What is a bad credit loan?

A bad credit loan is a personal loan product created specifically for people with poor credit. Many people take out loans for bad credit to consolidate debts, where other lenders may be unwilling to lend to them.

Whilst you can get a loan with bad credit, lenders are likely to offer a higher interest rate as they may consider you more of a risk.

What is bad credit, and do I have it?

Bad credit means that your credit history is viewed negatively by lenders. Previous financial problems and past debt can lead to poor credit. These include:

• Late payments on things like credit cards
• Defaulting on payments on credit cards and loans
• County Court Judgements (CCJs)
• Insolvency and debt solutions, like IVAs, DMPs or DROs
• Bankruptcy
• Too many hard searches on your credit history – if you’ve applied for credit multiple times

Sometimes, your credit score may be poor simply because you haven’t demonstrated responsible borrowing. This may be because you’ve never borrowed money, are young or have just moved to the UK. Taking out a credit card and always meeting your monthly payments is a good way to build your credit history and show you can borrow responsibly.

Even if you have poor credit, you may still be able to borrow money. Your options for poor credit loans include:

Personal loans: Some personal loans are available with bad credit, but you will likely pay higher interest rates and may not be able to borrow the full amount.

Secured loans: With a secured loan, you put up an asset as a guarantee when you apply for a loan with bad credit. Often, this will be your home. Secured loans offer a way to borrow a fixed amount at a more competitive interest rate when you have poor credit. Just be aware you can lose your home if you default on payments.

Guarantor loans: With a guarantor loan, the lender will ask a friend or family member to agree to take on the loan repayment if you can’t pay it. Guarantor loans for bad credit will help you access money, but may put financial pressure on your friend or family member.

Pros and cons of bad credit loans

Pros

• You can borrow money even if you have bad credit and get the financial help you need.
• You’ll get the money quickly. If you’re accepted for a poor credit loan, the money can be in your bank account almost immediately.
• If you keep up with the loan repayments, a bad credit loan can help you improve your credit score and get it back on track.

Cons

• Bad credit loans often come with higher interest rates over the long term. This means you’ll pay more in interest over the term of your loan.
• If you default on any payments of your bad credit loan, you can damage your credit score further.
• Borrowing money when you have bad credit means you’re increasing your debt even further. This can increase the pressure on your financial situation. If you’re worried you can’t afford the repayments, consider all your options and think carefully about taking out the loan.

How can I improve my credit score?

To improve your credit score, you should:

Pay your bills on time: If you have a credit card, for example, paying your monthly bills in full and on time every month will show that you are a responsible borrower and can be trusted.

Check your credit report for errors: You should regularly check your credit report to see if it is accurate and up to date. Any mistakes can negatively impact your score, so ask for any errors to be removed promptly.

Register for the electoral role: This is simple and easy, and helps boost your credit score by confirming your address for lenders.

Close unused accounts: Leaving unused accounts open can negatively impact your credit score. Close any you aren’t using for a quick boost to your score.

Don’t make too many applications at the same time: Each time you apply for a personal loan, the lender may run a hard search on your credit history. This would then show up on your file. If lenders can see multiple applications in a short space of time, they may be concerned that you are in financial difficulty.

Keep below 50% of your credit limit: It’s best to keep some credit available for unexpected purchases. This shows lenders that you can borrow responsibly.

If you have poor credit, consider the following instead of a loan:

Borrowing from family or friends: Depending on your relationship, you may be able to borrow money from those closest to you. You won’t need a credit check, and they may decide not to charge interest. Consider how borrowing money may impact your relationship, especially if you struggle to meet your monthly repayments. It can be a good idea to draw up a written loan agreement to clarify the amount, terms and repayment schedule.

Credit cards: You may be eligible for a credit card instead of a loan. This is more suited to smaller payments. Taking out a credit card and paying it back on time will also help you boost your credit score.

How Asda Money can help

At Asda Money, we can help you find the right loan at the right rate for your needs without harming your credit score and with no obligation to proceed to a lender.  This is possible through our carefully selected panel of trusted UK lenders

All it takes is one eligibility check, and then you can compare loan offers from across our lender panel to find the one that’s right for you. If you have bad credit and want more information on how to manage your finances better, discover the Financial Support at Asda Money.

Asda is in partnership with Aro which is a trading name of Freedom Finance Limited. Both Asda Money and Aro are credit brokers, not lenders. We offer our customers a different solution to borrowing money and finding a loan.

We work alongside Aro so we can provide our customers with their very best loan offer from a panel of handpicked trusted lenders.

With one simple eligibility check, our panel of lenders can provide you with a loan tailored to your needs. It’s also a safe way to find a loan without negatively affecting your credit rating.