Bad credit loans in the UK - What are they?

Bad credit loans are a real finance alternative for people who have a poor credit rating who need money in a hurry to meet an unexpected bill. But what are bad credit loans exactly and what does this mean for you?

In this article, Loan Princess guides you through everything that you need to know before deciding to apply for a bad credit loan including:

What a bad credit loan is
What they are used for
Who is affected by bad credit
What protections you have when taking out a loan
Whether you should go through a direct lender or broker

Bad credit loans – definition

Previously, people wanting a loan could really only apply to banks and financial institutions to borrow money. Those who applied for a loan through their bank usually had to have had an account with them for years that they maintained well. On the other hand, financial institutions were really only focused on lending large sums of money to people with outstanding credit records.

When bad credit loan providers began to offer their services in the UK a decade ago, millions of Brits applied for them – it was a way to get money into their account very quickly to pay for something urgent that they couldn’t meet from their own savings.

Short-term loan

With a short-term loan, you make repayments in monthly instalments over a time period lasting anywhere from two and twelve months. With a short-term loan, you can borrow usually between £100 and £1000.

The amount that you pay each month and the schedule is agreed with your lender before you take out the loans that you know that your loan is manageable.

Payday loan

A payday loan is repaid in one instalment, usually the next time you get paid by your employer or within 30 days – whatever you and your lender agree. Payday loans are generally for between £100 and £1,000.

Bad credit loans – why do people take them out?

Most people who take out a bad credit loan do so to cover an unexpected cost such as:

• Medical treatment
• Vet bills
• Car repairs
• Household bills

Bad credit loans are sometimes called fast loans because borrowers receive their loan very quickly, sometimes in a matter of minutes.

Many people have found themselves in stressful situations where they do actually need the money quickly. For example, if they’re on their way to work and their car suddenly breaks down having developed a major fault. Few people can afford to cover a bill as large as this straight away but they need to get their car fixed as quickly as possible.

If you don’t have enough in your savings account or if you can’t find a friend or a family member to let your them money, bad credit loans can provide you with a solution as the money can be transferred to your account within minutes of your application being made (in most circumstances – you will need to check to see if your current account allows “faster payments”).

It’s very important to remember that bad credit loans should only be used as a financial solution for emergency costs you have to pay and you haven’t budgeted for. Bad credit loans shouldn’t be used as a normal part of your monthly financial planning nor should you take out a bad credit loan to repay another form of credit.

If you have debt and feel that it is becoming unmanageable, you should contact the Money Advice Service or another recognised debt charity without delay.

Bad credit loans – my legal protections

The Financial Conduct Authority (FCA) regulates all bad credit loan providers in the UK. This regulation means that borrowers are protected by a set of strict guidelines that all lenders must follow. Bad credit loan companies holding an FCA licence need to follow these rules:

They can’t charge you any more than 0.8% interest per day
If you add all your interest and fees together, it must not be more than the value of the loan that you have taken out. If you borrow £50, you’ll never pay back more than £50 in interest and fees, and
They can’t charge you more than £15 in fees if you default on a payment nor can they penalise you by increasing your interest rate.

Bad credit loans – do I need to put up security?

Bad credit loans are unsecured. This means that you don’t need to offer any of your valuable possessions up as collateral.

So, if your financial situation changes after taking out the loan and you are unable to repay what you owe, the lender can’t repossess your home or car. This makes unsecured bad credit loans very different to loans like a mortgage where your house may be taken from you if you can’t keep up with the repayments.

Bad credit loans – how long do I have to pay them back?

You can typically take out a bad credit loan for one to twelve months. Because the time period for taking a bad credit loan is relatively short, you can’t take out the larger amounts of money like longer-term loan providers allow you to.
This means that your loan will be smaller and scheduled for repayments in a shorter period meaning that you have to be sure, before taking the loan out, that you can meet all the repayments.

Bad credit loans – should I apply direct or go via a broker?

Most borrowers don’t realise that every lender has a “profile” which is a description of their ideal borrower. A “profile” is more than what’s on a credit report – it’s your personal and financial circumstances when you apply.
However, the problem for borrowers is that loan companies don’t publish their profiles online which means that you don’t know if you have a good chance of being accepted for a loan with a certain lender or not. This could lead to you wasting a lot of time but there’s an extra danger too – multiple applications to different lenders could also lower your credit score. So, even if you do match a lender’s profile, you are less likely to be accepted because they will see that you have applied for several other loans.

These problems can be avoided by using a broker to find the lender who will offer you the best deal. When you submit your application to us, we take the time to match your individual circumstances with a lender who is happy to work with you.

The lenders who want to work with you then send us details of the amount that they are happy to let you borrow and on what terms.

Bad credit loans – what does bad credit mean?

While most people know the basics of normal payday and short-term loans, few people know what bad credit loans are and that they are available. If you aren’t sure why someone would opt to take out a bad credit loan or how your credit report is created, please read on:

Loans for people with bad credit scores

Your credit score is a number which is calculated by using all the information in your credit score. This number is then viewed by lenders each time that you apply for a loan or financial product to determine if you qualify or not.
Lenders also consider the personal information that you include in your application such as your income and monthly outgoings. With all this information, lenders reach a verdict on whether you meet their criteria and how likely they think you are to properly manage your repayments.

Which companies give me a bad credit score?

Lenders use one of the three main credit reference agencies in the UK – Experian, Equifax and CallCredit.
Your credit history report is created with information supplied by your current and previous lenders (loans, credit cards, and so on), your bank, and the utility companies that you have used. Each month, your report is updated and the information recorded is held on onto for roughly six years.
After six years, the older information on your credit report is removed.

Bad credit lenders use credit checks every time a borrower applies

Potential lenders regard your credit report as important information because, to them, it is a good indicator of how likely you are to repay your loan in full.

If you have a poor credit report, lenders may see you as a higher risk option because they will worry if you will repay the loan in full or not. If you have a good credit report, lenders will believe that you manage your credit well and they will feel more comfortable about lending you money.

Every lender has an obligation to ensure that they don’t offer you loans that you can’t afford. Because of this, credit checks provide loan providers with the crucial information they need to make sure that they’re not going to make things worse for a borrower by lending them money that’s going to be too much to pay back.

Apply for a bad credit loan through Loan Princess

Unfortunately, if you have bad credit, you are likely to struggle to find a bank or other mainstream lender who will say “yes” to your application.

However, people with bad credit still find themselves having to pay unexpected emergency bills and they need to take out a loan to cover it if they can’t get help from friends or family. That’s where Loan Princess comes in.

Loan Princess is an FCA-licenced loan broker which means two important things – you benefit from all the FCA safeguards on payday loans and short-term loans and you only have to make one application, not dozens.

All that you need to do is fill in our quick online form and tell us how much you want to borrow, how long for, and how you plan on repaying your loan. Your application will then be sent to our panel of top bad credit loan providers in the UK.

We work very closely with our panel of lenders so we know exactly what their ideal borrower looks like – but what does this mean for you? Loan Princess’s team of experts match you to the right lenders so that your application has a much higher chance of being accepted than if you had applied with a direct lender.

We only carry out a single credit report for your application – no matter how many lenders want to work with you. We send your credit report to the lenders who want to work with you so they don’t have to do searches themselves.
Once our panel of lenders has reviewed your application, they create a personalised offer for you which is based on your credit history.

If you want a bad credit loan which fits around your life and your circumstances, please apply through Loan Princess today.