There’s not just one type of bad credit loan – there are many different types out there which we’ll cover in details in this article for you. The term “bad credit loan” is more of a term describing the financial history of the type of borrower who wants to apply for one.
Please note that there’s absolutely no judgement in that statement. After what we’ve been through as a country for the last ten years, millions of us have fallen on hard times through no fault of our own. For the best part of ten years, prices in the shops were rising much faster than our wages and, for many people and their families, at some point something had a give – a missed mortgage payment here, a default on a credit card there.
The problem is that, even though we all know this has been going on, the banks aren’t interested in lending to anyone who doesn’t have a perfect credit history. It’s almost like they want to lend money to people who don’t even need the money – I’m sure you’ve heard the old expression that “the banks are quite happy to lend you an umbrella until it starts raining!”.
The good news is that many finance companies have a much more realistic, friendly, and open-minded attitude to working with people whose credit history is less than perfect. The downside is that, as a bad credit applicant, you have to pay a higher interest rate than the interest rate you’d receive if you got a loan from your bank.
Generally speaking, therefore, a “bad credit loan” is a loan with a higher rate of interest – that’s probably the most accurate definition.
Is it worth taking a bad credit loan out?
Debt is only generally a bad thing if you can’t pay it back. If you need to take out a bad credit loan and you’re absolutely certain that you know where the money is going to come from to pay it back, it probably would be worth it for you.
If you take out a bad credit loan and you successfully make all the repayments on time and in full, it could actually improve your credit rating meaning that, in the future, you have a wider range of lenders to approach who could offer you finance at or near to what the bank would charge you.
Better than all that though is not taking out a loan at all. Unless you have an urgent need for the cash – for example to pay for funeral expenses, car repairs, or medical bills – you might be better to bide your time and save up for a few weeks or months.
What type of bad credit loans are there?
There are 5 main types of bad credit loans available to borrowers in Britain and they are:
Payday loans belong to a group of financial products called “high-cost short-term credit” loans – HCSTC for short. There are some distinct advantages to HCSTC loans which we’ll cover in a minute but payday loans allow you to borrow an amount of money (normally between £50 and £1,000) which you then pay back all in one go plus interest on an agreed date. That agreed date could either be the next time your boss pays you or a day that you choose within the next 35 days.
Many people find settling a payday loan account all in one go a bit of a financial stretch. Many payday loan companies have started to offer short-term loans lasting between three months and twelve months – you might see them referred to elsewhere as instalment loans.
By splitting up your repayments over three to twelve months rather than paying it back all in one go, borrowers pay back a smaller amount every month. However, because the loan is taken out over a longer time, borrowers end up paying more in interest over the length of a short-term loan than they pay with a payday loan.
Just like payday loans, short-term loans are also “high-cost short-term credit” loans. Unlike all other types of finance offered in Britain, HCSTC loans come with three rather unique protections:
• there is a cap on the interest you pay – no more than 80p per day for every £100 you borrow,
• you’ll never pay more than a £15 default fee if your lender is unable to collect payment on the date agreed, and
• when you add the interest and any other fees levied against you during the life of a loan, the sum will never be higher than the original amount you took out. In other words, if you borrow £100, you’ll never pay back more than £100 in interest and fees on top of the original £100.
Guarantor loans are a relatively new phenomenon in the UK – in the eyes of many, they’re an unwelcome development in the world of finance.
Basically, when you take out a guarantor loan, you have to find someone who will promise to pay the loan back on your behalf if you can’t make the repayments yourself. We’re absolutely sure that the vast majority of the readers on our site benefit from having family and friends who would jump at the chance of helping them if they got into financial trouble.
The problem for us and many others with guarantor loans is the damage they wreak on long-established family relationships and friendships if the guarantor is forced to step in and make a payment on behalf of the borrower. How would you feel about being put in that situation?
The guarantor you find must have a brilliant credit rating and be a homeowner. Despite the fact that the person guaranteeing your loan needs to be financially solid, guarantor loan companies still charge in excess of 50-60% in interest rates every year in many cases.
