1. Bad credit loan
Some lenders and brokers specialise in providing bad credit loans to customers with less-than-perfect credit scores. These loans will often be for lower amounts with higher interest rates.
This is due to the lender trying to balance out the risk they are taking by lending to someone with a poor payment history.
Before you take out a bad credit loan, it’s important to make sure the loan is affordable for you to pay back each month. Otherwise, you could face large penalties and severe damage to your credit score. Any missed or late payments would be recorded negatively on your file and could lead to more serious consequences like a default or a CCJ. This could drastically affect your ability to take out credit in future.
2. Guarantor loans
Guarantor loans are usually taken out by people who have bad credit and are not able to obtain a mainstream loan themselves. A guarantor (i.e. a family member or friend) is required to co-sign the agreement, so their credit score is taken into account too. They formally guarantee to cover any missed payments on your behalf.
If payments fall behind on a guarantor loan it could put the guarantor's own finances at risk. Any defaults that occur are reported on the guarantor’s credit file.
Their liability is only discharged once the debt has been paid in full. If you are looking into this type of loan it’s important that both you and the guarantor are aware of the consequences you could face.
It is also worth noting that these types of loans can sometimes have higher interest rates than mainstream loans, due to the risk involved. This depends on the creditor and your individual circumstances.
3. Debt consolidation loan
If you have many debts, you may want to streamline your finances. You could consider combining your debts together by taking out a debt consolidation loan. Then you would only need to make one fixed monthly payment towards the balance. Please note that these types of debts are not necessarily cheaper and could take longer to pay off, so it is best to shop around for the best deal.
As with the above loans, debt consolidation loans can be either secured against an asset you own, like your home, or an unsecured loan. If you fall behind on secured loan repayments then you could place your assets at risk (e.g. if it is secured against your house, you could risk repossession). Risks with an unsecured loan can include defaults and CCJs on your credit file.
How will a loan affect my credit score?
Maintaining loan repayments over time can gradually help to rebuild your credit score. It indicates to lenders that you can afford to repay the money you initially borrowed.
On the other hand, if you take out a loan and miss 3-6 payments then you could receive a default notice. Any missed payments, defaults or CCJs stay on your credit file for 6 years, which could potentially harm your chances of obtaining credit in the future.
What happens if I get rejected?
All hard applications will show on your credit file, and this can reduce your score. This is because some lenders will view multiple applications as a sign you are struggling financially. For this reason, you should think twice before applying for another loan straight away
Many sites now have eligibility checkers, which perform a ‘soft check’ to indicate whether you will be accepted for a loan before you complete the application. As you can see the likelihood of acceptance beforehand, this can reduce the chances of you being turned down for a loan. Only hard searches appear on your credit file, so soft checks don’t impact your credit score.
You have the right to ask the creditor why you were rejected. You can also request a copy of your credit file from the credit reference agency they used, in case there is a mistake that needs to be updated.
Do I have any other options?
Before taking out a debt consolidation loan, make sure it is affordable and you have done your research. We’d suggest considering the following:
- Check out different loan companies to weigh up your options.
- Look into getting debt advice as an alternative to debt consolidation. There are charities who offer this service for free such as StepChange and Christians Against Poverty.
- As another alternative to a debt consolidation loan, maybe consider a credit card balance transfer. However you may find it difficult to get a 0% balance transfer if you have a poor credit score, and they will usually charge a transfer fee which is around 3%. If you go beyond the agreed interest-free period, then charges will apply.
- Think about using a standard credit card. Be aware that they may have high-interest rates, especially if you have bad credit.
- Consider using an overdraft as a short-term solution for small amounts. Some banks apply interest and charges.
- Look into Credit Unions as an alternative to traditional banks. Members collect their funds together and then lend it to one another when needed.
- See if you are eligible for a Budgeting Loan provided by the government to help cover essentials like clothes and food. Part of the criteria is that you have been on certain benefits for 6 months.
- Potentially ask family or friends for help.
If you are confident in your finances and ability to make repayments, you can apply for a bad credit loan online.
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Intelligent Lending Ltd is a credit broker working with a panel of lenders.