Bad credit loans

Bad credit loans are for people with negative entries on their credit reports. Things that lenders consider to be negative include late and missed payments, accounts in default, CCJs, bankruptcy, IVA (Individual Voluntary Arrangement) Debt Management Plans (DMPs), Debt Relief Orders (DROs), and home repossessions.

Use the Statutory Credit Report option from each of the three credit reference agencies. 

• Equifax 
• Experian
• Transunion

A statutory credit report will show your credit history for the past six years. This is what lenders see when you apply for credit. It doesn’t have to show a credit score, however, that’s only a guideline anyway. Credit scoring models differ among financial institutions.

The quickest way is to use an eligibility checker to see if a lender would consider your application, and if so, which one. Checking your eligibility doesn’t affect your credit score.

The manual method for a thorough lender analysis is to check your report and apply to bad credit loan direct lenders with an eligibility criteria that match your credit history.

Some subprime lenders will accept applicants with a CCJ as long as they are over 3 years old (as an example). If you have an active IVA or similarly serious negative marker on your credit report, you’ll need a specialist lender.

The eligibility criteria of the lender you apply to is what matters. Not just your credit score.

A loan to pay off debt is called a debt consolidation loan. Bad credit loans have higher interest rates due to the higher risk the lender assumes, but they could be more affordable for paying off multiple higher interest-bearing debts, such as a high balance on a high APR credit card, a payday loan, and car finance, provided the APR (Annual Percentage Rate) is lower than those of the debts being paid off.

Personal loans: Personal loans for bad credit are standard unsecured loans. The lack of security for lenders pushes interest rates higher.

Secured loans: Secured loans for bad credit require an item to be used as security, usually your home. Car finance can be secured against the vehicle, and homeowner loans are secured against your home. Interest rates are lower than personal loans because the lender can repossess the item used as security to recoup the money owed if you fail to keep up repayments.

Guarantor loans: A guarantor loan requires two signatories on the loan agreement; the primary applicant and the co-signer/guarantor. If the primary applicant defaults, the guarantor becomes liable for repayments. In that respect, these are a type of secured loan and that may be reflected in the interest rate offered. It helps to have a guarantor with a good credit rating and both applicants will be subject to affordability assessments. Lenders are required to do this for Responsible Lending purposes.

You may need proof of ID, proof of income, and proof of expenses. Lenders might ask for recent copies of your bank statement, or they may use Open Banking to view bank statements online, speeding up the process. The purpose is to assess whether you can afford the monthly repayments.

Authorised lenders are regulated by the Financial Conduct Authority, requiring them to conduct a creditworthiness assessment. Failing to carry out a reasonable assessment for affordability can see complaints escalate to the Financial Ombudsman for unaffordable lending practices.

Firms that provide loans to people with bad credit generally approve applications on the basis of your ability to repay rather than your credit history.

Some lenders cater to people with a poor credit history and are either on a low income, or receiving certain benefits, such as Personal Independence Payments, or Carers Allowance. It’s also possible for lenders to assess income as earnings from employment only, in which case, any top-up income from Universal Credit or Working Tax Credit may not be counted as income for the purposes of an affordability assessment.