Cheap Loans for Bad Credit
Updated: July 28, 2024 Author: Paul Gillooly
Key takeaways: Cheap loans for bad credit are still expensive. The cheapest you’ll find will be secured loans for large sums, or small unsecured loans with a guarantor. The key is to apply to a direct lender that caters to your current financial circumstances, i.e: accepts applicants with a discharged bankruptcy, or a CCJ older than 3 years. Know the eligibility criteria before applying.
What is a Bad Credit Loan?
A bad credit loan is for people with poor credit scores, causing them to become financially excluded from mainstream lenders. Gone are the days when a person would read your application, discuss your situation, consider your budget, and offer a bespoke solution. Applications are automated for the most part, filtering out people with subpar credit. Hope’s not lost though, because there are companies that specialise in servicing the bad credit loan marketplace. The caveat – they charge higher interest rates to protect their increased risk. Cheap loans for bad credit can have rates that make the hair on your neck stand up in horror. There are things you can do to bring those rates down.
How Did We Even Get Here?
You can be pigeon-holed as having bad credit because of unpaid debts, missing payments, or paying irregularly. It can also be because there isn’t enough credit history for a lender to feel comfortable enough to approve on a loan. This tends to apply to young people who may need to borrow money without much of a financial track record.
A Forewarning on Guaranteed Approval Loans
No lender can offer guaranteed approval. The FCA (UK regulatory body) require lenders to conduct a creditworthiness assessment(CONC 5.2A.4). If you can’t afford the repayments, they won’t approve a loan. Websites claiming “guaranteed acceptance loans” will be credit brokers guaranteeing to accept you as a client, with no guarantee from any company on their lending panel. All they can do is guarantee to help put your application together and show it to a panel of lenders. It’s possible to be a fee for doing that despite getting no funds. It’s the ‘administration’ fee.
Understanding the Lending or Qualifying Criteria
The vast majority of lenders are transparent about their eligibility criteria. You can use that information to direct your applications to the most suitable company likely to be able to assist. Applying randomly, or trying to get the cheapest loan rates without checking if you’re eligible first, can significantly heighten your chances of getting a loan rejection. Know this too – the more you apply, the worse your credit score becomes. By the time you get an application in front of a direct lender who can offer the cheapest rates, the accumulation of hard hits on your credit file can make you appear in desperate need of cash. That can lead them to assume financial mismanagement and propose a higher interest rate because of the assumed risk. You could pass the credit check, and the affordability assessment, meet all the lending criteria, and still be quoted an exorbitant interest rate.
The Damning Influence Bad Credit Has on a Loans Total Cost
If you have bad credit, lenders view you as a high-risk borrower. That’s reflected in the interest rates and fees they’ll charge. Each lender has a scorecard or a minimal threshold that must be met for them to approve a loan. It differs by company. Your credit score is irrelevant to the process. What’s important is the information on your credit report.
Some lenders flat out refuse to consider an application from someone made bankrupt ever! Others may state that if it’s been over a year and is discharged, they’ll consider it. An undischarged bankruptcy is the most severe entry, severely restricting your ability to access finance. The recency of events factors in too. A few missed payments several years back may be overlooked. Missed payments in the past 3 to 6 months get alarm bells ringing about your ability to make repayments. As such, interest rates go up because of the perceived risk. The more severe the entry on your credit file is, the higher the interest rate proposed will be.
What Constitutes Bad Credit?
Bad credit is defined by what credit reference agencies use to assign you a credit score. That score is a baseline indicator of your financial standing. It’s updated monthly by the companies you pay your bills to… Credit card providers, broadband providers, energy companies, credit accounts, and now, BNPL providers, too. Miss those payments, it goes on your file.
