When you’re applying for a loan, the potential lender will run a few checks on youridentity and financialhistory to determine their risk. One of the easiest and most reliable ways for them to judgeyour creditworthinessis to look at how you have handled debts and bill payments in the past. You can find thisinformation in your creditreport.
High credit card debt, missed household bills and defaulted loans will all affect your creditscore and make you ahigher risk. As such, having a bad credit score and/or report can make finding a loandifficult, but notimpossible.
What counts as a poor credit score?
When making a decision on a loan application, lenders will usually refer to a CreditReference Agency to find out acustomer’s credit score. A range of financial and personal data will be considered andultimately contributeto the final credit rating. In the case of Equifax,youwill receive a score from 0 to 1000.
The scale is divided into five ranges:
811-1000: Excellent
671-810: Very good
531-670: Good
439-530: Fair
0-438: Poor
If your score is over 670, you probably won’t have too much trouble getting credit, asyou’ve proved yourability to repay loans in full. People with ratings below 580 might struggle to find alender, or will have theirloan choices restricted. For example, they might only be eligible for small secured loanswith higher interestrates.
However, it is still possible for people with low credit scores to have successful loanapplications with particularlenders and products.
What’s the difference between secured and unsecured loans?
Secured and unsecured are the two main types of loans available from most lenders.Here’s how they’redefined:
A secured loan requires you to pledge something as collateral against the moneyyou’re borrowing. Thelender can then take possession of that collateral should you fail to make theagreed repayments. Forexample, a mortgage is a secured loan. Although the risk of your home gettingrepossessed is rare and a lastresort, it is still a possibility for those who miss their payments.
An unsecured loan is offered to borrowers who present less of a risk. It will bebased solely on your credithistory, proof of income and other financial circ*mstances. However, even if youhave a relatively goodcredit history, some lenders might attach a guarantee to their offer, especially ifyou’re trying toborrow a lot of money.
Is it possible to get a loan with very bad credit?
It depends on justhowbad your credit is. If you’re on the borderline of agood score, you mighthave to shop around and compare loans to find the best deals.
If it’s very bad, then you’ll have totakesteps to improve yourcredit score. Depending on your financial situation, you may need to spend a periodof time making sure younever miss a bill or credit repayment, putting yourselfonthe Electoral Roll and avoiding County Court Judgments (CCJs).
One factor that can also stand in your way is having no credit history at all - this is alsoknown as a ‘thinfile’. You might think never taking out a credit card or loan would be a positive, butit doesn’t givelenders much credit information to work with, making you an unknown risk.
A solution can be to take out a credit card and use it for regular spending, like groceries,bills and fuel, whilemaking sure you pay it off in full every month. If you do this, you’ll have built upenough evidence of goodfinancial behaviour which could positively impact your score and make you eligible forbetter loans andmortgages.
Some banks even offer specialist credit-building cards, where the interest rates start highand gradually fall as youcement your financial reputation. With higher interest rates, a consumer is encouraged to topay off the balance infull each month to maximise the impact on a consumer’s credit score.
What loans can a person with bad credit get?
If you fall into the “poor credit” category, it doesn’t block you out oflending altogether.However, the amount of money you can borrow, the competitiveness of interest rates and thetypes of productsyou’ll be approved for may be limited.
Secured loans are one option, as they put something you already own against the moneyyou’re borrowing. Butthere are also:
Personal loans: certain lenders will offer personal loans to those with bad scores.These put a strict limiton how much you can borrow and usually have high interest rates but can be a goodoption if you know you canpay it back quickly.
Guarantor loans: this is when someone you know (a guarantor) promises to pay off thedebt if you’reunable to. They will be credit checked and if they are considered low risk, the loancan be granted to you.If you go for this option, make sure the guarantor can make repayments in the eventyou can’t.
When searching for potential loans, find out whether it will leave asoftor hardsearch on your credit report. A soft credit search will show how likely you are tobe accepted for differentproducts without having a further impact on your credit score compared to a hard creditsearch.
Can you get a loan with extremely bad credit?
If your credit score is towards the bottom of the scale, you are going to find it very hardto get any kind of loanor credit card from a bank or reputable lender until you improve it. Though payday loans andpawnshops may betempting options, the rates are huge and put you at risk of falling further into debt.
However, there are lenders that specialise in bad credit loans with products that cater tocustomers who have poorscores. Loans for bad credit tend to be small and with short repayment terms. They may alsoinclude co-signed orjoint loans, where another individual is sharing or guaranteeing that the loan will be paidback in full.
Can I get a loan with very bad credit in the UK?
The UK has a well-regulated financial services sector, so there’s a complete range ofproducts available forborrowers at all points on the credit score scale.
If you’re scouring the internet for deals, always check if the lender is listed withthe Financial ConductAuthority (FCA). This will guarantee that they are legitimate and will treat you fairly.It’s important to beaware of the risks if you do decide to apply for a loan with a lender that is not FCAapproved.
How can you borrow money if you have bad credit?
If you’ve got bad credit and need the money quickly, you’ll have to go tospecialised lenders. If you canwait a few months, taking steps to improve your credit score and improve your report willgive you more options whenyou finally apply. Plus, it’ll save you money with competitive interest rates, andmight allow you to borrowmore.
