Bad Credit Loans

Bad credit loans are a popular form of finance and are fast becoming the only borrowing option available to many UK consumers. Our experts have provided a wealth of information on the subject, which we hope you find useful.

Understanding Bad Credit Loans

Did you know that around 55% of the UK population suffer, or have suffered with bad credit at some point in their lives? Having bad credit is obviously not an ideal position to be in, but it is also not as detrimental to attaining credit as you might think.

Due to the prevalence of bad credit amongst the UK populous, a significant proportion of the lending industry have geared a number of their products towards the sub prime market. For the loan shopper, the very fact that such a wide audience is now classed as having bad credit has essentially made the availability of bad credit loans more common than ever.

How is Bad Credit defined?

There are a number of ways in which being classed as having bad credit is determined but essentially it means that you have failed to meet the agreed terms of a past credit agreement or agreements. It could be that you have missed payments on a personal loan, surpassed an agreed limit on your credit card and then failed to promptly clear the balance, or maybe you have defaulted on your mortgage payments. The list is quite literally endless, however, what you do need to know if you are not already aware, is that each time such an incident occurs a record of the event is recorded on your personal credit profile or record.

Understanding your personal credit profile?

Your credit profile is one of the key determining factors used by lenders to decide if you are deemed worthy enough to qualify for your chosen product or if more niche products (such as a bad credit loans) would better suit. There are currently 3 classes used to describe borrowers within the UK. These are: -

• Prime
• Near Prime
• Sub Prime

What is a Prime Borrower?

Individuals who have a long-standing, undisturbed history of credit are described as being prime borrowers. In essence a prime borrower will have had a number of credit agreements (both secured and unsecured) of which the specific terms of said agreements would have been consistently met. Prime borrowers are viewed by the lending industry as being exceptionally reliable and as such will have little trouble obtaining credit, providing their desired product falls within a proven level of affordability.

What is a Near Prime Borrower?

In a similar vein to prime borrowers, near prime borrowers will again have had a varying number of credit agreements throughout their lives, of which the vast majority would have been reliably cohered to. However, they are likely to have experienced minimal credit problems at some point in the past such as slight arrears or the occasional late or missed payment which was then subsequently corrected.

What is a Sub Prime Borrower?

On one side of the coin a sub prime borrower can be defined is an individual who has acquired little in the way of credit and is therefore unable to prove their reliability to a prospective lender. On the other side of the coin, a sub prime borrower can also be an individual who has acquired much in the way of credit and has consistently (or more often than not) failed to meet the terms of their credit agreement.

Dependant upon which class you fall into will indicate what level of risk you pose to your prospective lender and will ultimately decide the product you qualify for and the rate you pay (bad credit loans will typically fall into the sub prime classification). It is also worth noting that different lenders or credit institutions will define the above classes differently, and may also apply separate tiers within them.

The disadvantages of Bad Credit Loans

The most obvious disadvantage with bad credit loans, as you would most probably expect is the cost. From a financial risk based perspective, the fact that a person is classed as having bad credit universally creates the impression that they are unreliable. For this reason, a credit provider will levy the risk associated to having bad credit against the cost of the loan. In other words, if a lender does agree to the bad credit loan he will try to recoup the value of the loan sooner rather than later through a higher than normal rate of interest. However, home status can also have a substantial bearing on the cost of bad credit loans.

If the applicant is a homeowner then he or she has the option to markedly reduce the cost of the loan by securing it against their property. Secured loans essentially offer the lender piece of mind, as if the applicant were to default or refuse to pay the loan, by law, the property could then be reclaimed by the lender in order to cover the outstanding balance of the loan. However, because the lender now has some form of security against the loan, the applicants credit history becomes less relevant and they are often offered a slightly more competitive rate as a result.