Your credit score is the lender’s window into your financial standing. It helps the lender assess how much of a risk you are to them as a borrower. People with a higher credit score are often categorized as ‘creditworthy’ because of their clean payment history.
Your behaviour is a crucial determinant of your holistic relationship with money. Having a low score may be a sign that you need to become more responsible with credit.
A bad credit score doesn’t necessarily hold you back from acquiring credit, but it certainly limits your options. More so, you may not qualify for competitive interest rates with a below-average credit score.
But emergencies are unexpected, and if you urgently need credit, there may not be enough time for you to work on your credit score. This article explores the types of loans available for people with poor credit and how you can apply for them.
What is a poor credit loan?
Creditors usually report all your repayments to credit bureaus, including your utility bills. Each timely repayment that you make gives a boost to your credit score. Missed repayments, on the contrary, show up as negative items on your credit report and hamper your credit score.
If you, for whatever reason, have missed loan or credit card repayments or have struggled to keep up with bills, you most likely have a bad or poor credit score.
Borrowing credit with a poor credit score isn’t impossible but pretty cumbersome – you need to know where to look. The perceived risk of default is usually higher in people with low credit scores. Due to this perceived risk, lenders set high-interest rates for borrowers with poor credit. So, not only may your options be limited, but you may have to pay a high price in terms of interest.
You should, however, choose an offer wisely. People with a poor credit score are well aware of how missed repayments roll into more debt. Weigh the merits and demerits of each credit option to make an informed decision.
How to find personal loans for poor credit?
Whether you have an immaculate credit report or one with a history of missed payments, the process of applying for a personal loan is the same for all. Your loan journey comprises of the following stages:
- Deciding a loan amount: A general thumb rule to abide by while borrowing money is borrowing what one can afford. Carefully assess your financial circumstances before concluding your loan amount. Be confident of your ability to repay this amount once your repayment period begins.
- Self-assessing your credit standing: Pull a copy of your credit report and self-assess your credit score before applying for credit. This practice will help you stay prepared – you’ll know what to expect when applying for a loan. Besides, if you’re planning a loan, you’ll have ample time to improve your credit score. Your first step should be to dispute discrepancies or incorrect items, which can lower your score.
- Applying online: Several financial institutions have warmed up to the idea of online lending portals. You can either apply with an online lender or compare multiple loans with a single platform using a broker. Either media will require your basic personal details such as the address, employment status and income, followed by loan-specific data (desired loans amount/ term).
- Processing time: Lenders usually take some time to process your loan application. Some lenders may take a few days, while some may assess the application within a few hours. These variations change from one lender to another.
- Disbursal: After the lender approves an application, they disburse the amount into your bank account, usually through wire transfer. You can use the proceeds at your convenience, but it is better to use them for the described purpose.
- Repayments: Repayment cycles usually start a few days or weeks after the date of disbursal. Lenders typically give their customers the liberty to choose their repayment date. It is imperative to stick to the repayment cycle until you pay off the entire loan amount.
Can I get instalment loans online for bad credit?
It is possible to apply for instalment loans online, even if you have a bad credit score. Although a bad credit score may curtail your options, it still is possible to get a loan with a below-average score.
Here’s a basic eligibility criterion for borrowing credit:
- You should be aged 18 or above.
- You need to have a current account in a UK bank.
- You should be legal UK resident.
- Your application should demonstrate your ability to repay the loan amount.
In many cases, lenders are hesitant to lend to an applicant with a low credit rating. Although, if you look on the brighter side, paying off a loan borrowed with a bad rating can do wonders for your credit score. Eventually, this will lead to better eligibility for future credit products.
What are the types of loans for people with bad credit?
- Personal loans: Unsecured personal loans don’t require a borrower to provide collateral security. Since there’s no collateral involved, lenders assess risk based on the borrower’s affordability and creditworthiness. Since the perceived risk in the case of bad credit borrowers is high, lenders set high-interest rates on loans.
- Guarantor loans: Guarantor loans are a form of credit wherein a close friend or family member partakes in the loan’s obligations with you. If you fail to keep up with the repayments, your guarantor will be held accountable for settling the dues. A guarantor should ideally have a decent credit score and earn sufficiently.
- Secured loans: Secured loans or homeowner loans are a form of credit wherein you leverage your equity in a property to borrow money. In the event of a default, lenders can foreclose and resell your property to recoup their loss. These loans usually have lower interest rates. Secured loans pose a greater risk to the borrower than the lender since they risk their property to secure the money.
A lot of people sometimes resort to payday loans to bridge their financial gaps. It is in your best interest to keep this option as your last resort because these loans can push you further into debt.
What are the drawbacks of payday loans ‘bad credit’?
The reputation of payday loans precedes the name. The notorious high-cost short-term credit product has long been under the FCA’s radar for unreasonable lending practices. Payday loans APRs can exceed over 300%.
Payday lenders market these loans to target people with low credit ratings who need urgent cash. Try not to fall for these marketing antics, for they can push you into a pool of debt.
Your chances of getting credit as a bad credit borrower may be slim but never zero. However, it is vital for you to make timely repayments as they can boost your credit score. Keeping a bad score consistently can hamper your chances of securing any credit in the future to support your life goals.