A logbook loan company will take possession of your car before they lend you any money and they’ll only lend you up to 70% of the value of your car when you take out a loan. You can continue to drive your car as normal as long as you’re making the repayments and you’re not in default on the loan. If you make all the repayments, the logbook loan company returns ownership of the car to you.
Homeowner loans, like your mortgage, are secured on your house. More precisely, they’re secured on your equity – that’s the difference between the market value of your home and the size of the mortgage left on it. If you default on a homeowner loan, your home is at risk of repossession.
Homeowner loans do allow you to borrow a great deal more than the other types of loan we’ve mentioned in this article. You can borrow the money (in many cases) over a 25 year period and the interest rate, even as someone with a bad credit history, will be much lower than payday loans, short-term loans, guarantor loans, and logbook loans.
However, unlike payday loans, short-term loans, guarantor loans, and logbook loans, a survey will have to be done on your home prior to an offer being made by a lender. That means that while you may get an in-principle “yes” in minutes from a homeowner loan provider, you may have to wait up to four weeks to get your money.
Should I use a bad credit loan to settle other debts?
Debt consolidation loans have become very popular in recent years. Credit cards, overdrafts, loans, and other types of financial products have been available in abundance for many years and many Brits hold multiple different accounts at different rates of interest. Actually understanding how much you owe and how much it costs you every month can be extremely difficult to work out.
The thinking behind a debt consolidation loan is that you pay off all of your other debts by taking out a loan at an interest rate which is lower than the interest rates on your current debt. That means, in theory, you can have more money left at the end of every month and you can get out of debt faster.
Of all the types of finance listed on this page, homeowner loans are the only type of loan likely to have a cheaper interest rate on them than credit cards, overdrafts, loans, and other types of financial products. There’s a good argument for taking out a debt consolidation loan in this type of scenario but always do your sums first – it may be even better to speak to Citizens Advice Bureau to get their opinion.
However, please do not use expensive bad credit loans like payday loans, short-term loans, guarantor loans, and logbook loans to pay off other loans. If you find yourself in this situation, please contact one of the following charities for help and support without delay:
Bad credit loan interest rates
For all applicants with bad credit histories, the interest rates you’ll pay will almost certainly always be higher than the interest rates paid on loans made to people whose credit histories and current financial situations are good.
Because if this is the case, please make sure that you only borrow the smallest amount of money over the shortest length of time possible and that you’re certain that you can meet all the repayments on your bad credit loan in full and on time.
Should I use a broker?
You can either approach a lender directly or you can go through a broker. It’s not very well known but you don’t, in most cases, pay more for a loan you get through a broker than you do going direct to a lender. When a broker introduces a borrower to a lender and that borrower goes on to take out a loan, the broker receives a small commission – that’s how companies like Loan Princess make their money. Brokers are paid this “thank you” bonus out of a lender’s marketing budget.
For lenders, it doesn’t really make a difference to them whether you approach them directly or through a broker. Why they like to work with brokers is that brokers are very careful to only present borrowers to a lender where an applicant’s details are similar to the ideal profile of borrower they want to work with.
Lenders generally only share this information with brokers – that’s why brokers have very high acceptance rates. Brokers save borrowers time and money and brokers save lenders money by presenting them with the type of borrowers they like to work with.
Can I get a bad credit loan through Loan Princess?
You can get a bad credit loan through Loan Princess – we’re brokers though and not lenders. What that means for you is that, when we have your details, we take them and the details on your credit file and we then use all that information to match you to the lender most likely to say “yes”. You don’t have to wait around though – our loan-finding service takes seconds.
We don’t charge borrowers a penny for our service and you’re under no obligation to accept the best offer we find you. When we find what we think is a great offer, we’ll show you all the details you need to know about costs, interest rates, and the number of repayments on the screen. Read the details closely and carefully and, if you’re happy with the details and you know how you’re going to repay the loan in full and on time, sign the online form.
To start your application, please click here.