How to Borrow Money with Bad Credit

Your guide to the how/consequences of borrowing with bad credit…

Updated: May 21, 2024
Matt Crabtree

Written By

Matt Crabtree

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Even if you have poor credit, you may still qualify for a personal loan, but you can expect to pay a high interest rate. If your credit history is less than stellar, you may want to work on raising your score before applying for a loan. Let’s find out how to borrow money with bad credit.

Borrowing with bad credit

Loans for bad credit often have whooping interest rates of around 49%. By comparison, a basic unsecured personal loan has a minimum interest rate of roughly 3%. For this reason, it is prudent to work on raising one's credit rating prior to the loan application.

Annual Percentage Rate is an abbreviation for that. The total amount paid over the course of a year to borrow money, including interest and fees. A poor credit history is reflected in a bad credit score.

Three credit reporting agencies (CRAs) have your credit file, which goes back six years.

Some causes of credit problems include:

  • Payments that are missed, late, or in default
  • Judgments from the county court, individual voluntary agreements, and bankruptcies
  • Being unregistered to vote
  • Inconsistencies or blunders, such as obsolete addresses being used for accounts
  • If you've never used a credit product before, you won't have a credit history.

You will not be eligible for membership if you have any outstanding CCJs, are making payments on an IVA, or have not yet been freed from bankruptcy.

Your bad credit borrowing options…

Do other options exist besides bad-credit loans? Even if you have a low credit score, you still have options outside of poor credit loans. Among how to borrow money with bad credit are these options:

  • Finance planning
  • Financial co-ops like credit unions
  • Loans for those with poor credit
  • Sponsored Loans
  • Mutual aid borrowing
  • And more (let’s investigate)… 

1. ★ Borrowing from loved ones

Get a loan from a reliable source. It's possible to get a better interest rate and more accommodating conditions on a loan from a person you already know and trust than from a bank or other financial institution. 

First, make a deal. Discuss the terms of the loan, including repayment and any interest that may be charged, with the person lending you the money. Make sure you're honest with the creditor about your situation and when you anticipate being able to pay them back so that the transaction doesn't strain your connection. 

Put it to paper. It's smart to formalise your understanding with a written contract. This will ensure that there is no misunderstanding down the road regarding what was agreed upon.

Lenders often require borrowers to sign promissory notes and have them notarized for added credibility in court. Take this loan as carefully as you would a borrowing from a bank. Find information about cosigning.

You may ask a friend or family member to cosign for a bank loan if you need to borrow more money than they can or are prepared to lend you on their own. If the person you've asked to cosign the loan has superior credit, you may be able to negotiate a far more favourable interest rate.

Remember that if you default on your loan payments, it might have a serious effect on your friend's or family member's credit rating. If you can't afford to repay a loan in your own name, don't take one out in someone else's. In this instance, your rate may change depending on the credit history of a close relative or friend. 

To figure out what your loan payments will be and when they are due, use a loan repayment calculator.

2. ★ Credit unions for poor credit

Credit unions serve as local institutions for saving and borrowing. They often have modest rates, far lower than those of payday or title lenders.

A credit union may be an excellent choice for a modest loan (often less than £3,000) if you have one nearby. Some credit unions require membership before lending money. Some need an initial deposit or a commitment to begin saving.

Go to a credit union in your area. Credit unions are cooperative savings and loan associations rather than for-profit corporations. Credit unions operate under a distinct business model, which allows them to charge cheaper fees and use factors other than borrowers' credit scores when making lending decisions.

The rate will be high if your credit is bad, but it won't be as expensive as it would be with a major financial institution. Make a deposit. Due to the cooperative nature of credit unions, loan eligibility is contingent upon membership.

Credit union account opening procedures are identical to those of traditional banks. A bank employee will assist you with opening a checking and/or savings account provided you come prepared with the necessary funds and identification.

