with all personal loans, bad or good credit, the larger the sum of money that you borrow, the lower the interest rate and, conversely, the smaller the sum, the larger the interest rate.
This is why taking out a personal loan for a very small amount of money is rarely worth the amount you’ll pay in the form of interest. The important thing however, is that you do a little shopping around to find the best deal – not only one that has the lowest interest or APR but one that meets your needs.
Choosing your ideal loan term
If you know you won’t be able to afford the monthly repayments then it will obviously make sense to extend the term of the loan so that these repayments are more affordable, even if this means that you’ll end up paying more in the long run.
Why it's crucial to compare lenders & loans
Before taking out a bad credit loan with any lender you should always shop around for the best deals just as you would if you had an excellent credit rating.
Many lenders prey on those with bad credit because they know that their options are limited so they'll accept ridiculously high interest rates and absorbent fees.
To avoid these dangerous lenders you simply have to educate yourself on financial terms and procedures and if nothing else, at least use one of the many great loan comparison tools you can now find online to compare deals.
Alternatives lending options in the UK
Guarantor loans for people with bad credit
If you don’t qualify for a personal loan, even with collateral, you have another option-a guarantor loan. Finding someone that will act as a guarantor for your personal loan may be difficult but it may also be the only way for you to access the amount of credit that you need.
A guarantor loan is a loan that requires a third party to enter into contract alongside you and the lender. The guarantor signs a contract that essentially makes them responsible for your debt should you fail to make the payments as agreed.
This is a very common alternative for people with bad credit because it allows them to take out a larger loan then they would otherwise get from most other types of bad credit loans.
In addition to giving you access to a larger sum of credit, you will also have the opportunity to rebuild your credit by making consistent repayments, on time.
The interest rates will be higher than for a loan where no guarantor is required however; a guarantor loan still remains one of the more affordable ways for someone with bad credit to access credit.
Logbook loans for people with no credit, or bad credit
If you own your vehicle you can probably take out a logbook loan. This is where you use your vehicle as collateral for the loan and is risky for the obvious reason that should you fail to repay the loan your vehicle will be reposed by the lender.
To make sure you understand this type of loan, note that the lender owns your car until you’ve repaid the money you’ve loaned. This interest is very high so, don’t just accept the first offer, shop around and compare as many deals as possible before settling on one.
This kind of loan can also give you access to quite a large sum of money – depending on the market value of your car. A lender will never loan you more than 50% of the value of your car.
In addition, you have 14 days to back out of the agreement, should you wish to do so. Since logbook lenders usually issue cash cheques, you will be charged 4% of the value of the loan for an instant cash advance on the loan.
In addition to a logbook loan, people with bad credit can also get a loan from a pawnbroker.
Loans from pawnbrokers
The most common type of item pawned is jewellery but pawnbrokers will generally accept almost anything of value. Pawnbrokers will rarely give you a fair value on an item for obvious reasons but, if you feel that they are being extremely unfair, then it may be worth visiting more than one to see who can offer the better valuation as well as interest.
If you don’t repay the loan, the pawnbroker will sell your item to recover his money. If the sale generated more than what they lent to you plus the interest you owe, you may be entitled to the surplus but, you must verify this with the pawnbroker beforehand.
A bad credit loan
If you are looking for a bad credit loan because you desperately need to pay off overdue bills or catch up on missed payments to your creditors another loan may not be the best way to do it.
You should consider getting some professional advice from a free debt advisory service or charity that may be able to find a better way to help you.
Debt consolidation for those struggling to manage debt
In addition, you may want to consider applying for a debt consolidation loan rather than a regular loan. This type of loan is specifically designed to allow you to pay off multiple existing debts by taking out one larger loan.
You then only need to repay this one larger loan so this is a very effective choice for those who have trouble keeping up with what they owe and to whom they owe it.
Debt consolidation loans will not necessarily be cheaper but, they will definitely make things a little bit easier for those who cannot manage their debts. One of the contributing factors that can make a debt consolidation loan extremely expensive is the early repayment fees you may be charged when paying off the smaller loans.
If you have 7 small loans and get charged a hefty early repayment fee for 5 out of the seven you could be looking at hundreds of pounds in fees.
If you have the patience to search for a few different debt consolidation loans you may even find a deal that will beat taking out a regular bad credit personal loan.
Getting to the core of bad credit
The key to dealing with an overwhelming amount of debt is partly understand how you got to into it in the first place and remedying the core reason. If you tend to overspend on your credit cards and cause unauthorised overdrafts – perhaps you need to request an extension on your limit or switch to a regular account that simply doesn’t allow overdrafts.
If you can’t budget effectively then it may be time to get some help from someone who does. Although it goes without saying, it would be more beneficial to find ways of increasing your income to catch up on and maintain your debt repayments then to take out another loan to deal with them.
This will help you repair your credit over time and you may even have some extra money left over to put away in an emergency fund. Once you have an emergency fund, you will feel more confident about your financial situation because, you’ll know that should any unexpected emergencies arise, you can handle it.