Credit Building > What are bad credit loans?

What are bad credit loans?

Wollit Team5 minute read · Updated 1st July 2024

Bad credit loans are personal loans meant for people who have had little luck with their finances in the past. If you have a bad credit history or hardly any credit history at all, these loans might be an option for you.

But they do come with a catch: higher interest rates and stricter rules than other loans.

This is because the lenders want to ensure they take a manageable risk. Still, if you handle them carefully, these loans could be helpful—not just for getting you the money you need but also for improving your credit score.

Also, just so you know, you won't usually see adverts for "bad credit loans" – that's just what people call them informally.

What is "bad credit" and do I have it?

Bad credit means that companies view your history of borrowing money as not so great, making it difficult to borrow money or access certain services. However, different companies assess your credit differently, so one might see you more positively than another.

You can check your credit score for free to understand how companies perceive you. Here's how:

To check your Experian credit score, sign up for a free Experian account.
To check your Equifax credit score, sign up for a free ClearScore account (Equifax doesn't offer free credit score access).
To check your TransUnion score for free, visit Credit Karma.

If your score is low, it could be due to things like:

Being late on payments,
Not repaying the money you owe,
Dealing with legal issues like County Court Judgements or bankruptcy,
And even making too many recent applications for credit.

Alternatively, your low score might come from not having much of a borrowing history for credit reference agencies to calculate your score on. This could happen if:

You're young and haven't borrowed much yet;
You've never had credit or a bank account;
Or if you've recently moved to the UK – your credit history from another country doesn't count here.

How can I get a bad credit loan?

First, figure out how much you can comfortably afford to pay back each month. Then, shop around and compare loans from different companies to find the best one that suits your situation and needs.

The most important thing here is to only apply for loans you're likely to be approved for, as each application leaves a mark on your credit report, potentially hurting your score.

Checking your eligibility before applying is the best way to avoid this. Plus, it can help you know your loan's chance of approval. Most bad credit lenders have an eligibility checker; even Experian, ClearScore, and CreditKarma offer one.

What minimum credit score do I need to qualify for a bad credit loan?

In the UK, bad credit loan lenders are open to considering you if your credit score is in the worst credit score band, as long as you meet other eligibility requirements, such as income and debt level.

If you need a reminder, here are the worst credit score bands in the UK:

Experian: under 560 (out of 999). This is called the "Very poor" score band.
Equifax: under 438 (out of 1000). They call this the "Poor" band.
TransUnion: 550 (out of 710). They also call this band "Very poor".

In any case, a poor or even very poor credit score alone doesn't determine if you can get a bad credit loan. There isn't a set minimum score that guarantees loan approval since lenders have varying eligibility criteria.

The main factor that matters for lenders when you have bad credit are:

What is your income;
What your current debts are;
Whether you can afford the loan repayments;
And how you've dealt with debt in the past – bad credit loan lenders will still run credit checks.

What are the pros and cons of bad credit loans?

Bad credit loans, despite their name, do come with some pros:

Access to money: If you need help covering basic living expenses, bad credit loans are sometimes the only option. Most lenders can get the funds to you within a few days.
Another tool to build your credit history: if you have a poor credit history, making timely payments on a bad credit loan can help rebuild it. It shows lenders that you're reliable, potentially boosting your credit score.

But they also have some big cons:

High interest rates: Bad credit loans usually come with higher interest rates because lenders view borrowers with bad credit as much riskier. The higher interest rate is how they get compensated for this extra risk.
Credit score impact: Applying for too many loans (which might happen if you're in a tight spot) can hurt your credit score. But missing payments on a bad credit loan (which can also happen if you're in a tight spot) could hurt your credit score even more. A poorer credit score makes it even more challenging to secure loans in the future.
Debt spiral risk: Using a loan to settle other debts might worsen your financial situation if you struggle to keep up with repayments. If you're unsure whether you can afford it, think twice before borrowing.

What are the bad credit loan terms like?

Bad credit loans come with tight terms because lenders need that extra security when lending to someone who has a poor credit history:

Representative APRs range between 39.9% to 89%. Occasionally, though, this can go even over 100% per year. APRs, by the way, include both interest rates and fees.
Borrowing limits start from as low as £50, rarely going only as high as £5,000. The majority only let you borrow between £200 and £1,000.
The usual repayment period is around 3 to 6 months. Sometimes, that can be faster, of one month, and rarely, it can go up to 36 months.

As you can see, bad credit loan terms, because they're so tight, can make it easy to miss a repayment and fall into a debt spiral, which can hurt your credit score even more.

Another thing to keep în mind here is that interest rates in the UK are currently pretty high, as the Bank of England is fighting to keep inflation under control.

This means that new loans will be more expensive. You'll pay higher interest charges, so the total cost of the loan will be greater. That's what the "variable" bit means when you see "representative APR"—the interest rate might keep increasing based on the Bank of England base rate.

Since bad credit loans already have very high-interest rates, with rates so high overall, these loans could cost you a lot in interest. You must think carefully about whether you can afford a bad credit loan.

How can I get better rates and higher limits?

If you can't afford to pay high rates or you need more money than a bad credit loan can offer, you might want to consider one of these other options:

Guarantor loans. To get one, you need to convince someone with good credit, like a family member, to agree to pay if you can't. This can help you get better rates or borrow more, but your guarantor could be asked to pay (or even lose their home) if you don't.
Secured loans: You put up your home, car, or something else valuable as collateral. Lenders might offer better terms because there's less risk for them. But you could lose whatever you put up if you can't make payments.
Debt consolidation loans combine debts from different accounts into one loan. This can simplify your payments and lower your interest bill. However, it might not be suitable for everyone. Even if the loan has a lower interest rate than your other accounts, you could pay more in interest if you take longer to pay it off.
Credit union loans: You might be able to join a credit union. These nonprofit organisations might overlook a bad credit score when deciding whether to give you a loan. However, some credit unions have restrictions, like living in a particular area or having a specific job. Others might ask you to save with them before you can borrow.
Budgeting loans: If you're on benefits, you might qualify for an interest-free loan from the UK government. The most you can get is £812, and you can only use it for clothes, rent, or food. Check the GOV.UK website to see if you qualify.

The other thing you can do to get better terms is to improve your credit score. Here are some steps you can take to improve your score and increase your chances of getting the loan you want:

Consider a credit-building credit card. They come with similarly high interest rates and low credit limits. However, some give you some time to repay before interest rates kick in.
Sign up for Experian Boost: A free service lets you connect your bank account to your Experian account. This can make regular payments (like a Netflix subscription) count towards your Experian credit score.
Download a credit-building app like Wollit. Wollit reports your monthly subscription as loan repayments. This means that, unlike a credit card or loan, you can build your credit history and improve your credit score without running the risk of missing a loan repayment or having to pay triple-digit interest rates and fees.

For more tips, check out our guides on how to improve your credit score.