Unsecured Loans for Bad Credit: Are They Really Possible? 

Yes, unsecured loans for bad credit can be obtained, but they charge high interest rates. Experts enjoin caution. 

What are unsecured loans for bad credit? 

Unsecured loans for poor credit are loans aimed at subprime borrowers. They can be used for a wide range of expenses. These loans are repaid over an extended period of time. Lenders decide the loan amount based on your creditworthiness. Of course, you can borrow a large amount of money if you demonstrate your repayment capacity.  

Bad credit unsecured loans come with high interest rates. You should use these loans only when other safer alternatives such as savings and borrowing from friends and family are not available. These loans can help build or improve your credit history if you repay them on time.  

Tips to improve your chances of qualifying for bad credit unsecured personal loans 

Though personal loans with bad credit are available from various direct lenders, it does not insinuate that they are easily approved. The following tips can help you qualify for unsecured personal loans despite a less than perfect credit history: 

Show stable income 

Whether you borrow a small amount of money or a large one, no lender will sign off on your application without a strong repayment capacity. They will prefer to see salary slips and bank statements. You must have proof of regular employment.  

Apply with a guarantor 

If lenders find you a high-risk borrower, they will most likely reject your application. A responsible lender will perform affordability checks to ensure you will not struggle with payments. If your credit score is abysmal or your income is not significant, you should arrange a guarantor.  

The guarantor must have a good credit score. Applying for a loan with a guarantor mitigates the risk for a lender. They can call in the guarantor to discharge the debt in case you fail to do so, but bear in mind that this will ruin your guarantor’s credit score as well. This is the biggest reason why people hesitate to act as a guarantor.  

Borrow a small amount of money 

Borrowing a large amount of money can be challenging to get approved because high interest rates significantly increase the total cost of the debt. Try to borrow a small amount of money. Lenders will most likely approve your application.  

Avoid multiple loan applications 

Multiple loan applications within a short period of time can ruin your credit score. Every time you apply for a loan, lenders run hard inquiries, which get recorded on a credit report. Multiple inquiries within a short period of time damage your credit score.  

Another reason why experts advise against it is that it proves your desperation for a loan. A lender will believe that you are an extremely risky borrower. Your desperation will cause lenders to cast doubt on your repayment capacity.  

Reduce current debt obligations 

Lenders will also look over your debt utilization ratio. If you already owe too much debt, they will be suspicious about your ability to repay the debt. High current obligations can cause hindrances in borrowing a large amount of money.  

What are the risks of unsecured loans? 

Unsecured loans should be used with caution as they are subject to some risks. 

High interest rates 

Interest rates for unsecured loans are very high. Even if your credit rating is perfect, unsecured loans cannot be secured at the most affordable interest rates. If you are borrowing a small amount of money, you will find these loans even more expensive. Since small loans are extremely risky, lenders charge exorbitant interest rates.  

A debt cycle 

It might be difficult to keep up with payment dates. Once you fall behind on the payment, late payment fees will be charged. This increases the debt. Over time, it becomes challenging to repay the debt.  

The consequences of non-payment are severe. Your lender might transfer your account to collection agencies, and if you still refuse to settle the debt, you can be taken to court.  

A restricted loan amount 

Since your credit score is not up to scratch, lenders will restrict the loan amount. Most lenders hesitate to lend more than £5,000.  

What are the alternatives to bad credit unsecured loans? 

You should consider the following alternatives first before applying for unsecured loans with bad credit. 

Borrowing from friends and family 

If you need a small amount of money, you can consider borrowing from friends and family. They will not charge interest, and you can choose a flexible repayment plan that suits your budget.  

Credit cards 

If you already own a credit card, you can use it to cover small unexpected expenses provided you pay off the whole balance on time.  

To wrap up 

Unsecured loans for bad credit can be obtained, but they come with a high interest rate. You should use these loans only when you need money urgently, and you are certain about your repayment capacity.  

FAQs 

Do credit unions offer lower interest rates? 

It is likely that credit unions might offer lower interest rates than lenders, but you need to be a member. Compare interest rates before applying for unsecured loans.  

What interest rates can I expect? 

The APR for bad credit unsecured loans range between 24.9% and 49%. In some cases, it could go up, depending on your overall financial condition. 

Are emergency loans the same as unsecured loans? 

Though emergency loans do not require collateral, they are not the same as unsecured loans. Emergency loans are short-term, high-cost debts and are repaid quickly, whereas unsecured loans have longer repayment plans.  

Can arranging a guarantor help secure lower interest rates? 

There is a possibility of getting lower interest rates, but it is not guaranteed. Your lender will consider your overall financial condition to determine interest rates. 

Are overdrafts cheaper than bad credit unsecured loans? 

 No, overdrafts are not cheaper than unsecured loans for bad credit borrowers. Overdrafts charge interest by the day, whereas unsecured loans charge a fixed interest rate.