Unsecured Loans for Bad Credit
If your credit score isn’t the best, obtaining a loan can be a daunting prospect.
As it stands, many lenders might be unwilling to offer you loans if you have a poor credit history as you’d be considered a high-risk borrower.
However, this doesn't mean that all hope is lost.
There are still loads of borrowing options available if your credit history is patchy and you’re in need of an influx of cash.
Unsecured loans are just one of the many avenues you could pursue to get the credit you need.
This article will prepare you for navigating the world of unsecured loans. We’ll discuss what they are, how they’re different from secured loans, how they can be taken out by those who have bad credit, and the other potential alternatives.
So, if you're struggling to get your loan application approved, keep reading to learn more about unsecured loans and how they may be able to give your finances a boost.
What is an unsecured loan?
If you have bad credit, taking out loans can be a challenge.
An unsecured loan is just one type of loan which those with a poor credit history may struggle to obtain.
But it can be done!
So, what is an unsecured loan?
This type of loan is not backed by any collateral, hence the name – the product is ‘unsecured,’ and backed up by your creditworthiness as opposed to any asset.
Essentially, this means that the lender you apply with doesn't require you to put up anything you own which is of value, such as your home or car.
Instead, the lender relies on your perceived capacity to repay the loan in order to determine whether or not to offer you the sum of money you ask for in your application.
As unsecured loans aren’t secured against any collateral you put up, lenders consider them to be a riskier lending prospect than secured loans.
As a result, they typically carry much higher rates of interest, and have stricter eligibility requirements for you to meet if you want to take one out.
However, they can be a great avenue of accessing credit for those who don't have anything of high value to use as collateral.
If you have bad credit, you may find it difficult to get a high loan sum which is unsecured.
Instead of borrowing a huge amount, you could try requesting to borrow a smaller amount which is easier to repay on time.
This would present less risk to the lender, potentially helping your case as a borrower.
Whilst an unsecured loan may come with a higher interest rate than say, a 0% interest credit card, you are typically more likely to get approved for a smaller unsecured loan, than a large loan.
And paying it back on time could actually help your credit score to improve in the long run.
You just need to be aware of the risks involved, and be clear on the interest you’ll pay each month as well as any additional fees.
What does it mean if I have bad credit?
In a nutshell, having bad credit means that your credit score is low.
Everyone has a credit score, and a credit history which shapes it.
Credit scores are therefore calculated based on a variety of factors like your payment history, the way you use any credit products, the overall length of your credit history, and types of credit accounts which you have open, or have used in the past.
If your credit score is low, it indicates that you might have a history of late or missed payments on debts and bills you’ve owed companies.
It could also show lenders that you have high credit card balances or partake in other irresponsible financial behaviours on occasion.
Unfortunately, having a score which is low can often make it more difficult than usual for you to get approved for loans, credit cards, or any other type of credit you might apply for.
However, there’ll always be a lender out there to help you, even if it’s just to advise on how to improve your borrowing prospects.
Having a bad credit record could also result in you needing to pay higher interest rates and fees on loans and credit cards than someone with a good credit score.
This is because lenders and creditors consider you to be a risky borrower, and they’re trying to cover their potential losses if you fail to repay a loan on time.
Whilst having bad credit can be frustrating and may seem like a huge, unwanted obstacle to accessing the funds you need, it's important to remember that poor credit is never a permanent fixture in your life.
There are steps you can take to improve your credit score over the course of a relatively short period, if you are diligent and determined in changing your situation.
How can I improve my credit score?
All is not lost, reader! There are many different things you can do to improve your credit score over time if it’s not looking it’s best.
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You can ask for a free copy of your credit report from each of the three major UK credit bureaus - Equifax, Experian, and TransUnion - and check it through for errors or inaccuracies which can cause your score to take a hit. If you end up finding any, you can dispute them with the relevant credit bureau and get them removed. This can work to improve your score relatively quickly.
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Late payments can, of course, have a negative impact on your credit score. For this reason, it’s important to make sure you pay all your bills on time. So, you could consider setting up automatic payments on any bills you need to attend to on a regular basis or set reminders on your phone to help ensure that your payments all go through on time.
