How to get a loan if you have a bad credit history

A recent survey revealed that 20% of British adults don't qualify for typical rate personal loans because of a bad credit history.

Bad credit loans are specifically designed for borrowers that have been refused credit elsewhere. They typically charge a higher rate of interest, but can allow a borrower to improve their credit rating if repayments are made promptly and therefore secure cheaper loan rates again in the future. These loans are also known as 'sub-prime', 'adverse' and 'poor credit loans' but essentially they all describe the same thing.

Why you might be refused a loan

All lenders have their own criteria for what is and isn't an acceptable lending risk.

Lenders assess your risk by checking the information you supply on the loan application form and by doing a credit reference check which gives a credit score in points. If your credit score doesn't reach the required level or points, you will either be refused, be offered a lesser amount than you requested, or be offered credit with a higher rate of interest. Some lenders will refuse you point blank, others will offer alternatives as above - every lender is different.

The most common factors that can result in a loan rejection and bad credit rating are:

In addition to these points, there are two factors that will result in an instant rejection of any credit application:

Whatever your credit file contains, a record of CCJ's, loan or mortgage arrears can deny you access to cheap borrowing that other people regard as normal.

So what are your borrowing options with a bad credit history?

As with any financial service the key is to shop around for the best deal.

This is crucial if you have a poor credit history and you should be totally upfront with the details of any arrears, late payments or CCJs. If possible, get an up to date copy of your credit report and use this to give lenders an accurate picture of your credit rating without having to make multiple applications and credit checks which could further impact your credit worthiness.

Firstly, try looking for standard rate lenders who offer the same interest rate to all successful loan applicants. The main providers at present are Direct Line, Goldfish, Nationwide and the Post Office.

If you are refused credit from a number of standard rate lenders, your only option may be to apply to a sub prime or bad credit loans company. They may accept you, but you will pay a higher interest rate because you are seen as a high risk borrower.

A bad credit personal loan allows you to maintain a reasonable rate of interest by securing the debt against any equity in your home. Therefore, it frees up the spare capital (or equity) in your property and gives you a chance to regain a good payment record.

By securing the loan on your property, you are reducing the risk to the lender and gaining access to rates that you would not otherwise be offered without the security of property. Of course, the downside of this is that you may be forced to sell your home if you are unable to maintain the monthly loan repayments.

It doesn't matter how many months arrears you have or how many CCJ's as long as you have the equity in your property. Whether or not you've missed a few payments on your current borrowings, there are bad credit loans that will allow you to re-establish a good payment track record and recover your credit rating.