Instalment Loans For Bad Credit

Updated: May 07, 2024 Author:

Key takeaway: Having a bad credit score doesn’t invalidate your eligibility for loans. It only means you have to approach the right lenders. With instalment loans, you can get the funds you need at the right moment, with a more flexible repayment plan. Your credit history will be checked and approval is not guaranteed. But you can boost your chances by applying with an asset for security or by having a guarantor in a better financial standing. 

When you need money for important or emergency expenses, a loan can quickly bail you out. Loans give you timely access to essential funds you don’t immediately have. This enables you to take care of those financial obligations, with a plan to pay back the amount borrowed at a later date. 

Having bad credit hinders your approval chances for loans, especially when you approach traditional credit institutions like banks. As a result, it always pays to explore your options before filing any loan application. If you have a poor credit history, instalment loans are one of the best options to explore

What are Instalment Loans?

All loans are typically paid back in two formats. The first option entails paying the entire amount borrowed plus interest in one big payment. Payday loans are usually like this. After getting approval, the full amount borrowed plus interest and fees are paid back at the end of the month when you get your paycheck.  

The other option is to pay the loan back in fixed amounts at regular intervals, spread over a specific period of time. That’s what instalment loans are. They are much better loans for people with bad credit because they have a flexible repayment plan. 

Types of Instalment Loans for Bad Credit

Many loans fall under the category of instalment loans, as they are paid back in instalments – usually monthly although the interval could be weeks. It all depends on the agreement between you and the lender. 

1. Unsecured personal loans are a very common type of instalment loan. They are termed unsecured because they don’t require collateral. However, they come with very high interest rates and the repayment period is typically between 3 to 12 months, although that could be longer. They are a tad difficult to obtain for people with a poor credit history. 

2. Secured loans. These are collateralised loans and offer fairer interest rates and fees, especially for those with bad credit. That’s because the collateral reduces the risk of the lender, assuring them you’ll be serious about repaying the loan since you have something to lose. Should you fail to keep up with payments, they can repossess the collateral and liquidate it to cover the loan. 

3. Credit unions are cooperative bodies whose members pull resources together to help each other out financially. They offer loans with favourable rates for those with bad credit. You have to be a member of the union to be eligible for this loan, and they often have very specific membership requirements. 

4. Guarantor loans. With guarantor loans, lenders will allow you to bring in a guarantor to assuage their fears of failed repayments. The guarantor has to be in good financial standing and they’ll take on the risk of the loan, should things go south. 

5. BNPL (Buy Now, Pay Later): BNPL providers tend to cover the price of a product when you checkout, and then those are repaid in instalments. They are a type of instalment credit, just not a loan because they don’t put money in your bank account. Just credit to cover the cost of a purchase, letting you spread it over several months. If you need a small loan to buy a new fridge freezer, you could be able to put it on finance through a BNPL provider.

Do Instalment Loans Require Credit Checks? 

Yes. 

Credit checks are a necessary condition required for any type of loan in the United Kingdom as  mandated by the Financial Conduct Authority (FCA). So if you have a recent CCJ or bankruptcy on your credit history, some lenders may reject your loan application outright. 

Some lenders may do a hard check, which can further damage your credit rating if done repeatedly on your credit report in a short period of time. Your best option is to ensure a lender does soft checks alone, which won’t leave a mark on your credit files. 

The other mandatory part of loans is the affordability assessment. Every lender has to carry out an affordability assessment of your credit profile. This will be done based on the information and documentation you provide during the application process. The goal is to determine if you have the capacity, capability and willingness to repay the loan amount without any hitch. 

Having a bad credit history doesn’t make it impossible to get an instalment loan. As long as you pass the lender’s affordability assessment, you have a chance of getting approval. 

Getting a Fair Rate and Boosting Your Approval Chances 

There are no guarantees that your loan application will be approved or that you will get the best rates – even though some lenders’ advertisements might suggest so. Each application is different and several factors are considered, including the lender’s financial condition, before a decision is made on a loan. 

As someone with a poor credit history, consider secured loans to boost your chances of approval. You can use your house, vehicle, stocks and shares, or even your personal savings- anything of real value, as a collateralised asset for a loan. As long as your asset is worth more than the loan, lenders would be less reluctant to say no to you.

You can even shop around for the best rates as some lenders specialise in some type of loans. Mortgage loans are more suitable for homeowners, logbook loans are for car owners, and so on. Picking a matching lender for your type of asset can save you some money in interest and fees. 

Having a guarantor also helps. Some instalment loans (including guarantor loans) would give you this option. A guarantor with a better financial condition, and maybe with assets such as a house, improves your overall profile, and increases your chances of approval. 

Your income-to-debt ratio will also play a part. If a lender finds out you have a stable income and don’t have many bills to pay each month, they will be more willing to offer you financial aid. 

Nevertheless, it is important to read the loan terms and fully understand the repayment conditions including the consequences of failed repayments. If you don’t understand any part of these terms, call the lender and ask for clarification. It is crucial to know this before you get the money. It will help you to avoid unforeseen issues which could put you in a financial quagmire.