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The Beginners Guide To How Bad...


The Beginners Guide To How Bad Credit Loans Work

The Beginners Guide To How Bad Credit Loans Work
The Silicon Review
18 December, 2019

We all need a little help every now and again but depending on or misunderstanding bad credit loans could be costing us greatly. Whether you are looking for a personal loan, a payday loan or a mortgage, a bad credit loan is a general term for the financial products available to those people who have a lessthanperfect credit history.

People who do have bad credit – for whatever reason – may struggle to find affordable or manageable loans because lenders put up the prices to combat the ‘risk’ of them as a borrower. This typically happens by the more risk-averse high street banks or traditional lenders. Online lenders and those who work in a dynamic pocket of the loans industry may operate differently and may be able to help these individuals.

Q. What Types Of Loan Can I Get With Bad Credit?

Bad credit loans are not, technically, a dedicated product. They are normal loans which have additional caveats, fees or criteria to suit those applicants or borrowers who do have bad credit. This could be any loan type, from mortgages to personal loans.

These additions or ‘extras’ for loans could have been added for any number of reasons, but there are times when a bad credit loan could result in an extremely high bill. A payday loan, for example, is known as HCSTC, or high cost short term credit. This is the official term in which lenders capitalise on consumers who only need a small sum of money to see them through until their next cheque.

Adding the ‘penalty’ of having bad credit to a high cost loan could mean that this is an unsuitable situation in which to consider bad credit loans. There are also plenty of alternatives for credit and emergency financing that might be more appropriate and available at a much lower risk.

It could be more feasible to borrow, or get approved, for a bad credit loan of £1500 or more as a personal loan. It is important to investigate the pros and cons of each loan product before applying with bad credit, but we will explain more about why this is important later.

Unsecure Bad Credit Loans

An unsecure loan is not protected by any collateral and is a straightforward lending agreement, like a personal loan. This means if you default or miss too many payments, the lender cannot automatically repossess your property, car or asset that has been tied into the agreement. This makes them a low risk borrowing option if you do have bad credit, as you are unlikely to lose your home or asset because of defaulting on payments.

Lenders run checks on candidates before a loan is agreed. If they are compliant and work within FCA regulations, they will run affordability checks and should not be worsening a borrower’s financial position by lending to them. In theory, this should protect someone with bad credit from making harmful financial decisions but there are too many uncontrollable variables and it is impossible to completely control your finances, especially when already tied into other debts.

An unsecure loan means that an individual does not need any considerable assets before they can get access to credit. Applicants are approved quickly and there are fewer variables a lender will need to evaluate before being given access to funds.

Unsecure loans are also incredibly flexible in how much money could be available and the terms could range anywhere from a year to 35 years. This provides an opportunity for those people who do have bad credit to rebuild their credit score into a more accurate reflection of their current situation.

Debt Consolidation

Applicants with bad credit could decide to use an unsecure personal loan for debt consolidation. This is where an individual borrows enough to cover all outstanding and owed monies to make it simpler, cheaper and more manageable to pay off their debt to one lender and avoid accruing multiple interests. This is another example of when bad credit loans might be beneficial because it makes debts more manageable and tidier, ultimately helping consumers avoid late penalties and defaults because there is only one repayment date and one debt amount.

It could be important to note that an individual with multiple debts could be seen as having bad credit, but this is not necessarily true. It will be important for the individual to calculate early repayment costs and how much they can actually save by using a debt consolidation loan. Moreover, debt consolidation loans for an applicant with bad credit might work out to cost the same as repaying multiple creditors but could simply provide an easy process that makes life a little simpler.

Secure Bad Credit Loans

A secured loan is a financial product that is tied in to the borrower’s other assets. These are sometimes referred to as homeowner loans because most are tied in with the equity within a home or property. Essentially, a borrower can put up their valuable assets as collateral to help reduce their risk and give a lender an incentive to fulfil their loans.

This could make it easier for those with bad credit to be approved for fundingbecause consumers are able to offset the appearance of their risk. If they are unable to make payments however, the lender will have a clause that allows them to take the money from the collateral property or assets.

For those with bad credit, this could be one way to start rebuilding a credit profile. Borrowers will have access to higher borrowing limits, as long as the equity within the property is reliable. The equity will be calculated based on the market value of the property. This means that there could be more advantageous times to apply for a secured or homeowner loan than others, such as when the property market takes a substantial dip like during a recession. It is worth noting that lenders might be more frugal in these instances though, as they will try to protect their money and may not be willing to lend to extremely risky customers, such as those with previous CCJs or IVAs.

Secured loan lenders will also investigate an applicant’s other financial commitments and history of repaying credit.

