What are the pros and cons of taking out a bad credit loan?
It's important to weigh up all your options before taking out a loan.
The pros of bad credit loans include:
Quick access to money as some lenders can transfer funds to your account quickly.
It may improve your credit score as keeping up-to-date with your repayments can positively affect your credit report. This will help if you want to apply for more credit in the future as you should see better interest rates.
The cons of bad credit loans include:
Committing to monthly repayments as you’ll pay back the amount you borrowed in monthly instalments. If you miss these repayments, you can risk damaging your credit score further.
High interest rates are expected if you’ve got bad credit. The overall amount you pay back on a loan will cost you more.
Extra fees – always check the terms and conditions for any penalties like late repayment fees and returned payment fees.
Why have I been refused credit in the past?
You may have been refused credit due to:
- A poor credit rating
- Having too many loans
- Your employment history
- Low income/irregular payments
- Your credit history
- Assets for a secured loan
A poor credit rating suggests you may be going through financial difficulties. This may not be your fault, but it suggests to the lender that you might struggle to pay back the loan. This can lead to your loan application being rejected, which can further harm your credit score.
Having too many loans when applying for another shows the lender that you’re financially unstable. This can suggest that you’d be unable to pay back the loan.
Your employment history. If you’ve been in and out of work or have changed jobs frequently, lenders might think this shows you’re in financial difficulties.
Low income/irregular payments can impact your eligibility for a loan.
Your credit history if you’re from another country or you’re too young and haven’t had time to build up a credit score. Unfortunately, this can count against you.
Not enough assets for a secured loan. If you apply for a secured loan, but you aren’t able to offer enough collateral, such as your house or car as security, a lender might reject your application. In this case, an alternative to a bad credit loan could be an unsecured loan.
How do I manage my loan repayment?
Once you have taken out your loan, it’s important to know how to manage it. It’s your responsibility to make sure you make the repayments on time, every month until it’s paid off.
When you take out a loan, you’ll agree with the lender on how long the repayment period will last. This will usually be 1 to 5 years. You’ll get the loan amount in one lump sum and you’ll normally have to repay it bit by bit every month until you’ve paid it off.
The final amount you pay back won’t just be the amount that you borrowed from the lender. The full amount you repay will usually include some interest and depend on a number of things, including:
- How much you’re borrowing
- How long you’ve agreed to pay the loan back for
- The interest rate
- Whether the loan is a fixed or variable rate
Make sure you know what the repayment date is each month. If you have bad credit, missing payments could mean you have to pay additional charges. It could also put more negative marks on your credit report.
Loan repayments will be taken from your account each month. The most common ways to pay are:
- Direct debit, which is set up by the lender using your account number and sort code. It’s usually a fixed agreement and should only be changed on the agreed date by the lending company.
- Continuous payment authority (CPA) or recurring payments, meaning the lender can take the money that you owe them at their discretion.
- A standing order, which is set up by you. You pay a fixed amount to the lender out of your account at agreed intervals, e.g. once a month. You can change or cancel a standing order at any time.
Of the three, a direct debit may be the best option as it puts the lender in control to take the payment regularly. Make sure you have enough money in your account each month to make the monthly payments.
With a direct debit in place, you’re more likely to make the payments, so you’ll avoid any black marks on your credit report. Need some more help working out how to manage your loan repayments? Take a look at our loans calculator.
What’s the difference between a soft credit check and a hard credit check?
A soft credit check happens when a broker or lender takes an initial look (check) of your credit report without examining it fully.
These types of checks on your credit report are only visible to you, so they’re not marked against you in your credit history. You can run as many soft credit checks on your report as you like, as companies can’t view them.
A hard credit check happens when a company needs a full check of your credit history. These searches are recorded on your report for you and companies to see. By looking at the hard credit checks on your report, companies will be able to see how many times you’ve applied for credit in the past.
Comparing bad credit loans with us and Monevo will only ever leave a soft credit check on your report. But a hard credit check will be needed to successfully apply for a loan.
This will happen once you choose a loan from our list of providers and click to visit their site.
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