Inquire about a loan. Discuss your loan options with a credit union banker and complete the required documentation. The banker you speak with at a credit union will be more likely to examine your unique set of circumstances when deciding whether or not to grant you a loan.

If you've had a loan application turned down by a big bank, try applying to a credit union instead.

Bad credit will still mean that whatever cash you obtain will only be provided at a high interest rate, so you shouldn't expect to acquire a loan under the same terms and circumstances as if your credit was good. The bank is taking on more risk by extending loans to you than it would to someone with a higher credit score.

The exact rate you'll pay depends on the loan package your credit union presents you with. To figure out what your loan payments will be and when they are due, use a loan repayment calculator.

3. ★ Budgeting loans & credit cards for poor credit

Government budgeting (Best Budgeting Apps) loans are zero-interest loans. The maximum loan amount is £812, and it may only be used for certain things like rent in advance or a funeral. You must have received one of the following benefits for at least six months to qualify for a budgeting loan:

  • Pension Allowances
  • Help with Money
  • Benefits for Job Seekers Based on Income
  • Benefits for Working Families and People with Disabilities
  • You may be eligible for a Budgeting Advance rather than these benefits if you are receiving Universal Credit.

To find out how to borrow money with bad credit this way, the Budgeting Loan application form is available on Gov.UK.

Meanwhile, credit cards for poor credit, also referred to as “credit-building” cards, are credit cards for those with poor credit ratings and minimal spending limitations. With a negative-credit credit card, you may avoid paying exorbitant interest rates and establish or improve your credit history. 

Nonetheless, monthly payments must be made in whole and on schedule. If you don't make your payments on time, you risk incurring late penalties and having your interest rate increase.  

4. ★ P2P loans for poor credit

Personal loans from individuals who lend you money from their savings in return for interest are known as “peer to peer loans”.

You may find that your application receives more favourable consideration from these lenders despite your low credit score. Loans for those with poor credit may provide lower interest rates.

Many firms that facilitate borrower-lender connections have sprung up since 2005. The possible benefit is that both the creditor and the borrower may benefit from a higher return on their investment than they would get at a bank.

Prosper, Lending Club, and Peerform are just a few of the websites that offered this kind of lending between individuals. Loan comparison websites, such as MoneyLend, LendingTree, and eLoan, are another choice.

You may use these websites to find out whether you qualify for a loan and get an estimated interest rate ranging from 5.9% to 36% or more based on the amount you want to borrow, the reason you want to borrow it, and your general credit status.

You’ll be given a high-level description of how to apply for a loan on one of these platforms.

The specific actions required might vary greatly based on the kind of loan being sought and the lending website.

📕 Getting a peer-to-peer loan…

Register yourself with one of the sites above, or somewhere else, if you’re learning how to borrow money with bad credit directly from individual human lenders. If you decide that peer-to-peer borrowing is the route for you, the first step is to open an account and provide the necessary personal details for a credit check.

Make a loan request. When you've created an account, you may apply for a loan and outline its purpose and desired amount.

Here is your chance to present yourself in the best light possible to prospective lenders. In this section, you should include anything that will help you seem to be a more secure investment, such as your track record of repaying previous loans or the novel ways in which you intend to utilise the funds.

Put in an offer and wait. You now need to wait for a creditor to make you an offer if they see you as a worthwhile investment. The loan might be offered in one lump sum or in multiple smaller installments.

Expect the terms and circumstances of any offer you get from a peer-to-peer lending site to be less favourable than they would be if your credit was strong, just as you would with a loan from a commercial institution.

Several of these businesses advertise rates “beginning at 5.5 per cent” or make similar claims. The yearly percentage rates stated in their loan agreements typically range from 12% to 16%, with higher rates being requested for more precarious loans (up to 36%).

For instance, one of these services may have a typical rate of 15% interest + 1% origination charge. If you borrowed £10,000 and paid it back over 24 months at £500 per month, the total amount you would pay in interest and fees would be less than £2,000. Around 20% of the total loan amount has already paid back. 

