If you have a poor credit rating, you’ll be turned down for the most competitive personal loans on the market. But that doesn’t mean you won’t get accepted anywhere. We take a look at your options if your credit score isn’t up to scratch.
What is a poor credit rating?
When you apply for any type of credit, the lender will check your credit report to see how reliable you are as a borrower. If you have ‘bad credit’ or a low credit score this may mean you’ve struggled to keep up with debt repayments in the past.
You might have a low credit score for reasons such as:
- late monthly repayments
- missing payments altogether
- an Individual Voluntary Arrangement (IVA)
- County Court Judgments (CCJ)
- too many ‘hard’ searches on your credit file – a hard search is recorded every time you apply for credit and too many in a short period of time can make you look desperate for credit.
You may also have bad credit simply because you haven’t borrowed in the past and have not had the time to build up a credit history.
If any of the above reasons apply to you, lenders will deem you as ‘high risk’ which means you will find it harder to get accepted for a loan.
What type of loan can I get with a poor credit score?
If you have a poor credit rating, the choice of loan options available to you will be more limited. However, you may still be able to choose from the following:
Personal (unsecured) loan: This type of loan is ‘unsecured’, so you won’t need to use an asset such as your home or car as collateral, but you will have a limited choice if you have a poor credit score, and the interest rate charged will be higher.
Secured loan: With this type of loan, the amount borrowed is secured against an asset, usually your home. For this reason, they are also known as homeowner loans or second charge mortgages.
Secured loans are far riskier than unsecured loans because, if you are unable to keep up with your repayments, you could lose your home.
The advantage, however, is that lenders may be more willing to lend to you because of the secured asset, and this usually means the rate of interest will be lower.
Guarantor loan: With a guarantor loan, someone such as a friend or family member (who will need a good credit rating) agrees to take on the debt if you are unable to pay it off.
Lenders are more likely to let you borrow if they know someone else will keep up with the repayments if you cannot. The debt is unsecured, so it won’t be linked to your home or any other asset.
What are the pros and cons of bad credit loans?
- You can often get access to your funds quickly – sometimes within 24 hours
- If you make your repayments on time, your credit score will increase, helping you to access to more competitive loans and other forms of credit in the future
- Monthly repayments are fixed, making it easier to budget.
- There is no flexibility with loan repayments, so if you regularly miss your monthly repayments you risk damaging your credit score further
- If your loan is secured against your home and you cannot keep up with your repayments, your lender has the legal right to repossess your property
- Interest rates are likely to be higher if you have a poor credit rating, making your overall debt more expensive.
How can I improve my credit score?
If you have a low credit score, the good news is there are several steps you can take to improve it. These include:
- regularly checking your credit report and correcting any mistakes
- registering on the electoral roll (if you haven’t already)
- paying bills on time
- spacing out credit applications by at least three months, ideally six
- keeping your ‘credit utilisation’ low – this is how much of your available credit limit you use (around 30% is about right).
What else should I consider?
If you’re thinking about taking out a loan with a poor credit rating, you should think carefully about how much you need to borrow and how much you can afford to pay back each month. Draw up a monthly budget and make sure you stick to it so that you don’t miss any repayments.
You should also consider the repayment term. Choosing a longer term will reduce the amount you have to pay back each month, but the interest rate is likely to be higher, and your total repayment cost will also increase – so you will pay back more overall.
Before applying for a loan, it can be worth using an eligibility checker (usually now offered by on lenders’ and comparison websites) which will show you how likely you are to be accepted for a particular loan without affecting your credit score.
Alternatively, you may want to think about using a credit builder credit card, which aims to help borrowers repair, improve or ‘build’ their credit score. Acceptance criteria are generally lower so a credit builder card can be a good choice if you can’t get credit elsewhere.
Note that credit builder cards generally have low credit limits and high-interest rates so it’s best to pay off your balance in full each month. But used sensibly, this type of card can help you to improve your credit score over time. You can find out more in our guide.