Long-Term Loans for Bad Credit

Updated: April 08, 2024 Author:

Quick answer: Long-term loans for bad credit have repayment terms from 1 to 7 years. Interest rates tend to be between 39.9% and 99.9% APR. Taking longer than 7 years to repay rarely makes financial sense because you can improve your credit score within that time, lowering applicable interest rates on new loans.

    The Impact Bad Credit Scores Have On Long-Term Loans

    Every individual has a credit file. Understanding how credit scores work is key to getting your financing options right. These are maintained by three credit reference agencies. Experian, Equifax, and TransUnion. When you apply for any type of loan, lenders run a credit check with one of the credit reference agencies, possibly more. The type of credit check varies by lenders. Some use only a soft credit search, most will run a hard check.

    The difference between a soft and a hard search is that soft searches don’t lower your credit score, hard searches do – each time one is run. For that reason, applications should be limited to one application search every 3 to 6 months. More frequently than that, your credit score will decrease. Every lender is required to get your informed consent to pull information from your credit files so you will know when your credit score will be affected.

    Know What Lenders Will Learn Before Applying

    Before applying for a long-term loan, it is good practice to learn what lenders will see once they view your credit report. The difference between good credit and bad credit scores can mean a huge difference in the interest rates lenders quote. All lenders will provide information about their qualifying criteria.  Be sure to learn what those terms are before applying to avoid rejections as much as possible.

    Banks almost always stipulate that a good credit score is required to be eligible. With Experian, credit scores from 881 are good. With TransUnion, scores would need to be upwards of 604, and with Equifax, you’d need a credit score of 604 and up to qualify for loans from legacy lenders. Lower credit scores than those would require applications to be directed to loan providers specialising in bad credit finance, which is for applicants who have negative entries on their credit files, lowering their credit scores, which causes mainstream financial institutions to reject their applications.

    You can get a copy of your credit files from each of the credit score companies directly, or use a third-party service that monitors credit scores, providing updates monthly. Some are free, others are paid.

    Identifying the Severity of Bad Credit Entries

    Not every negative entry on credit files leads to loan rejections. It depends on the lender you apply to. The most severe entries include CCJs and bankruptcy. Those severely restrict your ability to obtain credit of any type. The majority of the main lenders will not approve a loan with those, however, all information (except certain bankruptcy entries) disappears from your credit files after six years from the date it was first recorded. And, lenders are more concerned about recent entries than those that are about to disappear. This matters because within a month or two of entries dropping from your credit report, you’ll see an increase in your credit score.

    In practice, if you have a CCJ reported from 4 years back, in two years, that gets removed, and your score then goes up. If that was all you had lowering your credit score, it could give a bump high enough to meet the qualifying criteria of most lenders. When that is the case, you may want to consider taking a long-term loan for bad credit over 2 or 3 years rather than getting a higher-interest loan for 7 years. Then when your credit score improves, apply elsewhere for a cheaper rate.

    Early Settlement Adjustment Fees on Long-Term Loans

    When there’s a possibility of settling a long-term loan early, the fees to look for are early repayment fees to avoid paying more than you have to. Long-term loans (over 12 months repayment) can have up to 58-days interest charged as an early settlement adjustment. Given that long-term bad credit loans attract high interest fees, that settlement adjustment figure could be costly. The 58-days interest is the maximum lenders can charge for repaying early. Some lenders have no early repayment fees, some charge less than that, others charge the most they can.

    How to Find (and Apply) for Long-Term Loans with Bad Credit

    With bad credit, there are two options for finding and applying for loans. The first is to search for bad credit loan direct lenders, being sure to scruitinise the fine print for eligibility requirements ensuring they are suitable to your circumstances. The other method is to use a loan or credit broker. Both options require focusing on firms specialising bad credit. When applying to direct lenders, for every rejection, you’re best to wait a few months at least before applying to another firm. This is why it’s important to learn what you can about the eligibility criteria for their products before applying.

    A broker can help with filling in application forms, getting your documents in order, and directing your applications to the most suitable lender based on your financial circumstances. Some work with a panel of lenders, some charge upfront fees whether or not you accept a loan offer, and others get paid by the loan company if you’re approved. Agreements differ and some brokers can have exclusive access to better deals that aren’t available to the public because of their working relationships with the lenders. Before proceeding, learn about brokers vs lenders to help decide which approach to use when getting a loan.

    The Types of Long-Term Loans for Bad Credit

    Personal Loans

    Personal Loans also go by the term unsecured loans. All that means is that you don’t need to be a homeowner to qualify or provide any type of security.

    Guarantor Loans

    Guarantor loans are a type of finance that’s taken out in your name with a co-signer issuing the lender a guarantee that it’ll be repaid by them if the sole applicant defaults on the loan repayments.

    Credit Unions

    Credit Unions are cooperatives providing savings accounts and loans to their members. Around two-thirds of Britain’s Credit Unions are members of the Association of British Credit Unions.  Most loans are savings based, providing loans based on a multiple of the balance in your savings account. Your savings are their security. As an example, savings of £1,000 with a 3x multiple loan option could get you a £3,000 loan at a low interest rate. Poor credit scores don’t necessarily impact your ability to get an account, however, some will not accept applications from people subject to bankruptcy and similar severe credit problems.