Reach a compromise. You will negotiate terms with your creditor(s), who will then provide you with the money you need. The repayment of the loan is tracked and bills are processed automatically by the website in most cases. Some websites may ask for a “source” or “origination” fee, so keep that in mind. 

When applying for financing, make sure you read the terms of service.

5. ★ Sponsored/guarantor loans for poor credit

A guarantor loan is a personal loan in which another person (the guarantee) promises to repay the amount in your place if you fail to do so. Since the lender has collateral to ensure repayment, the interest rates may be lower than for loans to those with poor credit.

Before listing a guarantor on an application, you should confirm the information with them. Given the magnitude of this undertaking, they should have excellent credit and sufficient equity in their home (ideally, at least 50%).

If you want to know how to borrow money with bad credit this way, make sure your guarantor has a great track-record and can vouch for you. 

Using a secured loan…

With the allure of “one reasonable monthly payment”, secured lending companies will try to persuade you to consolidate your obligations. Nevertheless, secured loans are pricey and might lead to foreclosure if you default. For your wallet's sake, you should stay far away from them. This guide's primary goal is to assist you in locating less expensive options.

When you take out a secured loan, you pledge an asset (like your house) as collateral. As the name implies, these loans are only available to those who own a house to use as collateral for the loan.

The promise of safety is appealing, but…

Secured loans protect the lender against loss rather than you. A standard unsecured personal loan, therefore, is far preferable to a mortgage-secured one.

Most importantly, understand that your lender may seek a court order to sell your house to recoup any money it is due if you fail to or are unable to repay the loan.

Borrowing money against your assets is risky business and should only be done as a last option. Personal loans, low-interest credit cards, and mortgage extensions are all better options for those with good credit than payday loans.

1. ★ Home financing loan

A secured loan is one in which an asset of yours serves as security for a loan. A home equity loan is a kind of secured loan that allows you to borrow money based on the equity in your home. 

Your home's equity is its market value less any remaining mortgage balance. If you own a property worth £100,000 but still owe the bank £30,000, your equity is £70,000. When your property is used as collateral, the interest rate on such loans is often rather cheap.

This implies that the bank will be less likely to lose money on these loans regardless of how low your credit score is. 

The interest is usually deductible from your income. This makes this form of loan one of the most secure and inexpensive possibilities, in terms of APR, for those with poor credit. Learn more about these loans by discussing your options with your lender.

Keep in mind, too, that you could get a better price with a credit union. Take care! You risk losing your house if you can't keep up with the mortgage payments.

2. ★ Car secured loan

As I often say, not everyone has the wealth of assets to back buying Twitter. But for regular folk, it’s possible to finance your vehicle with a title loan. 

But learning how to borrow money with bad credit can be easier if you have equities. A car title loan is secured by the title to your vehicle, just as a home equity loan is secured by the equity in your house. You should realise that vehicle title loans may have interest rates of up to 300% before you even consider applying for one.

A vehicle title loan, in contrast to a home equity loan, often has a higher interest rate and a shorter repayment term of just 30 days. Get in touch with a title loan provider and bring your vehicle, its title, and a valid form of identification. When you've paid off the loan and interest, the lender will give you back the title to your automobile.

A duplicate set of vehicle keys may also be requested by certain title lending companies. Be careful to inquire about the total amount due and the repayment term's end date. If you can't afford to pay back your loan in 30 days, you risk losing your vehicle. 

According to research, borrowers typically spend a bit less than £2,000 in interest on a £1,000 title loan. Inability to make a timely payment usually results in a rollover of associated costs.

3. ★ Stop by a pawn store

If your savings account is running on empty, to get your hands on some fast cash, you may utilise an item of value as collateral at a pawn shop. Most pawn shops will lend you about £150.

