Getting a personal loan with bad credit

·5-min read
 (Unsplash)
(Unsplash)

If you have a poor credit rating, your chances of getting accepted for a personal loan will be much lower than someone whose credit score is in excellent shape.

The good news, however, is that there are a number of borrowing options still available to you. Here are the best options.

How do I know if I have poor credit rating?

It’s pretty straightforward to find out what shape your credit rating is in – all you’ll need to do is use an online service that enables you to check your credit score free of charge.

If you’ve borrowed in the past but struggled to keep up with debt repayments, it’s likely that your credit score will be low. This could be because:

  • you’ve missed debt repayments

  • you’ve been late with repayments

  • you’ve filed for bankruptcy

  • you have an Individual Voluntary Arrangement (IVA)

  • you have a County Court Judgment (CCJ)

  • you’ve made a number of credit applications in a short space of time

Unfortunately, if you have a poor credit score, lenders will consider you to be at higher risk of defaulting on repayments and will be less willing to let you borrow.

The same applies if you don’t have much of a credit history, perhaps because you’re a young adult and haven’t borrowed before. A lack of credit history means lenders won’t be able to assess your creditworthiness and you may also find it harder to get accepted for a loan.

Related: Compare Loans & Find The Right Deal For You

Can I still apply for a personal loan?

If you have a poor credit rating, you can still apply for a personal loan, but you may find your options more limited. You’ll certainly find it harder to get accepted for the most competitive interest rates and, as a result, your overall cost of borrowing is likely to be much higher.

The best way to look for a personal loan with bad credit is to use an online comparison service. You’ll need to enter how much you want to borrow, how long you want the repayment term to be, and what you plan to use the loan for.

You’ll then be able to sift through a range of deals and look for the one with the cheapest interest rate and best possible terms.

Note that the advertised annual percentage rate (APR) only has to be offered to 51% of successful applicants. The remaining 49% may not be eligible for this rate and are likely to pay more.

Are there any alternatives?

If you’re concerned that the interest rate on a personal loan will be too high, there are a few other loan options available to those with poor credit.

Secured loans, for example, often offer lower interest rates because they require you to put up an asset (usually your home) as collateral. For this reason, they can be easier to get accepted for.

Applying for a secured loan isn’t a decision that should be made lightly, however. Secured loans are far riskier than unsecured loans because, should you default on your loan, your lender could take possession of your property.

An alternative is a guarantor loan which requires a friend or family member (with a good credit rating) to commit to taking on the debt if you’re unable to repay it.

Again, guarantor loans can be easier to get accepted for because lenders have a guarantee they will get their money back if you are unable to repay it. But, unlike a secured loan, the debt won’t be secured against an asset, so there is no risk of you losing your home.

How easy is it to get a loan with bad credit?

Whether you get accepted for a loan with bad credit will partly depend on how poor your credit rating is. Those who have filed for bankruptcy or who have a recent CCJ are likely to find it harder to get accepted than someone who has made a couple of late payments in the past.

It will also partly depend on the lender. Lending criteria can vary, with some more willing to lend to those with lower credit scores than others.

Additionally, the amount you want to borrow can affect how likely you are to get accepted – those asking for larger amounts may find it harder than those borrowing smaller sums.

How can I improve my chances of getting a personal loan?

To increase your chances of getting accepted for a loan, your first step should be to look at ways to improve your credit score. This could include:

  • checking you’re on the electoral roll – this applies even if you don’t vote as it allows lenders to verify where you live

  • correcting any mistakes on your credit report

  • paying bills on time

  • keeping your credit utilisation low – this is how much of your available credit limit you use (around 30% is best)

  • checking for fraudulent activity

You should also consider disassociating yourself from your ex-financial partner. When you take out a joint bank account or mortgage you become financially linked to the other person.

If they have a poor credit rating, this can affect your chances of getting credit. If you’re no longer together and no longer share an account or mortgage, let the credit reference agencies know.

You could also think about applying for a credit builder credit card. These are designed specifically for those with low credit scores, with the aim of helping you to improve your credit score over time – so long as you keep up with your monthly repayments.

Interest rates on credit builder cards are generally high, however, so it’s important to pay off your balance in full each month to avoid paying interest.

What should I do if my loan application is rejected?

If you apply for a loan and are turned down, resist the temptation to apply for another one straightaway. Each time you apply for credit, a ‘hard’ search is recorded on your credit file.

If too many hard searches are recorded in a short space of time, lenders may view this as a sign you’re struggling to get credit.

Instead, it is better to check whether there are any further steps you can take to give your credit score a boost and wait three to six months before applying again.

Related: Compare Loans & Find The Right Deal For You

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