When your credit history is not stellar, you will have difficulty getting approval for a personal loan. Unsecured lenders come with high interest rates, and if your credit rating is less than perfect, your affordability is called into question. It does not imply that you cannot qualify for a personal loan with a bad credit rating at all,
Some lenders accept applications from subprime borrowers, but they charge higher interest rates and restrict the loan amount. There are two types of personal loans: emergency loans that are discharged in one fell swoop on the due date and large unsecured loans that come with a longer repayment period.
Both types of loans might cause financial problems as the repayment duration is not too long. Once you miss a payment, you will end up racking up debt. There are various types of loans that you may find safer in relation to personal loans.
Loans that are safer for people with bad credit
If you are a subprime borrower and you are looking for safer loan options, you should consider the following options:
Secured loans
There are various reasons why unsecured loans cannot be ideal solutions for you. As they are not backed by collateral, lenders charge high interest rates to abate the default risk. If you are a borrower with a subprime credit rating, interest rates will be higher. In order to avoid the risk, lenders will expect you to pay down the debt in a short period of time, which will increase the size of the monthly instalments.
There is no doubt that you will struggle to repay your debt. One missed payment can lead you to a debt spiral. In order to avoid being caught in an ongoing cycle of debt, you should consider secured loans.
Secured loans are subject to collateral. It means they will be secured against your property. One of the benefits of taking out secured loans is that they come with lower interest rates. Not only will you be offered lower interest rates, but you will also be able to borrow a large amount of money.
Despite your subprime credit rating, you will be able to qualify for lower interest rates, because your lender can repossess your property to get their money back in case you default.
Credit union loans
Credit union loans are the safest option when your credit rating is not stellar, and you need a small amount of money. Taking out an emergency loan from direct lenders will cost you a lot of money. Further, they are paid off in one shot, which is almost impossible for most of the borrowers. As a result, they end up being trapped in a debt trap.
Credit unions offer small loans with flexible repayment terms. Their deals are not as expensive as lump-sum loans from direct lenders. They will assess your repayment capacity and affordability. The repayment term is decided after taking into account your financial condition. This makes the payment much easier and more affordable.
Credit union loans are not only suitable for small emergency loans, but they are also ideal for consolidating debt.
Loans from responsible online lenders
Various direct lenders are out there who would provide you with bad credit loans. They might be small and large. However, you will be lent money based on your repayment capacity. Not all direct lenders are legitimate and follow the practice of responsible lending.
If you want to apply for loans for bad credit in the UK, you should ensure that you borrow money from a responsible lender. Bad credit loans can be used for small emergencies that are repaid in a lump sum, as well as for large expenses that are repaid over a duration of months.
The size of the loan varies between £100 and £5,000. However, since your credit score is not so perfect, most of the lenders will cap at £2,500. You should always try to borrow money from a responsible and credible lender who carefully examines your repayment capacity. This will reduce the risk of falling behind on payments.
Guarantor loans
Guarantor loans are also personal loans, but they involve a guarantor. It could be challenging to borrow a large amount of money when your credit score is less than perfect. Most of the lenders will turn down your application, or they will restrict the money and charge very high interest rates.
In order to improve your chances of being accepted, you can arrange a guarantor with a good credit history. When a guarantor enters into a loan agreement with you, they are not entitled to use the money. They are not borrowing. They are rather guaranteeing that you will repay the debt on time, and if not, they will be liable to pay it off.
- At the time of taking out a guarantor loan, make sure that you are absolutely certain about your repayment capacity.
- If you fail to discharge the debt, your lender will call on your guarantor to settle the dues.
- Bear in mind that falling behind on payments will affect your guarantor’s credit rating as well.
It is essential that your guarantor is well aware of the repercussions of acting as a guarantor. Payment failure can strain your relationship with the guarantor, too.
Government-backed loans
Government-backed loans are aimed at those who are on a low income. They offer interest-free loans that can come in handy during financial hardships. However, these loans are ideal only for funding unexpected expenses.
Loans that you must avoid
Loans that are not safe for people with bad credit histories include:
- Payday loans should be avoided. They charge very high interest rates. They can cost you thousands of pounds.
- Do not consider using doorstep loans because they charge doorstep service fees. This makes them even more expensive than payday loans.
- Loans offered by unregulated lenders. They could be loan sharks and trap you into an ongoing cycle of debt.
The final statement
If your credit score is not so impressive, safe loan options will be secured loans, credit union loans, and guarantor loans. Whichever loan option you choose, make sure you have carefully analysed your repayment capacity.
Also read what young uk adults need to know about credit and borrowing.
