With careful planning and management, bad credit loans can be a viable option for those looking to improve their finances. Nonetheless, making the decision to take out a loan should not be taken lightly. If you failing to keep up with repayments, your interest charges will increase and you may end up in a more difficult financial position as a result. But, with the right tools you can use your loan to work your way towards financial freedom.
To help, we've put together a handy guide on how you use a bad credit loan to improve your financial situation. Read on to discover our top tips.
Can I get a loan with bad credit?
If you're considering applying for additional finances, it's likely that you've asked yourself 'can I get a loan with bad credit?'. In short, the answer is yes! However, there are a few things you should do before you apply for a loan, including:
Know your credit score
You must know your credit score before you apply for a loan. This can help you to determine whether you really have a 'bad' credit score and as a result, you'll have a better idea of whether your application will be accepted.
Credit reference agencies such as Experian and Equifax have their own credit score ranges. For example, Experian's score is out of 999, whereas Equifax's score is out of 700. Once you know your credit score and where it sits on the scale, you'll be able to determine whether your credit score is 'good' or 'bad'.
Perform a soft credit check
To protect your credit rating, you should do a soft credit check before you make any applications. A soft credit check won't show up on your credit report and therefore lenders will see you as more 'trustworthy'.
Websites such as MoneySavingExpert.com have eligibility checkers which can tell you which credit and loan offers you're likely to be accepted for. Once you have this information, you can narrow down your search and only apply for the offer with the highest chance of getting accepted.
Ask family and friends for help
If you're having trouble finding a loan to suit your needs, it may be worth asking family and friends if they could lend you the funds you need.
This is easier and safer than taking out a loan, however, it's important that you work out an agreement stating when you'll pay the money back in order to protect your relationship with the family member or friend who is lending you the money.
Can bad credit loans reduce debt problems?
Many people use bad credit loans for restructuring finances, as it allows you to keep all your debts in one place. However, can this reduce your debt problems? If you keep up with your repayments and stay in control of your finances, this is perfectly possible. Read on to learn how. Take a look at our guide using bad credit loans to improve your finances
You can reduce your monthly direct debits
It can be difficult to stay on top of your outgoings if you have several direct debits to pay off different credit cards and overdrafts. However, you can use a loan to pay off your credit card debt so that you only have to worry about one monthly payment.
This can help you to budget better and plan around your monthly loan repayments.
You can opt for an unsecured loan
Bad credit loans come in two main forms, these are: unsecured loans and secured loans. Secured loans are secured against a significant financial asset such as your home. This means that if you don't keep up with your monthly repayments, the bank can repossess your home to claim enough money to cover the debt.
Whereas unsecured loans are not secured against any assets, therefore, there's no risk of you losing your possessions if you fail to keep up with repayments. However, it's also worth noting that unsecured loans tend to come with higher interest rates, as lenders see them as more of a 'risk'.
With this in mind, plus the fact that unsecured loans can be more difficult to obtain, especially if you have bad credit, they're usually the preferred when option compared to secured loans as they carry less risk.
You can use your loan to improve your credit score
If you take out a personal loan and keep up with your monthly repayments, this can help towards improving your credit score.
This is because credit reference agencies look at the way you manage your debts in order to determine your credit rating. If you make regular loan repayments on time, this counts as a 'positive' on your credit record and your credit score will continue to increase so long as you keep up with your payments.
Top tip: It's important to keep in mind that if you miss a payment or two, this will have a negative effect on your credit file and your score will go down. Therefore, managing your money and paying your debts on time is key.
You can use your loan for reducing monthly interest costs
Switching to a loan with a lower interest rate or a short-term deal can help you to save on interest costs. You can do this by taking out a new loan with a lower interest rate and using it to pay off your existing debts. Even if there is a small difference between your existing loan interest percentage and your new loan's percentage, over a number of years this can save you hundreds of pounds in interest charges, so it's well worth making the switch.
Top tip: Be sure to check for early repayment charges on the loan you want to pay off. Lenders tend to charge for early repayment because it means that they lose out on interest. If your early repayment charge is higher than the amount you'll save by switching to a new loan, it may be worth sticking with your current lender.