A pawnshop will offer you cash in exchange for your valuables. After a certain period of time, you may get the item back by paying back the loan plus interest to the person holding it. The broker will sell the goods to recuperate charges if you do not pay back the loan by the due date.

Don't put up for pawning something you'd really miss if you lost it. There is nothing you can do to get your item back from the pawnshop after the contract has expired and it has been sold. Don't count on getting anything close to what the item is worth now. The pawnshop's profit comes from taking on the risk of eventually reselling the item at market value.

Don't throw away the counterfoil. The pawnshop will provide you a ticket or receipt that may be used to reclaim your property at a later date. Put it somewhere safe, and make sure you remember when you need to return it. 

Pawn shop loans have fixed interest rates regardless of your credit history since the collateral you put up is regarded to be payment in full for the loan. These loans might have interest rates anywhere from 12% to 240% per year, depending on the laws governing pawn shops in your state.

At the high end, you'd have to pay back twice as much as the item's worth over the course of five months.

Can a person with poor credit get a loan?

You can still borrow money through a store or online broker, but you won't get the greatest terms or interest rates if you have a poor credit score. A bad credit loan is a kind of loan that many lenders will be willing to provide you since they can reduce their risk by lending money to those with poor credit.

Overall pros & cons of borrowing for poor credit…

Taking on more debt might feel like a huge risk if your credit score is already low. As long as you keep your accounts in good standing, you may see an improvement in your credit score as a result.

Your credit score should rise as time goes on if you have a history of borrowing money and repaying it in a timely manner, showing lenders that you are able to responsibly manage your finances. Because of this, you may be able to get the greatest prices in the future.

But, you should never borrow more money than you can comfortably pay back. Due to the higher interest rates associated with negative credit loans, your monthly payments will be greater than they would otherwise be.

For this reason, it's smart to research your options thoroughly before applying for a loan or other kind of financing. Be sure you can easily afford the monthly payments after you've paid your bills, rent, and mortgage, as well as any other necessary outgoings, by using a budgeting calculator to figure out how much money you'll have left over each month.

If you take on more debt than you can handle, you may find it difficult to keep up with the payments and your credit may suffer as a result. Because of this, obtaining financing in the future will be more challenging for you.

You may still get a loan even if you have a poor credit history. You may still gain access to money that works for your needs if you choose the correct loan product and maintain a strict budget

Interest rates for applicants with bad credit

So, what is the interest rate on a loan for those with terrible credit?

Since lenders are taking on greater risk by lending you money, the interest rate on a poor credit loan will be higher than that on a loan for someone with a strong credit score. It indicates an effort to offset any losses by increasing rates.

The specifics of a loan agreement are determined by many factors, including the lender's risk appetite and the borrower's credit history and score. But, since your house is being used as collateral, secured loans are often less expensive than unsecured ones.

Loans calculator will help you estimate how much you'll pay in interest and principal over the course of a loan. You may enter your monthly income and expenses, and the calculator will tell you how much you can borrow.

Summary…

Applying for a Loan When You Have Bad Credit

That summarise how to borrow money with bad credit. If you need a loan but have low credit, be sure you qualify for it before applying. Your credit can take a hit if you are turned down. Your application may also be affected by the following:

  • Savings 
  • Your current age
  • What you owe right now
  • Regular expenses

When applying for a negative credit loan, it might be helpful to do some research to see if any potential lenders provide a free eligibility check.

A “soft search” is another term for this. Credit scores are unaffected by “soft” searches, since they are not reported to credit bureaus. These function differently from “hard searches”, which are recorded when you officially request credit.

If you need a loan and have terrible credit, tell the truth even if it hurts. If you provide false information or omit necessary information on your loan application, the lender may reject your application and require you to repay the whole loan amount plus interest.

Consider your own situation carefully before submitting an application. Think about how much of a monthly payment you can easily afford to make without putting undue strain on your budget. Borrowing more money than you can reasonably pay back may have serious consequences, including fees and a drop in your credit score.

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