Spending too much on credit cards can cause your score to drop. So too can paying off personal loans early because aged accounts are factored into the credit scoring algorithms. You could have a stellar financial history and still have bad credit because of how you use what credit you have available. Credit card providers report your credit limit and your balance. Use 90% of your available credit, your score will drop because it’s an indicator of being over-utilised. Credit to debt ratios are best kept below 30%. Knowing how credit scores work will help in the long run, because when you can control (to a degree) what lenders see, you’ll can get lower cost finance.
In a nutshell:
Bad credit is a credit history that demonstrates repeated or regular late or missed payments or, high levels of debt, or both. The only thing standing between you and cheap loan rates is the number on your credit score, but remember, it’s influenced by the information reported on your credit report. They only stay there for 6 years, then the credit reference agencies drop them. Unpaid debts don’t disappear, but they do become invisible to lenders. When they do, you’ll get a boost to your credit score, and be able to access cheaper loans. With bad credit, pay attention to the dates because the nearer it gets to entries being removed, the lower the cost of borrowing becomes. Particularly in year 5 when there are less than 12 months. Lenders will know your score will improve soon.
How Can I Get a Cheap Loan with Bad Credit?
The cheapest loan rates (despite bad credit) go to those with something to use as collateral. You could consider car finance, or if you need a 5-figure loan, secured loans may be an option to explore. When comparing these, use the APRC (Annual Percentage Rate of Charge) for comparison as that factors in all the costs involved over the term of the loan. Not just the APR. Guarantor loans can get cheaper interest rates on unsecured loans because you have someone else assuring the lender that they’ll pay if you fail to repay. Of all the loan types there are, you’ll get the lowest rates from direct lenders, and a significantly higher chance of approval from specialist bad credit loan direct lenders.
Targeting suitable lenders is essential; otherwise, you risk wasting time and having applications fail needlessly, which will reflect on your credit score, potentially making it worse. Free checker tools can assess your eligibility for a standard loan without leaving a record on your credit report. Use these to do due diligence before applying anywhere. Some of the best credit monitoring apps are free so you can use those to see what impact a loan application has on your credit score. After 2 rejections, you’ll likely see the score drop. Wait until it picks up, which takes 3 to 6 months, before applying elsewhere.
If your credit report dictates that you have bad credit, look around the marketplace for the cheapest loans from the available bad credit loan providers. Expect interest rates to be upwards of 39.9% APR with security, and higher than that on short-term unsecured loans. The sooner you repay it, the higher the interest rate. Taking out a long-term loan over 12 months will get a lower APR, but there’s often an early settlement fee canceling out the potential savings of settling the loan early.
The financial horizon may seem bleak now, and will do until your credit score improves. In the meantime, there are strategies you can deploy to lower the cost of borrowing.
How to Get a Better-Priced Loan with Bad Credit
The best way to get a more attractive loan deal is to make yourself more appealing to lenders with a better credit score. That starts with managing your current finances. Consider a zero-budget strategy – you create a budget and allocate every pound of income to something. Assign something to a budgeting app like the free hyperjar account. That money can then be divided between different jars for different expenses. £50 in a savings jar (with a linked card) to use for fuel can make you think twice about spending the extra few pounds at the garage at the coffee machine.
Going forward, good practice for repairing credit includes making sure there are no errors on your credit report. Register to vote – this is one of the quickest and easiest ways to boost your score. Improve your financial habits by paying bills on time. Use Direct Debit, Standing Order, or Continous Payment Authority so you don’t forget. Set phone reminders for the dates your creditors issue statements, like the 5th of the month, “check credit card statement”. The 11th of the month, “check phone bill”. You need to know what the minimum payments are and when the due date is, then pay it a few days before it’s due in case there’s a delay in payment processing.
It’s also important to be strategic when applying for a loan. Do your research and make one or two considered applications. Repetitive, consecutive applications will leave a footprint on your credit report. If you need to make multiple applications, space them out. Consider using a credit monitoring app to monitor your credit score so you know when it’s time to take a breather, stop trying, and look at other ways to bring your budget under control.