If at any point in your life, you've needed to borrow money, you're most likely familiar with the concept of a credit score and why having a strong credit rating is essential.
Many people have a poor credit score that prevents (or at least makes it more complicated) them from obtaining loans, credit cards, or even mortgages.
This can be stressful if you're in need of financial assistance and there are lenders that offer loans for bad credit. In this article we'll explore what they are, how much they cost, who they are suitable for, and where to find them.
Lenders that offer bad credit loans
While you've got some options when it comes to securing a loan, not all lenders are created equal.
For example, while some lenders may specialise in providing low/attractive interest rates, they may not give out larger loan amounts.
Let's take a quick look at some of the lenders you have at your disposal.
| Provider | Score | Details |
|---|---|---|
| 1. Bamboo Loans | ★★★★★ | Learn more |
| 2. Everyday Loans | ★★★★★ | Learn more |
| 3. Amigo Loans | ★★★★★ | Learn more |
1. Bamboo Loans
A UK-based lender that specialises in providing personal and unsecured loans for those with bad credit.
Not only have they streamlined their application process by removing the need for a guarantor, their loans range from around £1,000 to £8,000 with repayment terms of 1 to 5 years.
Interest rates range from 26.9% to 69.9% APR depending on your creditworthiness.
Bamboo Loans also offers a free credit checker tool to give a little bit of assistance to anyone who's having issues understanding their credit rating and how to improve it.
2. Everyday Loans
Loans range from £1,000 to £15,000 over a period of 2 to 5 years, but it's worth noting that their rates are on a case by case basis, so make sure you speak to one of their support team members if you'd like an accurate quote.
They're also a direct lender rather than a broker, so this means you can cut out the middleman and avoid paying any random application fees that you might find with other lenders.
3. Amigo Loans
Another UK-based lender that specialises in offering guarantor loans to individuals with bad credit is Amigo.
Their services are actually a little bit different from the other two lenders, as you'll need to have a guarantor who can support your loan application, and they'll need to have a good credit score.
In this kind of scenario, the guarantor acts as a co-signer, offering additional security to the lender and increasing the likelihood of approval. If the loan can't be paid back, it will be the guarantor who has to cover these payments.
In terms of the numbers, Amigo Loans offer sums of up to £10,000 with interest rates starting from 49.9% APR.
What is a bad credit score?
Put simply, bad credit is a term used by banks and other financial institutions when they're describing a credit score that's less than optimal.
Credit scores themselves are simply a three-digit number ranging from 300 to 850 that represent how reliable someone is at repaying their debts.
Anything above 580 is usually considered to be a good credit score, and as such, the banks roll out the metaphorical red carpet for you when trying to secure credit. They're aware that you're likely going to pay it back promptly and without any hiccups, making it an enticing offer for the bank.
Conversely, those with a credit score below 580 are less favoured by the banks, as it signifies that you might be less straightforward when it comes to paying a loan back.
As a result, any borrowers with low credit scores typically have trouble obtaining loans from traditional lenders.
Importance of finding the best loans for bad credit
If you find yourself in a situation where you have bad credit, it's in your interest to rectify it if you're looking to improve your financial health in the long term.
Aside from more mainstream, lenders refusing to issue loans for you, some lenders may take advantage of your poor credit score by offering you loans with high-interest rates and generally unfavourable terms.
This is why it is important to compare bad credit loans online so you're not paying more than you have to. There's a range of options specifically designed to help you rebuild your credit score by offering affordable interest rates and repayment terms.
The idea is that by making timely payments on these loans, you can demonstrate to future lenders how you're a responsible borrower and have improved your credit score.
Read About: How to Improve Your Credit Score
Understand your credit score
So, how exactly is your credit score calculated? Basically, the final score you'll see when taking a look at it is comprised of a few different factors:
- Payment history
- Credit utilisation
- Length of credit history
- Types of credit
- New credit inquiries
Out of all of these, the two most critical variables are always payment history and credit utilisation, making up 35% and 30% of your score, respectively. Payment history looks at whether you have paid your bills on time, while credit utilisation looks at how much credit you are using compared to your credit limit.
No matter the reason, it's always worth keeping regular tabs on your credit score, but this is especially important when you're planning to apply for a loan or credit card.
If you check your score on a more regular basis, it gives you a more accurate and up to date picture of where you currently stand. This gives you an opportunity to make any necessary changes if there's any glaring errors.
For example, if you have a high credit utilisation rate, you can pay down your balances to improve your score.
How to check your credit score
While it sounds slightly complicated, the process of checking your credit score is actually pretty easy.
At this point, you can utilise a few different credit reference agencies like Experian or Equifax. These agencies calculate your credit score and it's free to check it with them.
First, you'll have to start an account on a credit reference agency's website and provide them with a bit of personal information. This is to check you're who you say you are and usually includes: your name, address, and date of birth. You might also be asked to give them any details surrounding your income and employment.
After you've given them all they needed, the agencies will begin generating a credit report and score specific to your own personal finances. This report that they make shows you your credit history, including any loans, credit cards, or other forms of credit you've applied for or used in the past. It also points out any times you've missed payments.
Alternative methods
Aside from those credit reference agencies we just mentioned, there are also credit monitoring services which you can pay for. These services allow you to monitor your credit score and give you reports on a regular basis, often sending alerts when there are any changes or updates to your credit file.
While there's often rumours that regularly checking your credit score can adversely affect your credit rating, we need to put these to bed as they're simply not true.
