A Guide To Bad Credit Loans
There are moments when we may find ourselves in a financial mess and borrowing seems like the only way out. Luckily, the financial sector provides a multitude of borrowing options each tailored to meet your needs. This guide provides an in-depth look at bad credit loans.
Understanding secured loans, unsecured loans, and bad credit loans?
An unsecured loan is that which the borrower does not have to pledge an asset to act as collateral for the loan. Instead, your eligibility for the loan will be assessed by reviewing your credit rating.
A bad credit loan is a form of credit extended to people who have a poor credit score. Such people usually have difficulties in getting access to borrowed funds due to previous credit issues. Most banks in the UK will shy away from extending credit to people with a credit score lower than 660.
On the other hand, a secured loan is that which the borrower surrenders an asset such as a motor vehicle to serve as collateral for the loan. If you’re insecure about your creditworthiness report, you can still leverage your assets and access credit from banks and other lenders.
What are some of the examples of secured and unsecured loans?
The most common types of unsecured loans include credit cards, personal loans, student loans, Personal lines of credit, signature loans and debt consolidation loans, normally used to pay off credit cards. Some banks in the United Kingdom do offer up to £50,000 in unsecured loans depending on your credit score.
A guarantor loan is a form of a collateral-free loan that requires a guarantor to co-sign the loan agreement. The guarantor is the individual or entity that agrees to settle the debt if the borrower defaults on payments. Guarantor loans are a viable option for people with a low credit score. All you need to do is find a trustworthy guarantor who is over 18 years of age and has a good credit history. You can borrow any amount from £500 to over £15000 if you have a reliable guarantor.
Payday and doorstep loans
If a poor credit rating is haunting you, you can also consider acquiring credit through Payday loans and doorstep loans. These are forms of unsecured credit offered by alternative lenders(excluding banks). Such loans are not secured by tangible property as is the case of mortgages; instead, the lenders explore other measures such as asking for a postdated cheque to shield against the risk or loss.
Bridging loans, also known as caveat loans, are short term loans taken for a period of 2 to 3 weeks pending long-term financing. They are common among people who want purchase an apartment before proceeding to sell their current home.
In contrast, any loan that requires collateral falls under the category of secured loans. Examples of such loans include car loans (where the vehicle get repossessed in case of default), mortgage and home improvement loans.
Banks rely on credit scores to gauge the potential risks or lending to customers and to limit losses due to bad debts. Once you apply for credit, the bank will retrieve your credit history from sources such as the government, credit card companies and other banks. The credit report contains all your borrowing activity as well as a final credit score.
Traces of bankruptcy, default in payments, or late repayments can put a serious dent in your credit score. However, if you already have a rating of 660 or below, there still exists some lenders willing to offer credit to people in a situation similar to yours.
Interest rates on loans
Interest on loans, also known as the cost of borrowing can have a serious impact on your finances, especially if the interest rate is high. Bad credit loans, in particular, tend to attract some of the highest interest rates in the industry. To mitigate losses due to bad debts, lenders resort to offering questionable borrowers a high interest rate for personal loans.
Default on repayment
For the case of secured loans, if the borrower defaults payment, the lender is at liberty to gain possession of the collateral to recoup losses. With bad credit loans, lenders have to take a different approach which includes taking the borrower to court or contracting a collection agency to recover the debt. If the borrower loses the case, the court can order the borrower to clear the debt or part with a portion of their property to cover the amount due.