For those with bad credit, it can be hard to get access to mainstream finance in the form of basic loans and credit cards. At times, one can feel that there are no options when looking for short term loans or borrowing a few hundred pounds. Below we explain what bad credit is and some of the credit options available in the UK.
What is Bad Credit?
When a UK resident turns 18, they are automatically provided with a credit score which is a numerical value used to represent your creditworthiness. The maximum score according to Call Credit is 999 and the lowest is 0. Your score can go down if you fail to make credit card and loan repayments on time and being below average puts you in the bracket of bad credit.
Other things that can give you bad credit include having an Individual Voluntary Arrangement (IVA) where you have accumulated large debts and arrange an agreement with your creditors to repay an amount you can afford.
On a similar level is a County Court Judgement (CCJ) which involves your creditor registering a court order to recover any funds they have lent to you. Both of these outcomes, including bankruptcy, have the potential to damage your credit rating and can stay on your credit file for 6 years or more.
There are several ways to improve your credit score such as joining the electoral roll and closing down any accounts that you are not using. You can read our list of tips here.
Bad Credit Loan Options
Specific Credit Cards
There are specialist credit cards available for those with bad credit. Card providers consider that those with poor credit are a greater risk to lend to, so this is managed by limiting the amount you can borrow and charging a slightly higher rate to mitigate the risk of default.
For instance, the rate charged for bad credit card holders is around 29% to 35% APR compared to a good credit customer being charged around 18% APR and around 3 years of interest free credit. (Source: CreditCards.com)
A secured loan involves borrowing a sum of money and putting down something valuable as security such as a car or home. The agreement states that if the customer is unable to keep up with repayments, their security is at risk of repossession so that the lender can recuperate the funds that they have lent out.
For those with a bad credit history and unable to show proof of regular repayments, using something as security can sometimes be an option to get access to funds.
Individuals are able to use their car as a form of security, commonly known as a car loan or logbook loan. There are also companies that allow you to put down your house or flat as collateral in order to borrow money too.
Other specialist companies such as Borro can provide funds using items such as art or jewellery as a form of security.
Guarantor lending involves borrowing up to £15,000 and having an extra person as security to be your guarantor. This can be a family member, sibling, friend or colleague who agrees to co-sign your loan agreement and repay if the borrower cannot. This type of finance is common for those with bad credit as they are able to leverage the good credit or homeowner status of their guarantor in order to be approved.
The rates charged range from 39.9% to 49.9% APR provided that you have a homeowner guarantor, and around 59.9% for tenant guarantors.
Peer to Peer Loans
Peer to peer lending is a type of loan where you essentially borrow from other people in the UK. These people are known as ‘investors’ who are looking to get a return on their investment when lending out to other people on a peer-to-peer platform like Zopa or Ratesetter.
The interest rates available start from 3% APR for good credit customers and 9.9% APR for bad credit customers (Source: The Guardian). So those with poor credit may be able to get finance, albeit at a higher rate, because an investor is hoping to make a better return.
A credit union is a type of non-profit organization set up in your local neighbourhood designed to help those in the local community. You typically need to be living in the vicinity or working in the public sector such as a nurse, teacher or policeman.
Individuals can borrow up £3,000 for up to 10 years, provided that they have some form of income to pay it off. The interest rates are very low, at around 3% APR and there are no default fees or additional interest charged for being late.
You should always think carefully about whether you can afford the repayments and consider whether other options are available before applying for a bad credit loan. If you do apply for a bad credit loan, compare all the options carefully to keep the costs down and ensure you are aware of the consequences if you cannot keep up the repayments.