Credit Building > Can you get low interest loans if you have bad credit?

Can you get low interest loans if you have bad credit?

Wollit Team4 minute read · Updated 29th June 2024

If you have a bad credit score, you probably already know that most loans will come with very high interest. But there might be low interest options.

Why do bad credit loans charge high interest?

A bad credit loan is a loan for people who have a bad or no credit history. Because lenders see them as risky, these loans have higher interest rates and stricter rules than loans for people with good credit.

What counts as a bad credit score?

When you apply for a loan, lenders usually check your credit score to see how risky you are as a borrower. This credit score is based on your financial and personal information, and it's used to determine whether you'll get the loan and what the terms will be.

Take the Equifax score range, which is between 0 and 1,000. Here's how the different score bands are called by Equifax:

811-1,000: Excellent credit;
671-810: Very good credit;
531-670: Good credit;
439-530: Fair credit;
0-438: Poor credit.

If your credit score is above 670, you'll generally have an easier time getting approved for loans and getting better terms, like lower interest rates. However, if your score is below 580, you might struggle to find lenders who are willing to work with you, or you might only be eligible for smaller loans with higher interest rates.

But even if you have a low credit score, it's still possible to get a loan. Some lenders are willing to work with people with poor credit, but the terms may not be as favourable.

What is a bad credit loan?

A bad credit loan is a type of loan for people who have a low credit score or no credit history at all. Lenders see these people as higher risk, so they charge them higher interest rates and have stricter rules for these loans compared to loans for people with good credit.

Is it possible to get a loan with very bad credit?

How easy it is to get a loan depends on how bad your credit is:

If your credit score is just a bit low, you may need to shop around and compare different loan options to find the best deal.
If your credit score is really low, it will be very difficult to get a loan from a bank or reputable lender. You may be tempted by payday loans or pawnshops, but these have extremely high interest rates and can put you deeper into debt.

The good news is that there are some lenders that specialise in loans for people with poor credit. These loans tend to be smaller and have shorter repayment terms. They may also involve a co-signer or joint loan, where someone else is responsible for repaying the loan.

These loans might not be what you were looking for – you might want to work on improving your credit score before applying for a loan. This will give you more options and better terms in the future.

What loans can a person with bad credit get?

If you have poor credit, you still have options for borrowing money, but there may be limitations on the amount you can borrow, the interest rates, and the types of loans you can access. Here are some options:

Secured loans: These loans require you to use something you own as collateral for the money you borrow.
Personal loans: Some lenders offer personal loans to individuals with bad credit, but these often have strict borrowing limits and high-interest rates.
Debt consolidation loans: These loans help you combine multiple debts into one, simplifying your repayments with a single interest rate.
Guarantor loans: for this kind of loan, a guarantor agrees to repay the debt if you cannot. The guarantor has to go through a credit check as well, though.

When considering loans, check if the lender will perform a soft or hard credit search. A soft search gives you an idea of your acceptance chances without impacting your credit score, unlike a hard search.

What's the difference between secured and unsecured loans?

Secured and unsecured are the two main types of loans available from most lenders. Here's what they mean:

A secured loan asks you to provide collateral, for example your home or a car. This acts as a guarantee. If you fail to make the loan payments, the lender can just keep the collateral. For example, a mortgage is a kind of secured loan where your home is the collateral.
An unsecured loan has no collateral. Instead, the lender bases the loan decision on your credit history, income, and what you can actually afford to repay. Even with good credit, some lenders may still require a guarantee, especially for larger loan amounts.

The main difference comes from the risk involved. Secured loans charge lower interest rates since the collateral reduces the lender's risk. Unsecured loans have higher interest rates because the lender is taking on more risk without any collateral.

Which are the best low-interest loans for bad credit?

There are many kinds of loans for people with bad credit in the UK. Looking only at the ones with low-interest rates, here are some of the best options we found:

Abound: you can borrow between 2000 to 10,000 and only pay an APR of 25%.
Lendable: You can borrow between £1,000 and £25,000 and pay 34.9% APR.
118 118: offers between £1,000 and £5,000 at an APR of 49.9%.

Are these the best options? If you're looking for an unsecured loan, probably. Every other lender we looked at listed representative APRs from 60% all the way to 170%!

That doesn't mean you should go for any of the three we listed, either.

If your credit score is already low, having to pay such high APRs puts you at risk of harming your credit rating further if you can't keep up with loan repayments. An even worse credit score will make it very difficult to borrow in the future.

And if you're using the loan to pay off another debt, you could make things worse if you struggle to keep up with the loan repayments. If you think you might not be able to afford the loan, then think twice before borrowing.

How can I get better loans if I have bad credit?

If you want to get access to better loans, there is only one thing you can do: improve your credit score.

Here are some steps you can take:

Register to vote.
Don't change your address too often.
Pay all of your bills in full and on time.
Reduce how much credit you use and aim for a low credit utilisation ratio (the percentage of your credit limit that you actually use). Experian recommends to keep this under 25%
Check your credit report for any mistakes.
Remove old financial links from your credit report, such as if you've ever had a joint loan or mortgage with an ex-spouse.

One major factor that can also make it very hard to get better loans is having no credit history at all – this is also known as having a "thin file". You might think never taking out a credit card or loan would be good, but unfortunately, it also doesn't give lenders any information about you. This can sometimes make having no credit history worse than having a poor one.

A solution you could try is downloading a credit-building card like Wollit.

Unlike a bad credit loan that often comes with high-interest rates and fees, Wollit lets you pay a fixed monthly membership fee, which then gets reported to the credit references as loan repayment.

This helps you build a credit history and potentially improve your credit score without running the risk of taking on a large amount of debt.