Like normal loans, a bad credit loan can be secured or unsecured, there are 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.
- 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.
1. 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 for bad credit 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.
2. 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. In most cases there is a credit check,
although its influence is not as much as it would be on a loan.
Payday loans are ideal for people that need small amounts of money, typically up to £1000,
and can pay it back in a short period of time.
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.