It is possible to take out a loan with bad credit although your options may be more limited. However, there are plenty of providers across the country who specialise in bad credit loans and there are options available to suit your specific needs.
What Does It Mean To Have Bad Credit?
A credit score is a number which represents a person’s financial history taking into account any money they may have borrowed in the past. If you have a higher credit score, this is indicative that you are more of a reliable borrower who can meet repayments.
For those who have struggled to repay a loan or a credit card bill historically, this will be reflected in your overall credit score and subsequently may impact your ability to borrow money in the future.
Similarly, for those with no credit history (either due to age or having lived overseas), they may find it difficult to demonstrate to lenders that they have a good credit history.
What Types of Loans Are Available for Those With Bad Credit?
Even if you have bad credit or no credit history, there are options available to take out a loan. These include the following…
Secured Loans: Secured loans tend to be the most common option available. These are loans that are offset with collateral, meaning that they are a lower risk for the lender. The borrower will need to put up something valuable – home, car or anything else that can be used as collateral – and this possession will be repossessed should they default the loan repayment. Secured loans are different to unsecured loans – unsecured loan borrowers not requiring collateral to get approved.
Guarantor Loans: These loans are designed for borrowers who have poor credit or no credit history and who are rendered with few options. Guarantor loans work by having a relative or friend act as a “guarantor” meaning that they promise to pay back the remaining amount should the borrower default. Due to the extra risk associated with this type of loan, there are usually higher interest rates.
Personal Loans: Even with a less-than-exemplary credit rating, there are personal loans available on the market. However, usually they have stricter lending criteria. For example, there is usually a stricter cap on how much you are able to borrow. Additionally, due to the high risk nature of these types of borrowers, lenders usually ask for a much higher APR in order to protect them should the borrower default the payment. For that reason, personal loans tend to be quite expensive in the long run.
Can You Improve Your Credit Score?
You could have access to a wider range of options and better lending conditions by improving your credit score. This can be done over time by paying back your bills when they are due but there are also some simple things you can do to improve your credit score in the short term.
The simplest way to improve your credit score is to never make a late payment. Additionally, you can crease how much you are using your credit and increase your credit limit. If there are any errors on your credit report, you can request for them to be removed.
If you are able to meet your repayment schedule in full and in a timely manner every month, you can increase your credit score over time. This will help you in the long run as it shows that you are borrowing responsibly.
Factors To Consider When Taking Out a Loan With Bad Credit
When taking out a loan, there is always an element of associated risk. Especially for borrowers with lower credit scores, there is more risk both for the borrower and the lender.
Here are some key things to consider before opting to take out a loan with bad credit:
- Cost of defaulting – if you default on a loan payment, it is always costly, but it is especially expensive in the case of a bad credit loan and could involve repossession or legal action. The important thing is to always make sure you are meeting your payments.
- Credit score, income and other factors – it is not just credit score that lenders will look out before considering you for a loan. Your income, employment history and stability, outstanding loans and amount of equity will all be considered.
- Affordability of the loan – if you have a lower credit, it is likely that you will have a more expensive loan and can borrow a smaller amount. Before entering this agreement, you must ensure that you are able to comfortably make the repayments alongside any other outgoing payments for the full duration of the loan term.
- Limits on what you can borrow – unlike typical loans, bad credit loans will tend to have stricter limits on the amount that you can borrow. This is due to the level of risk for the lender. For anyone needing to borrow money, they should manage their expectations to determine how much money they should borrow with the higher interest rate and whether or not they can afford it.