Q. How Does Bad Credit Occur?

There are different levels of ‘bad credit’. It could be as simple as failing to stick to a credit agreement and missing repayment terms once or twice in the last 10 years. However, there are more severe ways to mark a credit profile.

County Court Judgement –  A CCJ is a court order that people in serious debt may be served. This is served by one creditor who believes they will not be paid the money they are owed without getting the courts involved. It is essentially a court order to pay the money owed or come to the arrangement with the creditor. A CCJ is legally required to be public knowledge on the register of judgements, orders and fines unless the full amount owed is paid within a calendar month from the CCJ being issued.

Alternatively, a CCJ can be disputed and the courts could admit to an error which will mean the order will also remain unregistered. Despite the CCJ not appearing on a credit profile, the defaults that lead to the error could appear and affect an individual’s credit score.

Individual Voluntary Arrangement – An IVA is a legal agreement between individuals and creditors on how a debt will be repaid after a loan or borrowed monies has been renegotiated. An IVA can be flexible but does tell other lenders and potential creditors that you were unable to meet a previous agreement.

Alternatively, those with no substantial credit score or history could also be unfairly penalised. This occurs when, usually a young person, is seeking credit for the first time. They may not have had to use a loan or borrow money for, which means lenders have no past information to make evaluations about the risk of lending to them.

Q. Does Looking For A Loan Make My Credit Worse?

One of the factors that is used to establish a credit score is the number of applications any individual has submitted. This is somewhat an outdated factor now and is one of the lowest ranked factors used to calculate any credit score. Credit applications are expected to only account for about 10% of your score, but this will vary from lender to lender.

When someone applies for a loan of any kind, creditors would run credit checks, this is known as a hard credit check because it marks the score of the applicant. This typically stays on a credit report for a couple of months to two years, unlike the six to ten years of other misdemeanours, such as a CCJ, so the effect of a credit inquiry is quite minimal.

However, if someone with bad credit makes a lot of inquiries for any loan type, this could show up as a red flag for creditors, as well as damaging your credit score. This is not good practice for someone who is already struggling to maintain or curate positive credit for themselves. Making lots of inquiries is an issue for creditors as it may indicate you are unable to cap spending or get a grip on shopping behaviours and not living within your means and getting into deeper debt. Alternatively, it could suggest that an individual is piling different debts up, especially if the loan is being used for debt consolidation.

Credit inquiries should not be considered too much of a concern for those who need a loan with bad credit for a genuine reason. Consumer websites, brokers and even some direct lenders will be able to provide comparative information that eradicates the need to go direct to multiple lenders.

Updated technology means that if one lender is unable to meet a loan requirement, because you have bad credit or for any other reason, they may be able to connect you with a lender with the appropriate appetite. A soft check will be performed as a preliminary assessment, but before the loan is agreed between parties, a hard check will be carried out.

This could help consumers save so much time and will help them get the best rate, as advertised.

Q. Did You Know All Lenders Interpret Credit Score Differently?

Creditors and lenders will all have their own processes for evaluating a candidate for a loan. Of course, there are some standard methods or ‘types’ or credit score, such as:

  • FICO
  • VantageScore
  • Equifax
  • Experian
  • TransUnion

This is why consumers who check their credit score themselves (which is recommended before applying for any financial product with suspected bad credit) may notice discrepancies. This does mean that there is no ‘perfect’ or ‘ideal’ credit score that should be a target, because it differs, and all factors cannot be accounted for. Within these different types of credit score, the weighting will also vary and is up to the lender’s discretion.

Q. How Much Does It Cost To Get A Bad Credit Loan?

There is no set cost for bad credit loans, but many people fail to notice just how harmful it can be to have marks on your credit score:

  • Research shows that paying more than a £3000 credit card bill over 2 years might cost almost £2000 more in interest than if the individual had a good credit score.
  • A personal loan of £7,500 may cost almost double to repay over four years, as a result of a higher APR.
  • Interest-free or no cost months or incentive options offered by lenders may be reduced or not available at all, upping the total cost of a loan.

This just highlights how important it is to work on credit score and always practice positive behaviour that will work towards building your score, not worsening it. Smaller things may also start to impact the cost of living as a result of bad credit and a low credit report, including:

  • Unable to qualify for loans
  • Unable to qualify as a guarantor for other loans
  • Unable to get a mobile phone contract, losing out on cost-saving benefits and advantageous packages
  • Individuals could be subject to higher insurance premiums, especially if they are looking to pay monthly
  • Utility bills and security deposits for tenancy agreements may also be rejected or put up to offset the risk of lending or extending any type of credit or asset