- It is possible to get a loan with a poor credit history
- Credit unions offer the lowest interest rates for subprime borrowers
- Be wary of short-term loan offerings that could further hurt your credit history
If you have a poor credit score or even just a limited credit history, it can be difficult to access loans and credit cards with a good interest rate. Many people with poor credit histories find themselves locked out of the traditional financial market. This can make life difficult when a financial emergency strikes because they’re left struggling to access money to cover car or household repairs, vet bills or other unexpected costs.
If you’ve found yourself turned down by your bank or another mainstream lender, read on to discover some of the other lending options that may be available to you.
What Does a Bad Credit Score Mean?
Many consumers in the UK find themselves confused about credit scores, especially if they read a lot of international personal finance blogs. The credit scores that Experian, Equifax and Transunion show to consumers when they check their credit files are not used by lenders in the UK. Rather, lenders access the credit files provided by those companies and use their own risk assessment algorithms to make a decision.
The small fluctuations in the score you see from those providers doesn’t matter. However, if you have lots of late payments, defaults or a County Court Judgement (CCJ), you may struggle to be accepted by a mainstream lender.
What Are Bad Credit Loans?
Bad credit loans are loans issued by companies that specialize in people with poor credit histories. These loans are usually for smaller amounts of money than those offered by a mainstream lender, and the interest charged on the loans will be much higher.
Bad credit lenders need to charge more interest because they’re dealing with riskier borrowers and know that a large percentage of the borrowers they lend to will either default on the loan or be late with some of the payments. Someone who’s faced with an emergency such as a broken-down car may choose to pay the higher interest because it’s better than the other option of not being able to get to work.
Why Might Someone Have Bad Credit?
There are many reasons a person might have a bad credit score, including:
- Several recent missed payments
- One or more CCJs
- Not being on the electoral roll
- Financial associations with someone who has bad credit
In England, information stays on a person’s credit file for six years. The impact of late payments and defaults drops over time, so a default that is several years old may be ignored by some mainstream lenders. CCJs are more serious, however, and many banks will not want to deal with someone who has a CCJ on their credit file, even if that CCJ is several years old.
Top Lenders for Borrowers With a Bad Credit History
Subprime lenders charge high interest rates, so the best option is to avoid borrowing from them whenever possible. However, if you have no emergency fund and can’t borrow money from friends and family or get an advance from your employer, a subprime lender may be the only option.
If you have a credit union in your area, consider reaching out to them because they’re more likely to offer friendly rates and flexible options. Alternatively, for smaller loans, consider a credit-builder credit card that you pay off within the interest-free period. Only consider other, higher-priced lenders if those options are unavailable.
1. Local Credit Unions
Many towns and cities have local credit unions that offer saving options and affordable loans. Credit unions operate as cooperatives that are committed to the benefit of their members. This means they can be more flexible than banks and traditional lenders. Find out if there is a credit union near you and consider joining them.
Most credit unions require someone to have had an account with them for a set period of time before they’ll issue a loan, but they offer good interest rates on savings and more personal service than traditional banks so membership is worth having.
2. Credit-Builder Credit Cards
Credit-builder credit cards such as Vanquis and CapitalOne are aimed at people with poor credit histories. Some credit builder cards are available to people who have CCJs. CapitalOne sometimes offers cards with 0% interest on purchases for a short introductory period.
People with very poor credit histories are usually offered an initial credit limit of just a few hundred pounds. However, if that initial credit limit is acceptable, taking out such a card and paying it off before the 0% period ends is a much more cost-effective way of borrowing than taking out a short-term loan, and it can help the borrower build a positive credit history too.
3. Peer-to-Peer Lenders
Peer-to-peer lenders such as Zopa offer an alternative form of borrowing for people who don’t qualify for normal loans. The requirements for loans are usually slightly stricter than the requirements for a credit-building credit card.
These loans can be a good option for someone who can’t access the best rates from mainstream lenders but is looking for a loan that’s bigger than the credit limits offered on those starter credit cards. Liquidity for peer-to-peer loans comes from individuals who invest funds into a lending pool and receive interest as borrowers pay back those loans.
4. Guarantor Loans
Guarantor loans such as those provided by Amigo Loans are a specialist form of borrowing that allows people with poor credit histories to access larger amounts of credit. It is possible to take out loans for several thousand pounds under a guarantor loan scheme.
These lenders will give a loan to someone with a poor credit history if that person has someone else with a good credit history and qualifying income who is willing to guarantee the loan. If the borrower fails to make payments, the lender can pursue the guarantor for the money. Interest rates on this kind of loan are often 49.9% or more.
5. Bad Credit Lenders
If you don’t want to ask someone to act as a guarantor for you, there are other options. Bad credit lenders such as 118 Money offer loans of between £1,000 and £5,000 and are willing to consider people with poor credit.
The interest rates charged by these lenders are similar to the rates charged by guarantor loan companies, so it’s important to borrow only the amount you need and try to repay it as quickly as possible. 118 Money also offers a credit card, and the more flexible repayment terms of the card could make it a better option for some borrowers.
6. Homeowner Loans
Homeowners may be able to get a loan from a lender such as Oplo. This lender offers secured homeowner loans as well as unsecured personal loans. It’s important to be aware of the risks associated with a secured loan. If a borrower fails to make repayments on a loan that is secured on their home, they could have their home repossessed.
For this reason, secured loans should be seen as a last resort. Even if you’re confident that you can make the repayments, remember that your financial circumstances can change unexpectedly.
What To Do if You’re Turned Down for a Loan
If you’ve applied for a loan and been turned down, don’t panic. Before you apply for any other financial product, request a copy of your credit file from the three main credit reference agencies. You can view your credit file for free via the MoneySavingExpert Credit Club and the smartphone apps Credit Karma and ClearScore. Each of these apps pulls data from a different agency. Make sure your address, date of birth and financial details are correct with each of those agencies. If you notice any errors, send a Notice of Correction.
If your information is correct and you’re not sure why you’ve been turned down for credit, remember individual companies have their own scoring and risk assessment systems. Next time you want to apply for credit, use the lender’s eligibility checker before putting in an application to avoid having hard credit searches recorded on your credit file.
Get Help With Managing Your Repayments
If you already have debts and are struggling to make the repayments or considering a consolidation loan to reduce the interest you pay, think carefully before taking on more debt in this way. Many people take out short-term loans and then find the interest and charges make it difficult for them to keep up with payments in the future.
You can get free, confidential advice about debt, budgeting and financial issues from the national charity StepChange. Dealing with financial issues can be difficult, but by seeking advice quickly you can avoid paying even more in interest and late fees, and get back on the path to a good credit score.