If your credit history is patchy, getting approved for a loan can be a real headache, especially if you need it quickly.
Mainstream lenders you may come across are usually hesitant to extend offers of credit to people with a less-than-perfect score.
Unfortunately, this setback can leave you feeling like you’ll never be able to access the funds you need.
However, don’t worry – you’re not alone in facing this situation.
Many people across the country struggle with bad credit as a few minor setbacks can cause serious damage to your score.
Fortunately, there are still many loan options out there to help.
One such option is taking out an instalment loan.
In this article, we’ll explore what instalment loans are, details of how they work, and find out why they could be a potential lifeline for those with a poor credit score who are in need of quick cash.
Just be aware that failure to keep up with loan repayments can negatively affect your credit score further and lead into further debt if you aren’t able to keep up.
If you need help repaying your debts, the government website Money Helper has some advice.
What is an instalment loan?
An instalment loan is a type of loan which is repaid in – you guessed it – instalments.
The repayments you will make are fixed and regular, spread out over a set period of time which you will agree with a lender before signing your loan agreement.
Instalment loans are distinct from other types of credit product in that you’re not expected to repay the loan all at once, which can be a relief if you’re new to borrowing, or your credit record isn’t the best.
It sets this type of loan apart from types of products such as payday loans, which require the cash your borrowed to be repaid in full on your next payday.
With an instalment loan, the repayment schedule can stretch across several months to a few years, until the money you borrowed is paid off in full.
The amount of cash you can borrow with an instalment loan varies, depending on the lender and the way they interpret your creditworthiness.
Generally, instalment loans are taken out to fund larger expenses, such as unexpected car repairs, home renovations, or planned debt consolidation.
Due to their versatility and the fact they’re tailored to you, instalment loans come with varying interest rates, fees, and repayment schedules.
With that in mind, it’s important to shop around and compare various options from different lenders to find the best loan for your individual needs.
What are the different types of instalment loans?
There are many different types of instalment loans out there on the market.
Each one has its own features and requirements, and some are easier to obtain with bad credit than others.
- Personal loans are a hugely popular type of instalment loan. They are extremely flexible and can be used for a wide variety of purposes such as debt consolidation, home modifications, or expenses which crop up unexpectedly. But beyond these uses, there are many more. Personal loans are typically unsecured, which means that you don’t need to put up collateral to get accepted. However, if your credit score isn’t so good, it may be a good idea to offer a valuable asset to secure the loan and lower the lenders’ risk. This will increase the likelihood of you being able to access the funds you need.
- Car loans are a type of instalment loan which are used to cover the cost of purchasing a vehicle, whether that’s a car or a van. These loans are secured, which means that the vehicle can serve as collateral for the loan. If you have poor credit, this type of loan can usually still be accessed as the lender will have the security of the vehicle to fall back on if you default.
- Mortgage loans are paid in instalments and are used to cover the purchase of a home. These loans are usually offered long-term, with repayment periods of 15-30 years, or sometimes more in certain circumstances. Like car loans, they are also secured, with the home acting as collateral. Whilst the lender can repossess the house so has security in that respect, it can still be hard for those with bad credit to access a mortgage as a house is such a huge purchase. It is best to seek help from a specialist lender to figure out your options, if your score isn’t in such good nick.
- Small business loans are paid back in instalments, and are designed to help business owners who need financing to start or grow their small business. These loans are offered in either a secured or unsecured capacity, meaning that you can work with the lender to tailor the conditions to your needs. The repayment terms and interest rates which you will be required to abide by can vary depending on the lender.
It’s important to bear in mind the responsibility which you will take on under each of the above loan options if you choose to take one out.
If you’re already struggling financially, now may not be the best time to take on extra debt, even if an affordability test confirms you can technically afford it.
It is always best to borrow within your limits and build up a positive credit profile as far as you can. Simply paying on time can keep your credit score in good shape.
What is bad credit?
You may have heard of the term ‘bad credit’ with regards to loans in the past. It refers to when a person’s credit history is in poor shape.
Your credit report is an overview of your past borrowing and repayment habits.
And the information contained within it gives lenders an idea of how likely you are to repay a loan based on your past behaviour surrounding debt.
If you have bad credit, you’re likely to have a series of missed payments, unpaid debts, or lots of credit products taken out simultaneously reported on your file.
Having these marks against your name reduces your score overall and can make it difficult for you to get approved for loans, credit cards, or any other forms of credit product.
Could I use a guarantor to get a loan if I have bad credit?
Fortunately, if you have poor credit, you can easily use a guarantor to help get a loan.
A guarantor is someone who agrees with the lender to take responsibility for the loan repayments if you are unable to make them.
People tend to choose a close friend or family member to take on this role for them.
Doing so can provide much needed security for the lender, making it more likely that they will lend you the amount you request on your loan application.
When you are applying for a loan with a guarantor, the lender will usually take the creditworthiness of both you and your guarantor into account to make their decision.
Ideally, your guarantor should have a really good credit history, as this will increase the chances of your loan application being approved as it can balance out your poor credit background for the lender.
Using a guarantor to secure a much-needed loan can be a hugely helpful option if you have bad credit.
But even though you now have somebody taking the loan out alongside you, it’s important to make sure that you are able to repay the loan you’ve taken out anyway.
If you default, it will of course be your guarantor’s responsibility to repay your debt.
This could damage their credit score drastically, as well as their personal relationship with you if you fail to keep to your agreement to pay the lender.
Make sure that both you and your guarantor fully comprehend the terms and conditions of the loan you’re taking out.
Ensure to discuss them with your guarantor before applying as, if you do, they will know exactly what they’re getting themselves into, and you will both be able to manage each other’s expectations.
How can I improve my credit score to access better instalment loan deals?
- Missed payments can have a hugely significant impact on your credit score, and not in a good way. Always be sure to pay any bills on time, even if it’s just making the minimum payment that you’re able to under the deal you have with the company.
- It goes without saying that high levels of debt can hurt your credit score, perhaps beyond what you’d expect. Before taking on any more credit, focus on paying down your balances and avoiding any new loans if that’s possible in your situation.
- Regularly check your credit file to make sure there are no errors or inaccuracies which could be harming your credit score and keeping it low. Fortunately, consumers can get a free copy of their credit report from each of the three major credit bureaus every single year. By having access to this helpful document, you can pinpoint any areas where you’re failing to be financially responsible.
- The duration of your credit history can also impact your credit score and is nearly as important as the details of the history itself. Lenders want to see a wide range of instances where you’ve been responsible with money, and with debt. Keeping old credit accounts open – even if you’re not using them – can potentially improve your score quickly.
- Applying for lots of new credit at once can damage your credit score quite considerably. By limiting your applications to just the credit you really need, you can show lenders that you are always bringing your debt down, rather than driving it up.
- Having a diverse mix of different types of credit you’ve accessed can help improve your credit score. Things such as credit cards, auto loans, and mortgages all add up to show lenders you can manage your finances responsibly.
Whilst having a low credit score can be frustrating, positive changes won’t happen overnight, as much as we’d like them to.
However, by taking the steps we’ve described, you can slowly but surely work towards getting yourself a new and improved credit score.
Ultimately, this will help you get better loan deals from lenders, as your riskiness as a borrower will decline considerably.