How to borrow money with bad credit

Bad credit loans

Bad credit loans are usually unsecured personal loans. They are designed for those with poor credit histories – or those with no history at all –  who are usually excluded by mainstream lenders.

Interest rates are typically much higher on bad credit loans than normal personal loans. This makes them an expensive option for borrowing money.

Your credit score indicates the state of your credit file. The better your score, the higher your chance of being accepted for a loan at a competitive rate. The lower your score, the lower your chance.

Everything in your financial history is recorded on your credit report, such as applications for credit and missing payments. The record dates back six years. While lenders do not see your score, they are able to look at your credit file via credit reference agencies (CRAs) such as Experian and Equifax.

Not all lenders offer loans to people with a bad credit history and even those that do could reject your application if your record is particularly poor.

What are the pros and cons of a bad credit loan?

Pros

• You are more likely to be accepted than for a standard personal loans

• It could improve your credit score if you pay on time

• There’s a quick approval process

Cons

• High interest

• Less choice in lenders

• Not a good long-term borrowing option

What is the APR on bad credit loans?

The average APR on bad credit loans is around 49%. In comparison, the cheapest rate on a standard personal loan is about 3%.

This is why it's a good idea to try to improve your credit score before applying for a loan.

APR stands for annual percentage rate. It's the cost of borrowing over 12 months and includes the interest on the loan and any fees.

What is bad credit?

Bad credit is indicative of a poor credit history. Your credit history is stored by three credit reference agencies (CRAs) and dates back six years.

The reasons why you might have bad credit include:

• Missed, late or defaulted payments

• County court judgements (CCJs), individual voluntary agreements (IVAs) or a file for bankruptcy

• Not being on the electoral register

• Discrepancies or mistakes, such as accounts registered to an old address

• No credit history because you've never had a credit product before

• If you have active CCJs, are still repaying an IVA or have yet to be discharged from bankruptcy then you will not qualify for a bad credit loan.

What is a CCJ?

A CCJ, or county court judgement, is a type of court order. It's normally obtained by a lender instructing you to pay back money you owe to it.

You can find out more about CCJs and how they work on the Money Advice Service website.

What is an IVA?

An IVA, or individual voluntary arrangement, is a formal agreement between you and any lenders you owe money to where you agree to pay back all or some of your debts over a specified amount of time.

At the end of your IVA you will be debt free. But the IVA will remain on your credit file for six years after its start date.

Discover more about how IVAs work on the StepChange website.

What are the alternatives to bad credit loans?

There are several alternatives to bad credit loans, even if you have a bad credit score.

These include:

• Budgeting loans

• Credit unions

• Credit cards for bad credit

• Guarantor loans

• Peer to peer loans

1. Budgeting loans

Budgeting loans are interest-free loans from the government. The maximum amount you could get is £812 and the money must be used for certain expenses, like advance rent or funeral costs.

To be eligible for a budgeting loan, you must have been receiving one of the following benefits for at least six months:

• Pension Credit

• Income Support

• Income-based Jobseeker Allowance

• Income-related Employment and Support Allowance

If you're already being paid Universal Credit instead of these benefits, you may get a Budgeting Advance instead.

You can apply for a Budgeting Loan on the Gov.UK website.

2. Credit unions

Credit unions offer savings and loans to local communities. They are often low cost and significantly cheaper than short-term lenders.

If there's one in your area, they could be a good option for a small loan (usually under £3,000).

To borrow from a credit union, you may have to become a member. Some require you to start saving with them first.

3. Bad credit credit cards

Typically, known as credit building cards, these are credit cards with low spending limits designed for those with low credit scores.

You could avoid paying high interest and build your credit record with a bad credit credit card. But you must repay them on time and in full every month. If not, you could damage your score even further and face late payment fees and higher interest rates.

Discover how to get a credit card if you have bad credit.

4. Guarantor loans

Guarantor loans are personal loans where a named guarantor agrees to repay the loan for you if you're unable to.

The rates may be lower than bad credit loans because the lender has added security that the loan will be repaid.

You must check with your chosen guarantor before you put them down on your application. It's a huge commitment on their part, and they'll need a good credit score and at least 50% equity in their property if they have one.

Learn more about how guarantor loans work.

5. Peer to peer loans

Peer to peer loans are unsecured personal loans from private lenders who use their savings to lend you money in exchange for earning interest on the loan.

These lenders may be more willing to consider your application even if you have poor credit. The rates may be cheaper than those on loans for bad credit.

Discover more about peer to peer loans.

How to apply for a bad credit loan

Before you apply for a bad credit loan, check you meet all the criteria. A rejection could result in further damage to your credit score.

Other factors that may influence your application include:

• Your income

• Your age

• Your existing debts

• Your regular outgoings

To get a better idea about whether or not you'll be accepted for a bad credit loan, look for lenders that offer a free eligibility check before you formally apply. This is sometimes called a 'soft search'.

Soft searches do not appear on your credit file and so will not damage your score. They work differently to hard searches, performed when you formally apply for credit, which are marked on your credit file. 

Compare the latest bad credit loan rates