At some point, all of us may need to apply for a business loan to buy unexpected stock, a car repair, pay for training, or some other unbudgeted expense. People with a bad credit history often face dire consequences financially, especially when they apply for a loan and get turned down by a high street bank. However, for some small business owners, bad credit loans can be a solution.
Having bad credit means your credit history is viewed negatively by companies. If your score is low, it could be because of:
- Late payments
- County Court Judgements
- Too many previous loan applications (known as “hard searches”)
The situation becomes even worse when you have to pay higher interest rates and have very few options left for debt repayment.
Bad credit loans are designed for such people who might be responsible citizens but somehow, they have a low credit score because of a missed payment.
Companies do not advertise “bad credit loans”- this is just a common, unofficial name for them.
Five top tips for those seeking a business loan – In need of some cash? We take a look at what small companies need to bear in mind before pursuing a business loan
What are bad credit loans?
A bad credit loan works just like any other loan – you borrow a certain amount and pay that back in set monthly instalments (which include the loan balance and interest). You can use your loan for almost any purpose, including an emergency, premises improvements or debt consolidation.
Bad credit loans are divided into two main types:
- Secured bad credit loans
- Unsecured bad credit loans
Both these types have their own pros and cons but usually most people prefer a secured bad credit loan.
Secured bad credit loan
A secured loan requires some sort of an asset to be used, usually your home, against the loan amount in order to secure it. This is due to the poor credit history of the borrower since there is risk involved in these types of loans and the lender needs a way to make sure the person would be able to return the loan along with interest.
One type of a secured loan is known as logbook loan, which takes your car as security. It is possible to borrow up to £50,000 using this approach, even if you have a poor credit score. Some companies offer same-day loans by offering this type of bad credit loan to borrowers. These companies can be approached online, and the procedure is as simple as filling out a form. Usually there are three steps involved in this process: apply online, speak to a lender, and receive money in your bank account.
However, be warned – logbook loan interest rates can be as high as nearly 450 per cent over an 18-month repayment period, meaning that if you borrow £700, you would end up repaying £1,260.
Unsecured bad credit loan
The other type of a bad credit loan is known as unsecured loan. In this type, no equity is required to secure a loan, but the borrower usually has to pay much higher interest rates.
There are many subcategories of these loans, including business loans, car insurance, and debt consolidation.
Again, there are online firms which offer unsecured loans by cooperating with a number of lenders who are willing to provide short-term loans to people with a poor credit history. These online companies offer safe and secure ways of getting a loan when all other options fail. The process is easy and straightforward, there are no documents required, the approval time is usually 24 hours to 3-5 business days. Moreover, you get funds instantly in your bank account through electronic money transfer.
Business loans for starting up abroad – There is no reason in principle you cannot finance the purchase of an overseas business in the UK
Frowned on given the bad publicity and extortionate rates charged to come borrowers, payday loans are also unsecured and must be paid back in full along with interest within a fortnight. Payday loans are for smaller amounts, usually between £100 and £1,000. Typically, you will agree that the payday loan company can take its payment from your debit card on the day your salary hits your bank account.
Improving your credit score
Ironically, it is only through taking out a loan and repaying it on time that you can rebuild your credit score. These credit-builder loans can repair the damage done if you have a less-than-perfect credit score.
Credit builder loan
Credit builder, or credit repair, loans are designed to help those with a bad credit score, or a limited credit history improve their score. By making all the repayments on a credit builder loan, you demonstrate that you can manage your finances and repay a loan in full.
These loans aim to help you rebuild your credit score, so if you need to borrow money in the future you can hopefully access more affordable rates.
Credit builder loans typically only offer a relatively small sum of money, anywhere from less than £100 to £5,000 or sometimes more, with repayment terms ranging from six months to several years.
But these loans can be very different to standard personal loans. Some lenders will “lock away” the money and only give you the money once you have made all the necessary repayments. And the lender takes a one-off fee for transferring your money back to you.
Credit builder credit card
Credit builder cards are a type of credit card that can be used to improve your credit score. When you use a credit builder card, you’ll do exactly that: build (or rebuild) your reputation with lenders and credit reference agencies – increasing your chances of successfully applying for loans, better credit cards (and eventually, large credit products such as mortgages).
If used properly, a credit builder credit card can improve your credit score within four to six months.
Credit builder cards usually have a much lower credit limit (meaning you can spend less on them) than standard credit cards, and you’ll have to pay higher interest rates if you don’t repay on time.
More on business loans
What documents do you need when applying for a business loan? – Various lenders require different business loan documents. Adam Parker ticks off his business loan checklist