Bad credit loans is a term used to describe personal loans that are provided to those with a poor credit history or bad credit rating. It is often possible to be able to obtain a bad credit loan from most financial institutions or high street lenders however you are likely to pay a premium for this service as the lender is likely to perceive you as a high credit risk. Having said that a bad credit loan could provide an answer to your immediate financial circumstances, but should only ever be entered into with much consideration. We examine some of the benefits and disadvantages of a personal loan for those with a bad credit rating and explore some of the best options available.

Bad Credit Loan - Advantages

1. Rebuilding Your Credit Rating

If you have a history of bad credit then a personal lone designed for those with a bad credit rating can actually help you improve your credit history, if you are able to fulfil the terms of the credit agreement. It is an ideal way to demonstrate your ability to meet repayments on time and enable lenders to place some confidence back in you.

Ensure that you keep records of your payments and always ensure that get a receipt, or if the process is automated directly from your bank account, make sure you check your statements to ensure that your monthly repayments are being sent in a timely fashion.

Also ensure that you sign up for a credit checking service. Organisations like Call Credit, Experian and Equifax can offer you this service for a small annual charge or a small monthly charge. Some of these even offer a free credit report for the first month. It is a good idea to check your credit report on a monthly basis and use it to monitor how your credit rating changes, as you meet the repayments of your bad credit loan. Remember that factors used in credit scoring include, timely repayments, debt to income ratio, bankruptcy & county court judgements. In addition each time you apply for credit a request will be made with a credit reference organisation and this will be registered on your credit report. If you have lots of applications for credit in a short period of time, this can also be a negative factor, as it suggests that you are desperate to get credit.

2. Provides Immediate Cash Help

One of the key reasons that you may be seeking another personal loan is because your financial circumstances have not improved and your bad credit history has limited your normal options for acquiring a personal loan. As such a bad credit loan could provide an immediate, short term solution to your financial circumstances, even if it means paying a higher repayment amount.

Once you have access to the money from the loan, make sure you sit down and budget exactly how it will be spent. Do not use it to pay for day to day requirements but ensure that it is used to pay off high priority debts, that are likely to end up in you being disconnected or losing your home. These may be electricity, gas and water arrears, mortgage repayments or TV licence or council tax arrears.

3. Lending From a Reputable Source

If you obtain your bad credit loan from a high street lender then it is likely that you will not be tempted by personal loans from unscrupulous companies, with poor practices. Door to door lenders or those who specialise in bad credit loans, may seem a good idea at the time but they are also likely to resort to more pressured tactics to secure their money should you default on payments, precisely because they are exposed to higher risks in lending you the money. It may help you read online reviews of financial organisations prior to arranging a bad credit loan, but you should never take on a personal loan from a lender just because they advertised on TV or came knocking at your door. Also check that they are registered with the Financial services Authority as this will afford you protection under the consumer credit act if you get into difficulties. It in doubt speak to your local Citizens Advice Bureau or a qualified debt counsellor.

Bad Credit Loan - Disadvantages

1. Higher Interest Rates

Getting a personal loan from lender, when you have a bad credit history means that you are likely to pay larger monthly repayment premiums. This means that you could be paying 5% more than customers with good credit histories.

2. Spiralling Debts

Given that you are likely to be paying higher interest rates to secure a bad credit loan, it is possible that you can get into greater debt more quickly, as repayments spiral out of control. It is very easy to get behind with a repayment and once you do, further interest will be added to the outstanding amount, meaning that your debts increase more quickly than you could have anticipated.

3. Secured Loans and Repossession

Many bad credit loans are frequently secured on a property, precisely because of the risks involved in lending you the money. As such if your fall behind with your repayments due to the higher interest payments, then lenders are likely to quickly resort to repossession to recover their money. It is important that you take this into consideration before arranging a personal loan, as it may make your situation worse.

4. Negative Credit Rating

Bad credit loans are designed for individuals who are deemed to be a high lending risk and likely to default on payments. It is therefore critical that you meet your repayments on this type of loan. Doing so is likely to help repair your credit rating but failure to meet repayments is likely to mean that you will unable to access future credit from reputable organisations and making your debt problems worse.

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