Options
Like normal loans, a bad credit loan can be secured or unsecured; there are however, differences and advantages to either:
1. Secured loan with bad credit
Secured
loans are loans whereby the borrower is required to put
up collateral on which the loan is secured; in the UK this
is commonly your home, although in instances where the loan
amount is small, other assets such as your car can be accepted
as collateral.
Collateral provides lenders with a safety net; they know
that should you fail to pay back the loan, at least there's
a way to recoup their money. This makes things easier for
them, if you're a homeowner with equity; a bad credit rating is a less effective
disadvantage.
2. Unsecured loans
These are personal loans whereby the lender doesn't require
collateral, if you fail to repay the loan, your possessions
are not immediately at risk.
In this instance, the lender relies on the trust put in
you to pay back the loan, this makes it a risky loan. Having
a poor credit history elevates that risk; this is why unsecured
bad credit loans typically incur very high interest charges.
Other disadvantages:
- Loan amount: lenders prefer to keep unsecured loans
at low amounts perhaps because of the risk involved; most
UK lenders do not exceed £25000.
- Although the loan isn't secured, if you default and are
referred to collectors, your assets might be repossessed.
Alternatives to loans with bad credit
Credit cards
If you are unable to get a loan due
to a poor credit rating, credit cards for people with bad
credit are a viable alternative since approval is relatively
easier.
Another advantage of credit cards over loans is flexibility;
with a loan, you agree to a set repayment period (e.g. 5
years) whereas on a credit card you can pay back the money
at any point. The money you've paid back also becomes available
credit, which you can re-use should you need it in the future.
Payday loans
These are loans that you take out
on the promise of paying them back at the end of the month,
typically they're only available to people that are currently
employed. Most do not carryout a credit check, therefore
bad credit history isn't a problem.
Payday loans are ideal for people that need very small
amounts of money, up to £750, or if you need the money fast.
Remortgage
If you are a homeowner and have some equity in your property,
it might work out better to remortgage rather than take
out a loan with bad credit: remortgaging might not substantially
change your monthly repayments whereas a loan would create
an extra payment to make every month.
Related to Loans for people with bad credit:
Bad credit loan -
Adverse credit loans -
Bad credit credit cards
Low interest debt consolidation loans
