Bad credit loans are known as personal loans aimed at helping the subprime borrower tide over during financial emergencies such as medical emergencies, unexpected repair work, job loss, and consolidation loans. A poor credit score is not an exclusive type of loan. It is rather a personal loan applied for by borrowers with low or no credit history at all.

Bad credit loans are only provided by direct lenders, but not banks, and work the same way as any other loans do.

• Upon submission of a loan application, an affordability check is made, which includes a perusal of your credit report and bank statement to analyse your past payment record and current repayment potential.
• Once the approval is made, money is transferred to your account, which you are supposed to pay back either in one fell swoop or in fixed instalments, depending on the size of the loan.

Here are the key facts about bad credit loans:

• Bad credit loans come in all shapes and sizes. They could be small and large.
• Even if you are borrowing a large amount of money, the maximum repayment length cannot be more than a year.
• Small subprime loans that come with a lump sum repayment plan do not let you borrow more than £1,000.
• They charge very high interest rates.
• Loans with bad credit generally require a credit check. Hard inquiries get recorded in your credit file. As a result, you lose your credit points.

What are the types of bad credit loans that come with the fastest approval rate?

Having said that, bad credit loans are not an exclusive loan product. A loan that you take out with a low credit score is called a bad credit loan. Bear in mind that there are always two types of loans: secured and unsecured. They have different names because of their functions.

For instance, when a secured loan is used to purchase a car, it is called a car loan, and when it is used to purchase a house, it is called a mortgage. The following are the types of subprime loans.

• Payday loans

Payday loans are short-term loans and aimed at subprime borrowers. The maximum amount you can borrow through payday loans is up to £1,000. They are paid down in one fell swoop, generally the day after the next payday. The maximum repayment period of these loans cannot be more than a month. Most of the time, it is just 14 days.

Annual percentage rates, which include fees along with interest rates, of payday loans are very high. They can go up to 500%. If you fail to repay the debt, it will be rolled over, adding late payment fees and interest penalties. Payday loans should be used as a last resort when you have failed to secure other alternatives.

• No credit check loans

No credit check loans are similar to payday loans, but they are more expensive than them. Payday lenders run soft credit inquiries, but no credit check loans include neither hard nor soft inquiries. It means they are available without any credit checks at all.

No credit check loans are very expensive. They charge higher interest rates than payday loans. They also come with a small amount of money that you are required to pay off in one go on the due date. The repayment length of these loans is not more than a month.

Since they are not subject to any credit checks, they are processed faster than payday loans. Therefore, they are also called 10 minute loans with no credit check.

• Monthly instalment loans

They are small personal loans to be paid down over an extended period of time. When these loans are applied for by subprime borrowers, they are called bad credit loans. The repayment period of these loans varies between three and 12 months.

Although instalment loans offer greater than payday loans and no credit check loans, the approval is fast. You will get money the same day you submit your application.

Similarities and dissimilarities between all these loans

Here are some similarities and differences between all these loans:

• All these loans are aimed at subprime borrowers.
• They are all expensive. They carry very high interest rates.
• Payday loans and no credit check loans cannot help you improve your credit rating, but monthly instalment loans do.

Scams to look for while choosing a bad credit loan

You should be vigilant while choosing subprime loans for yourself. Watch out for the following things in order to avoid being trapped in a scam from an illegitimate lender:

• The lender is not concerned about your credit history

If your lender is indisposed to credit score perusal, it is a red flag. No legitimate lender is authorized to lend you money without a credit history check. If not a hard check, they are obligated to run a soft check.

It is, in fact, good for borrowers because it reduces the risk of borrowing more than their affordability.

• You receive promotional offers every now and then

If you are getting promotional offers from lenders over and over, you should not pay attention to them. Lenders are not supposed to encourage you to borrow money to pay for your expenses. Bear in mind that borrowing is seen as an inability to manage your funds competently.

Such offers from lenders cannot be considered legitimate. They are most likely to be loan sharks. Caution is enjoined.

• A lender is unregistered

You should carefully check whether your lender is registered or not. An unregistered lender will charge exorbitant interest rates in order to make a profit. Unfortunately, you would not be able to file an affordability complaint against the lender to the Financial Ombudsman Service because the onus of choosing a lender was on you.

Improve your credit score

Just because a loan can be approved despite a poor credit rating, it does not insinuate that you do not have to improve your credit rating. Here are some ways to ameliorate your credit score:

• You should avoid late payments. They not only increase the cost of the debt, but they also pull your credit points. The impact of late payments and defaults remains for two years and six years, affecting your ability to borrow money at affordable interest rates.
• Do not carry any balance on your credit card because doing so will affect your credit rating. Keep the credit utilization ratio less than 30% and make sure you pay off the balance in full.
• Do not borrow more than you can afford. If you suspect your repayment capacity, you should reduce the loan amount.
• Do not close all your credit cards even though you do not use them. Otherwise, your credit utilisation ratio will increase.

The final word

Bad credit loans are approved quite fast. The application is signed off on, usually on the same day you put in a loan application. At the time of applying for these loans, you should be careful about your repayment capacity as well as the lender you are borrowing from. Make sure that you have checked your affordability as well as the authenticity of a lender.