Bad Credit Loans and Poor Credit History

February 9, 2015

If you have a poor credit rating, you may find it difficult to borrow money at ‘regular’ interest rates. Interest will be charged at a higher rate than normal so that lenders can protect themselves from the risk of default.

Your credit history will have been adversely affected if you got behind with repayments on credit card or store card borrowing, or if you have a County Court Judgement against your name.

Whatever the reason for a low credit score, if you are looking to consolidate existing loans or simply need access to new borrowing, you might want to consider applying for a Bad Credit Loan at some point.

You need to be over 18 years of age and in employment before you will be considered for this type of loan, which has the potential to improve your credit rating as long as you make all repayments as required.

One anomaly of the credit rating system can be seen when someone has been in possession of a credit card for many years. Having successfully managed their payments they assume that their credit rating will be good, but because they have not been granted credit recently (usually within a period of a few years), they are also regarded by lenders as having a low credit rating.

This seems counterintuitive, but lenders need recent proof that a consumer can manage their finances, and if that proof is not visible within a credit report, lenders will attempt to reduce their own level of risk in the same way as they do with unreliable payers.

What are the features of a Bad Credit Loan?

Unsecured loans

The main feature of an unsecured Bad Credit Loan is the higher interest rate charged. This is charged because, with a poor credit history, lenders see you as a higher risk and want to make sure that this risk is adequately covered.

Unsecured loans of this type may be offered if the total loan amount is less than £35,000, and although you will suffer a higher rate of interest, the most important advantage of an unsecured loan is that your home will not be put at risk.

Secured loans

A secured Bad Credit Loan on the other hand, puts your home at risk of repossession should you miss payments, because of redundancy for example, or other employment problems that affect your ability to repay.

Great caution should be exercised before taking out a secured loan, as the ramifications of non-payment are serious, and even though a lower interest rate seems attractive when compared with that of an unsecured loan, the risks involved may simply not be worth it.

Factors which influence how much you can borrow on a secured loan include the value of your property and your level of income.

 

Are there any advantages of taking out a Bad Credit Loan?

  • The main advantage of this kind of lending is that a line of credit is available to people who would otherwise struggle to obtain a loan.

 

  • A Bad Credit Loan offers the opportunity for consolidation of existing debts, to access a lump sum of money for a large purchase, or to improve a credit rating.

 

  • A longer loan repayment term may be available with a secured loan – potentially up to 25 years.

 

And what are the drawbacks?

  • Some lenders only offer Bad Credit Loans secured against a property.
  • The downside of a longer payment term is the higher total amount of interest payable.

Interest rates are often tiered depending on how much is borrowed. This can be an advantage or a disadvantage depending into which tier you fall, and can lead people to borrow more money than they really need in order to benefit from reduced rates of interest.

 

What if you have already been turned down for a loan?

What can you do to help yourself in the long term? Actions that will improve your credit rating and help you to manage debt more effectively include:

  • Credit builder credit cards

These are aimed at people with a limited or poor credit history, and offer the opportunity to demonstrate their ability to repay debt on a regular basis. The downside of these cards is the high interest rate charged, and low credit limits offered.

  • Make sure that you are on the electoral roll

The electoral roll is checked by lenders before granting loans and other borrowing. It will help a loan application if the lender can confirm your personal details in this way.

  • Close down existing credit card accounts

Even if there is no balance on these cards, a lender will simply see the amount of credit available to you, even if you have no intention of using it. Closing down unwanted credit card accounts can improve your credit rating if you have several cards with large credit limits, albeit unused.

 

Taking out a Bad Credit Loan

It’s important to remember that failure to make repayments on time and in full will adversely affect your credit rating. If you renege on a secured Bad Credit Loan it could also put your home at risk, so this is not something to take on without careful consideration.

 

It is advisable to seek help from a professional money advisor before taking out a Bad Credit Loan, whether secured or unsecured. They will be able to guide you through potential pitfalls, and help you build up a detailed budget.

 

Generally speaking, the minimum amount you should consider taking out on a Bad Credit Loan is £1,500. This is because it can be cheaper to borrow on a credit card for lesser amounts.

 

If you have ever wondered what ‘APR’ means, it is the Annual Percentage Rate that includes all charges and fees associated with the loan. It is compulsory for lenders to advertise the APR of each loan in order to provide borrowers with a realistic view of how much they will pay overall.

 

 

 

 

 

 

John Baird

Insolvency Adviser

Tel: 0800 063 9250

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