How to get a loan with a low credit score

Around nine million adults across the UK were denied credit over just 12 months, according to research from 2023 conducted by Money and Pensions Service.

When you apply for a loan, it may be the first time you realise you have a low credit score or problems with your credit history.

If this is the case – don’t panic. There are lending options out there for everyone, including loans purposefully designed for people with poor credit scores or problematic credit histories.

Here, we’ve put together some of the basics about having bad credit, what bad credit loans are, and some tips on how you can improve your credit rating.

If you’re struggling with debt, there are charities such as Step Change that can offer free debt advice and help.

You can also read our guide on some way to approach getting out of debt.

Whenever you apply to borrow money, lenders will check your credit report (also known as a credit file) before they agree to lend you money.

A credit report is a record of your borrowing behaviour. It includes how much money you’ve borrowed, if you’ve paid it back and whether you’ve done this on time.

You can read more about this here: What is a credit report?

If you have 'bad' credit, it means you’ve probably struggled to pay back your debts. Because of this, a mark will have been left on your report by a lender. This might be for a number of reasons:

• You haven’t made the monthly repayments on time
• You’ve missed the repayments altogether
• You’ve been declared bankrupt
• You’ve entered into an Individual Voluntary Arrangement
• You’ve had a County Court Judgement (CCJ) awarded against you

Bad credit loans ​​are specifically designed for people with low credit scores. Lenders offering these types of loans tend to charge higher rates of interest due to the greater risk.

As with most loans, you can get two types: unsecured or secured. The main difference is that a secured loan uses something valuable that you own (such as your house or car) as collateral for the debt. This means if you fail to make your payments, the lender keeps whatever this is – even if it’s your home. Obviously this is a very big risk to take, especially if you’re not sure you can make the repayments, so you should think this through very carefully.

Read more about the difference between secured and unsecured loans here.

Things to think about when it comes to loans for bad credit

Loans for bad credit tend to be an expensive way of borrowing money. Before you take out this kind of loan, you should make sure you’ve considered all of your options. This might mean going to a credit union for a loan or lookig at debt consolidation loans instead if you’re trying to manage your debt.

Avoid applying for multiple loans at once as this could damage your credit score and make it harder for you to be accepted by a lender. Instead, use a quotation search (known as a soft search) to see how likely you are to get a loan before you apply – these kinds of credit checks won’t damage your credit score.

If you do take out this type of loan you should try and pay it back as quickly as you can in order to avoid expensive interest rates.

If you take out a loan for bad credit and you’re able to make all your payments on time and in full, it can really help boost credit rating. It will show lenders you can borrow responsibly and be trusted to pay back your debt. This means if you need to borrow again you might be able to take out a loan at a much cheaper rate of interest.

On the other hand, if you take out a loan for bad credit and you fail to repay it, this could have a negative impact to your credit score – more so than if you had problems repaying a standard loan. This damage is likely to hinder your chances of being able to borrow again in the future.

Unfortunately, the best loan rates and offers will only be given to people with high credit scores. The good news is: you can start to build up your credit score at any time to get yourself on the right path for a cheaper loan.

You can find out more in our articles on how to improve your credit score and factors that affect your credit score.

In short, here are some of the steps to boost your credit rating:

Check your credit report regularly, making sure all the information you expect to be there is present and correct. You can also read our 5 minute checklist of things to look out for in your credit report.

Sign up to the electoral roll – lenders see this as a sign you’re more stable if they can verify where you live.

If you borrow money, pay it back on time and (if possible) in full each month.

Avoid using too much of your credit limit.

Avoid applying for too much credit in a short space of time.

It's worth checking how likely you are to be approved for a loan in the 'Offers' section of your account before you officially apply. Every time you apply for credit a 'credit application' search, or a ‘hard search’, is carried out and a mark is added to your report. If lenders see a lot of applications in a short space of time, they may view you as a riskier borrower and may choose to not lend to you.