In fact, checking your rating at frequent instances lets you identify any errors that might be apparent in your credit report, and you can then arm yourself with this knowledge when disputing and correcting them with the credit reference agency.
Consider different types of loans
As we touched on earlier, many of the major and more traditional lenders are probably unwilling to extend credit to anyone with a below average credit score.
However, there are several types of loans that are specifically available for people with bad credit.
In this section of the article, we'll explore the different types of loans available and provide insights into the pros and cons of each of them.
Secured loans
These are loans backed by collateral, which typically means providing an asset to the lender that they can seize if you failed to make the payments. Some of the more common forms of collateral include things like a car, home, or other valuable possessions you may have.
Secured loans are often easier to obtain for people with bad credit since the lender has a safety net in the form of collateral.
We mentioned earlier how a low credit score normally indicates that you have trouble paying the loan in a timely fashion, which is a big concern for the lender. Since you provide them with something valuable upon receiving the loan, the risk on their end is mitigated as they simply seize the asset until you repay it.
As a result, a secured loan usually has lower interest rates compared to unsecured loans.
| Pros of secured loans | Cons of secured loans |
|---|---|
| ✔️ Easy to obtain for people with bad credit | ❌️ Risk of losing collateral if payments are not made |
| ✔️ Lower interest rates compared to unsecured loans | ❌️ Longer approval time since collateral must be assessed |
| ✔️ Larger loan amounts may be available | ❌️ Possibility of incurring additional fees |
Unsecured loans
On the other hand, unsecured personal loans don't require any kind of collateral and are backed only by how high your credit score is. While you don't need an outrageously high credit score to take one of these out, you might find that they're a bit harder to obtain if you have a sub 500 credit score.
So, although they're not specifically built for people on the wrong side of the credit rating, you can still opt for one of these loans if you're not in the doldrums yet.
Unlike their counterpart, unsecured loans usually have higher interest rates compared to secured loans as there's no collateral to back you up.
| Pros of unsecured loans | Cons of unsecured loans |
|---|---|
| ✔️ No collateral required | ❌️ Can have high interest rates |
| ✔️ Typically faster approval time compared to secured loans | ❌️ Might be a bit harder to obtain a smaller loan |
| ✔️ A good option for people with no collateral or those who don't want to risk losing their assets | ❌️ Not as easy to obtain for people with bad credit as it is for a secured loan |
Payday loans
If you're looking for a loan that can help you in the short term, payday loans are another popular option that are designed to be repaid whenever your next payday is.
What sets these loans apart from something like an unsecured loan is how easy they are to obtain, even if you have a poor credit rating.
However, they normally come with extremely high-interest rates and fees, which can make them a risky financial option.
| Pros of payday loans | Cons of payday loans |
|---|---|
| ✔️ Easy to obtain | ❌️ Abnormally high interest rates in comparison with other popular loan options |
| ✔️ Fast approval time | ❌️ Risk of getting trapped in debt cycles |
| ✔️ Small loan amounts may be available | ❌️ Limited loan amounts |
Lenders that specialise in bad credit
There are several lenders that specialise specifically in providing loans to people with bad credit.
These lenders are aware of the unique challenges that people with bad credit face and are happy to take on the risk.
However, expect the fees and interest rates to be higher than loans offered to those with good credit scores.
Shop around for the best rates
Remember, receiving loans without the perfect credit score is harder, but by no means impossible.
The key for this sort of thing is to take a look at different lenders and compare loans so you're left with the best rates for your current status.
How to find the best rates
Fortunately, there's a few different strategies you can employ when trying to compare rates. One of the more popular options is to use one of the many comparison websites on the internet like Credit Karma.
Services that fall into this category are incredibly effective when looking for the best lenders as you get to see all of them in one convenient location, and you can normally filter them based on your specific requirements.
All of this stuff adds up and can make all the difference when seeking the best deal possible.
Another strategy is to work with a loan broker. These are people that can help you find lenders that specialise in bad credit loans and can even leverage their financial nous to negotiate lower interest rates on your behalf.
Yes, they do charge a small fee on behalf of their services, but it's likely that whatever money you save on interest will far outweigh the cost of hiring a loan breaker.
Beware of scams
Unfortunately, the desperation involved in getting a loan when you're experiencing financial hardship has opened the window for scammers looking to make a few quid from those in need.
Let's explore some of the more common scams targeting people with bad credit and provide tips on how to avoid falling victim.
Scam examples
One of the oldest tricks in the book for scammers is the “advance fee loan” or “guaranteed approval” offer. In this scam, a lender promises to approve your loan application regardless of how shaky your credit history may be, under the condition that you first pay an upfront fee. Do you see where this is going?
Once you pay the fee, the lender mysteriously disappears, and you never receive any more.
Naturally, these scams are particularly harmful as they prey on those already struggling financially and often make their life worse.
Next up we have the “phishing scam”, where fraudulent lenders contact you by email or over the phone to request some personal information like your bank account details.
As this can be a pretty standard procedure in some application processes, they prey on your ignorance by claiming to be a legitimate lender and will instead use the information to steal your identity or access your bank account.
Remember, before signing up to any financial lenders, please exercise some critical thinking and perform your due diligence before submitting an application or providing any personal information.
Ensure you're doing things like checking credentials, reading reviews from previous customers, and double-checking they're registered with the relevant regulatory bodies. You should also be wary of lenders who are pushy or who pressure you to sign up quickly.
