Extramile Finance

When it comes to signing off on an application for a bad credit loan, every lender has their own requirements. Still, common requirements include proof of income, residency in the UK, and sometimes the involvement of a guarantor.

Getting qualified for bad credit loans could be challenging. It does not imply that you are locked out of borrowing in the UK. You can apply for poor credit loans from direct lenders and credit unions. Banks are not as flexible as online lenders. They might not feel inclined to approve your application.

What counts as bad credit in the UK?

When you apply for a loan, a lender will check your credit report to know your past payment behaviour. If you made all payments on time, your credit score will be good, and if not, your credit score will be poor. Here is what counts as bad credit:

• Missed payments and late payments on loans and credit cards
• Some of your accounts went into default due to non-payment for 90 days
• A county court judgment for unpaid debts
• Appearance of a debt management plan or insolvency on your credit report
• No credit history

What is a bad credit loan?

A bad credit loan is a loan that you take out despite a poor credit rating. Online bad credit loans in the UK from a direct lender charge high interest rates. They also restrict the loan amount, which means you might not be able to borrow a large amount of money. Here are the features of poor credit loans:

• These loans are also known as small emergency loans, as they fund small unexpected expenses worth £1,000. Some lenders can let you borrow a large amount of money despite a poor credit history.
• On-time payments on bad credit loans can help improve your credit score if they are paid off over an extended period of time.
• When the loan amount is less than £1,000, the whole debt will be discharged in one fell swoop.
• Interest rates for these loans are quite high.
• There is a high probability of getting into an ongoing cycle of debt, especially when the debt is to be paid off in one go.
• The repayment term for small bad credit loans does not last beyond a month.

What are the requirements for bad credit loans?

Here are the requirements for bad credit loans:

• Your credit score

Just because some private money lenders accept applications for bad credit people, it does not mean that your credit score will not be perused. A lender would want to know how bad your credit score is. They might not accept applications from borrowers with an extremely poor credit rating.

If your credit score is lower than the bare minimum score they follow to accept applications, you will be turned down.

• Proof of income

You will need to provide financial information in an application form. Normally, these details include your monthly income, monthly expenses, existing debts, and the number of dependents.

A lender will ask for proof of income such as payslips, bank statements and tax returns. These documents are necessary to demonstrate affordability.

• UK residency and age requirements

You cannot borrow money if you have not come of age. In addition, you must be a resident of the UK. If your name is not on the electoral roll, get it done.

• An active bank account

You must have an active bank account, as lenders will directly transfer funds to your bank account. Loan repayments will also be made from that account.

• A debt-to-income ratio

Lenders will also take account of a debt-to-income ratio. This suggests how much debt you owe against your income. A high debt-to-income ratio will call your credibility into question. As a result, lenders might reject your application.

An ideal debt-to-income ratio should not exceed 30%. Lenders assess this ratio because they want to know your affordability. Sometimes, taking on a new debt puts borrowers under intense pressure, which often leads to debt.

Additional requirements for bad credit loans by type

Bad credit loan types	Additional Requirements	APR
Guarantor loans	A guarantor with a good credit history	From 20% to 35%
Secured loans	Your house will be pledged against the loan	From 6% to 24.9%
Credit union loans	Membership required	From 12% to 30%
Small emergency loans	No additional requirements	Up to 100%

What are the ways to improve your chances of qualifying for bad credit loans?

Here is how you can easily secure bad credit loans:

• Get your name registered on the electoral roll.
• Pay off your existing debts and credit card bills on time.
• If possible, reduce your existing debts before taking out a new loan with bad credit.
• Avoid multiple loan applications within a short space of time to protect your credit score.
• Consider a guarantor with a good credit rating or apply with a co-applicant.

The bottom line

In order to apply for bad credit loans in the UK, you must be a resident of the UK, have proof of income, maintain a lower debt-to-income ratio, and hold an active bank account. Getting approval for these loans is not hard, but they come with higher interest rates. You should carefully determine the cost of these loans and compare it with alternatives to choose the most affordable loan product.

FAQs

1. What are alternatives to bad credit loans?

The following are the alternatives to bad credit loans:

• Credit cards – you can use credit cards to cover small unexpected expenses. They are affordable only when you pay off the credit card bill in full within the interest-free period.
• Peer-to-peer lending – There are some online platforms where money is borrowed and lent between individuals. Interest rates will be slightly high.
• Overdrafts – they should be a last resort when the nature of the expense is unavoidable. Pay off the balance in full as soon as possible because interest accrues by the day.

2. What risks are associated with loans with bad credit?

Poor credit loans are subject to the following risks:

• They charge high interest rates. You might find them difficult to manage, which increases the risk of falling into an abyss of debt.
• With secured loans, you are at risk of losing your property.
• Your relationship with a guarantor could be ruined if they end up repaying the debt when you fail.

3. Will interest rates be lower if I have no credit history?

Interest rates cannot be lower in case of no or little credit history. Lenders cannot feel confident about your repayment behaviour in the absence of your credit history. They charge high interest rates to mitigate their risks.

4. Can I get a bad credit loan when I am on benefits?

Bad credit loans are generally approved for borrowers with a regular income source. Since you are on benefits, you might not be able to qualify for these loans. But some specialist lenders provide loans on benefits to the unemployed. Your benefits will be regarded as your income. Your chances of getting loans on benefits are high when you have a passive income source as well, such as rental income, dividends, or income from a side gig.