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High credit card balances can hurt your credit score quite substantially. For this reason, it’s a good idea to work on paying down your balances as much as you can. As a rule of thumb, try to keep your credit card utilisation below 30% of the total credit you’ve got available.
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Opening a lot of new credit accounts in a short space of time can hugely impact your credit score, and not in a good way… If your score is on the low side, try to limit the amount of new accounts you open as much as possible, only using what you really need.
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If you have bad credit, or even no credit history at all, you might consider taking out a secured credit card. These usually require a small security deposit, but they can help you build up a credit record over time, allowing future lenders to see how responsible you are with credit use.
Improving your credit score takes a fair bit of time and effort. However, it's always worth it in the long run.
Having a higher score will eventually help you qualify for better interest rates on loans such as your mortgage and credit cards, as well as giving you peace of mind that you’ll be able to access credit if you need to in the future.
What are the benefits of taking out an unsecured loan?
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Unlike secured loans which require you to put up collateral, unsecured loans do not require any assets to be put up as part of the loan agreement. This means that you don't risk forfeiting any of your assets if you're unable to make scheduled repayments. It also means that you’re able to access a loan if you don’t own anything of a high enough value.
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Unsecured loans are highly flexible and can be used to cover a wide range of expenses. Things like debt consolidation, house renovations, and unexpected medical expenses can be dealt with using an unsecured loan and you usually don’t need to tell the lender what you’re using the cash to finance. This makes covering expenses straightforward if you get approved.
Whilst unsecured loans have some excellent features, it’s important to note that they can also come with higher interest rates and fees than you’d expect, especially if you have bad credit.
Before you apply for an unsecured loan, it's very important to consider whether you can actually afford the monthly repayments which are required of you.
What if I have bad credit and can't get approved for an unsecured loan?
If you have bad credit and have found you are unable to qualify for an unsecured loan, there are still many options available to you on the marketplace.
One option could be investigating secured loans instead.
These are backed up by collateral such as your car, home, or any other assets which are worth a substantial portion of the loan’s value.
Because these loans are a much less risky prospect for lenders, they may be more willing to lend you some cash in a secured context, even if you have bad credit.
However, it’s important to keep in mind that if you default on a secured loan at any point, the lender may repossess the collateral to recover their lost money.
Another option to access credit could be to explore alternative lending options, of which there are a few.
Peer-to-peer lending is just one.
This method of lending connects borrowers with individual investors who are willing to lend to those in need of cash.
Platforms which facilitate this exchange usually have far less stringent credit requirements than traditional lenders and may be more willing to work with borrowers who have a bad credit score.
Lastly, it's vital to actively work on improving your credit score over time by getting all of your payments up to date, reducing any balances you have on credit cards, and disputing any errors you may find on your credit report.
Could a guarantor loan be a solution for me?
If you’ve had no luck with loan applications on your own, you could draft in a guarantor to help get your application over the line.
A guarantor loan is unsecured but requires a guarantor to co-sign on your loan agreement with a lender. Normally, people choose a family member or friend to perform this duty.
It’s wise to pick somebody you trust, as the guarantor must agree to take on the responsibility of repaying your loan if you are unable to do so, for whatever reason.
Guarantor loans are usually accessed by individuals with bad credit, or no credit history at all. This is because having a guarantor can dramatically improve your chances of getting approved for a loan.
The lender views the guarantor as an additional layer of security, which ultimately reduces their risk of a loan default occurring.
Whilst guarantor loans are a lifeline for many people with bad credit, it's important to remember that if you’re unable to make the loan repayments, your guarantor becomes legally responsible for paying off your loan.
Naturally, this can present a significant burden for the guarantor.
It can even damage their credit score if they are unable to make the payments on your behalf.
As is the case with any loan, it's really important to consider the terms and conditions of a guarantor loan before either you or your guarantor agrees to it.
By ensuring everyone understand the process, and by putting a plan in place for repaying your loan on time, it can be a smooth process which those with bad credit can benefit from.