Personal Loans for Bad Credit

Updated: September 23, 2024 Author:

The Challenges Of Getting Personal Loans for Bad Credit

Finding a personal loan with bad credit is a careful balancing act.

Comparison shopping for low rates can make your situation worse because it’s not just a bad credit score that affects the interest rates.

Many things can go against you, with each factor increasing the cost of borrowing.

If you’re under 25, separated, divorced, renting, self-employed (or juggling a few part-time jobs), doing unskilled work, have recently moved, changed jobs in the last six months, or missed a bill payment in recent years, you’re likely to be quoted a higher interest rate than advertised when comparing personal loans of any amount.

Did you know that the advertising rules for lenders allow them to approve the advertised rate to just 51% of applicants?

That’s what the ‘representative’ APR (annual percentage rate) is for.

When you have bad credit, you can all but guarantee that the representative APR will become higher when you get your personal quote.

Anything that pushes your risk profile up, pushes up the APR you’ll be quoted.

With bad credit, comparison shopping for personal loans can be a severe hindrance, working against you with each application.

After two loan refusals, automated systems will reject every other attempt because hard inquiries put a dent in your credit score.

Getting loans approved when you have a bad credit rating is tricky.

You need to approach lenders strategically and take the advertised rates with a pinch of salt.

If they say that you can borrow from £5,000 to £25,000 at rates from 6.5%, you can expect your maximum loan amount they’ll consider to be on the lower end of the scale with the APRs on the higher side.

The Types of Personal Loans for Bad Credit

Urgent Loans from Payday Lenders

When you need cash in a hurry, payday lenders provide an urgent loan service or emergency loans with a same day money transfer service, subject to approval.

Credit checks are required as are verification of income details from employment to ensure you have the means to repay.

Given the speed of service and the bad credit, rates for this type of loan are the highest.

Interest rates can be as high as 1,625% APR, and that’s because they are not intended to be repaid over 12 months.

Emergency personal loans are typically under £1,500 when you have a bad credit rating with the repayment due within 1 to 3 months.

Lower Rate Personal Loans with Bad Credit

To access low rates through a personal loan with bad credit, lenders will prefer to have security.

There are two ways this can be done. The first is through a secured loan and the second is with a guarantor loan.

Secured loans

With a bad credit score, secured loans are almost always easier to be approved for and that’s because nearly all of the risk is transferred from the lender to the borrower.

You give them an asset of higher value than the loan amount you’re taking out, and they use that as collateral against your loan.

Secured loans can be arranged for £100 loans all the way up to £15,000 loans, either as a loan secured on a home, or through a logbook loan with a vehicle worth twice the amount you’re borrowing.

Campers, vans, and boats can be used as a security with logbook loan firms.

Guarantor loans

Guarantor loans are easier to be approved for because you’re leaning on someone else’s good credit rating.

The hardest part is finding someone willing to stake their financial reputation (and their earnings) on you repaying the loan.

When your credit score is poor, getting a guarantor loan approved and then keeping to the loan repayment schedule can help you begin to repair bad credit, however, until all the repayments are made, the highest risk is with the person you ask to co-sign the agreement.

If you miss payments, the person assuring the loan repayments becomes the debtor, assuming sole liability for the loan repayments.

Peer-to-Peer (P2P) Lending Platforms

Peer-to-peer lending platforms match investors with borrowers.

A few offer direct-to-consumer loans, but most are focused on investor start-up funding.

If you’re considering a personal loan because of the struggle to finance a start-up with a business loan, consider looking for P2P lending platforms that use a soft credit check and approve funds to those with bad credit.

Direct Lenders

For the lowest rates, direct lenders are your best option.

There’s no set up fees and no broker fees to pay to credit intermediaries who may charge an introduction or arrangement fee for matching you to the most suitable lender.

Many bad credit loan companies are direct lenders. Some work exclusively through broker firms, but certainly not all of them. Before applying for any loan directly (or indirectly) check your credit report to find the reason for your low credit rating and match the cause to a direct lenders eligibility criteria.

As an example, if your credit report shows a CCJ was recorded 2 years back, look for lenders that state they accept applicants with an aged CCJ, or older than a specific time period.

When getting into specifics with direct lenders, be wary of companies promising guaranteed loans, or no credit check loans.

All lenders are required to do at least a soft credit check and a creditworthiness assessment to ensure you can afford the loan repayments for the term of the loan.

No Guarantor personal loans

Unsecured personal loans with no guarantor are the highest risk to lenders as they’re essentially being asked to take your word that you’ll repay with no assurances that they’ll get anything back if you were to default on the loan.

With bad credit, secured loans are easier to be approved for. You need something of higher value to use as collateral and some can pay the same day.

As an example, if you have a a high-spec gaming PC worth over £1,000, securing a loan against it with a pawnbroker loan or buyback loan, could let you secure a £700 loan (possibly more) with a lower APR despite not having a guarantor.

Debt Consolidation loans

Debt consolidation loans are a type of personal loan to roll multiple smaller loans and outstanding credit agreements into one larger sum loan, which can have a lower APR.

The larger the loan amount, the lower the interest rates become, but the time to repay is longer-term so it pushes up the total cost of borrowing.

It’s not always suitable as some credit agreements and short-term loans can have early settlement clauses included in the contract, penalising you for ending the agreement early.