A recent study has found that one in four adults in the UK have some sort of adverse credit. Poor credit can be the result of being completely new to borrowing or the consequence of having a history of late payments, CCJ’s or bankruptcy.  Generally speaking, people with poor credit find it difficult to get a loan.  This is because lenders see them as a higher risk.  Lenders who do offer loans to people with poor credit have higher interest rates because the risks are much higher to them as opposed to someone with a good credit history.

There are two types of loans; secured and unsecured.  Simply put, a secured loan is a loan that is secured against an asset that the borrower owns, more often than not the person’s home. This acts as collateral for the loan and in the event that the borrower doesn’t keep up with the repayments, the lender can then repossess the asset.  An unsecured loan is only supported by the borrower’s creditworthiness so for people with a poor credit history, the interest rates on unsecured loans are considerably higher and the amount you are able to borrow is usually lower.

While those with a tainted credit history should shop around and take into consideration the funding options available to them, it is unlikely that they will find themselves eligible for the low interest rates they see advertised.  It is not advisable to make loan applications with several different companies in the hope that one of them will be successful; this will have a further negative effect on your credit rating. It’s also important to note that each lender has its own criteria to determine eligibility, so it’s worth researching the approval criteria before making an application.

We are often asked what types of loans are best to be avoided when trying to increase your credit score.  The advice we always give is that payday loans more often than not, have an adverse effect on your rating and can leave you in a worse financial position than before thanks to their sky high interest rates and fees.  If you are considering a payday loan, its best to think about the reason why you are going down this route. A payday loan is the wrong choice for you if:

    • You are using it to pay off other loans
    • You’re not sure how you are going to pay it back with interest
  • You already have another payday loan which has not been settled
  • You want a loan to pay for unessential items

Regardless of the type of ‘poor credit’ loan you go for, it is important to remember that you shouldn’t borrow more money than you can afford to repay.  Keeping up to date with the monthly repayments can get you back on the road to improving your credit rating so that in the future you can enjoy the financial benefits that come along with having a good credit score.

For further advice on loans for people with poor credit or how to manage your credit score please visit https://www.moneyadviceservice.org.uk/en 

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