Taking out a loan with bad credit is not recommended unless it is an emergency. Borrowing funds despite a subpar credit history will attract high interest rates, making a loan deal way more expensive and increasing the risk of falling into debt.
Loans offered to subprime borrowers are emergency loans. They come with a paltry sum that is required to be discharged in one fell swoop. Accessing money with a substandard credit rating is certainly a herculean task, but it is not impossible as well. Small emergency loans charge very high interest rates, with APR up to 500%.
As the maximum repayment term of these loans cannot be beyond 15 days or a month, you will most likely find it challenging to repay the debt on time. Once you fall behind on the payment, you will end up rolling it over, accumulating the debt. Eventually, you find yourself up to your ears in debt.
Is it a good idea to take out a loan with bad credit?
No, in no way. Experts will never recommend applying for a loan with poor credit, especially if you have or had debt problems. First of all, it is all but impossible to access affordable interest rates.
In fact, most of the lenders will straightaway turn you down if the loan amount is large. Secondly, you will find it challenging to manage payments. As a result, it will spiral into financial difficulties. Under no circumstances should you borrow money with bad credit.
What if you have an emergency?
If there are emergencies, you should consider cheaper alternatives.
Friends and family
They will not hesitate to give you a helping hand if you need a paltry sum. However, you must ensure that you will repay the money. The good thing about borrowing from your acquaintances is that you do not have to pay interest, but it is advised that you pay slightly more than the borrowed sum. Make sure that you sign an agreement over repayment terms, so you do not cause unnecessary delays in clearing dues.
Credit unions
If you are a member of a local credit union, you can easily apply for a loan from it. Loans from credit unions are slightly more affordable than bad credit loans in the UK from a direct lender. The reason why their deals are cheaper is that they are non-profit organizations.
A credit card
If you already have a credit card, you should use it. Credit cards will prove to be less expensive than bad credit loans as you can avoid paying interest by clearing dues within the grace period. Interest is charged only if you fail to pay off your bill on the due date.
What should you do to improve your chances of getting a loan?
In order to improve your chances of getting qualified for a loan, you should take the following steps:
Deal with your debts
If you already have debt problems, it is advised that you do not borrow more. It will only add to your problems. You should rather try to seek help to deal with your debt.
- Free up some money
First, you should try to assess your overall financial situation and see what debts are the most expensive. Short-term high-cost debts such as overdrafts, instant loans, and other small emergency loans are very expensive. Since they charge very high APRs, make a wiggle room in your budget by reducing your monthly discretionary expenses. Unless you settle the whole of the debt, you should cut back on your discretionary expenses.
- Consolidate debt
Consolidation is the best option when you have multiple debts and just cutting back on your discretionary expenses cannot cut it. However, it is essential that most lenders do not consolidate debts when your credit score is not up to par.
Additionally, there is no guarantee that all outstanding high-cost debts will be consolidated. It completely depends on the lender how much money they will consolidate. Most times, they do not lend more than £1,000. Despite having a consolidation loan, you will be managing several loans separately.
- Debt avalanche and snowball
If consolidation does not seem to be the best option, you can consider avalanche and snowball. They are both debt repayment strategies.
Avalanche allows you to pay high-interest debt first while making minimum payments on other debts. In contrast, snowball enables you to pay the smallest debt first while making minimum payments on the remaining debts.
Avalanche and snowball strategies are both aimed at people with different perspectives. Those who need motivation should use a snowball method, and those who need peace of mind should use an avalanche method.
Try improving your credit score
The aforementioned ways can help you settle your outstanding debts. The next step is to do up your credit history. After the settlement of the debt, you should know what exactly your credit score is. You might see a slight improvement because of a reduced credit utilization ratio.
Bear in mind that lenders access your credit report information, not the score, so missed payments and late payments in the past will continue to affect you for up to 6 years. In order to negate their impact, you should take the following steps:
- Make sure you do not borrow money for some time after clearing all dues. There should be a pause in borrowing for at least three to four years.
- Then, take out credit builder loans. They have been specifically designed to help ameliorate your credit score provided the debt is discharged on time.
If your score is still not good, try getting qualified for a guarantor loan. You can also apply for a loan with someone else with a good credit rating.
The bottom line
Not until it is an emergency should you borrow money with bad credit. You should rather aim at improving your credit score in order to qualify for loans. This will help you avoid paying very high interest. Manage your debts responsibly to avoid taking a toll on your credit rating.
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