Unsecured Loans with Bad Credit
Introduction
An unsecured loan is a loan for which no security, or collateral, is required. The loan is backed only by the creditworthiness of a borrower, and his or her, promise to repay the loan amount. As such, it is seen by lenders as a high risk form of lending and is typically only available to borrowers with high credit ratings and, even then, at a less competitive rate of interest than a loan secured on property or other assets. Bad credit means just that, a poor or impaired credit rating on the part of a borrower, as a result of late, or missed payments on credit agreements, overuse of credit, CCJs ("County Court Judgements") or, in the worst case, bankruptcy. In any case, bad credit increases the level of risk perceived by a lender still further, and as a result of the so-called "credit crunch" – which has seen lenders become increasingly selective in who they lend money to, and at what rate – obtaining an unsecured loan with bad credit, at least from a mainstream lender, may prove to be very difficult indeed.
Bad Credit Unsecured Loan Considerations
The good news for potential borrowers with bad credit, however, is that the credit crunch – and more recently, recession – affects everyone, and in response, there is any number of companies specialising in unsecured loans with bad credit. Unsecured borrowing may still be the right choice, therefore, for those looking to borrow smaller amounts of money over shorter periods. Indeed, for anyone with a poor credit rating, an unsecured loan – albeit at a relatively uncompetitive rate, when compared with a "standard" unsecured loan deal – can provide an opportunity to rebuild that credit rating, and hence a route back to mainstream borrowing in the longer term.
The availability of unsecured loans with bad credit, and the interest rate you pay, depends, of course, on the degree to which your credit rating is impaired, along with more standard factors, such as the amount of money you wish to borrow, over what time period, etc.. The maximum amount that you can borrow with an unsecured loan is £25,000 – usually repayable over a maximum of 60, or possibly 120, months – although the exact amount that you are offered may depend, once again, on your credit rating, income, employment status, etc..
If you are accepted for an unsecured loan with bad credit, each of these factors will affect the APR, or "Annual Percentage Rate", which you are offered. APR is the most important single factor in determining the cost of an unsecured loan, because it takes into account the amount and frequency of repayments etc., and includes any administration fees and charges associated with the loan. In other words, APR represents the total cost of borrowing over a 12-month period so, typically, the lower the APR, the less you pay overall for your unsecured loan.
You should be aware, however, that APR is not necessarily the be all and end all when it comes to the cost of borrowing. It is advisable to examine the terms and conditions of any unsecured loan product that you may be offered to check for any hidden fees and charges that may not be immediately apparent and which are not included in the APR. If you wish to pay back an unsecured loan before the end of the term originally agreed – you may come into some money unexpectedly, for example – be aware that many lenders apply a penalty, known variously as an early redemption penalty, fee, or charge, to your loan account. This may be equivalent to one or two months' interest on your loan amount, so if there is any likelihood that you will be able to repay your loan early, look for a lender that applies no such charges.
A lender may also recommend that you take out PPI, or "Payment Protection Insurance", so that you are covered in the event that accident, illness or redundancy renders you incapable of meeting loan repayments. This is all very well in theory, but PPI can be hugely expensive – PPI on an unsecured loan of £7,500 over 5 years can easily add £2,000, or £3,000, to the total amount repayable – and there may be caveats regarding the length of time the insurance pays out, existing medical conditions, self-employment, etc.. You are not duty bound to take out PPI with a lender, whatever they may say, and there are alternatives, such as income insurance, which may be more appropriate to your own circumstances, and more competitive.