A very bad credit situation is destructive and the ultimate consequence of poor financial management. Defaults, County Court Judgments (CCJs), and bankruptcy are indications that someone has a very poor credit score.
Don’t worry! Solution is available
On one side, it may seem impossible to come out of this situation. But on the other hand, still some solutions are available. A loan solution, very bad credit loans from direct lenders in the UK, is used to solve the issue of the worst credit situation.
Due to derailed financial situations, borrowers get expensive deals of very bad credit loans. Hence, applicants are usually curious about interest rates and applicable fees. Through a step-by-step process, you can understand everything about the rate of interest and the features of these loans.
What are very bad credit loans?
The very bad credit loans are short-term borrowing options for people who want to get rid of their worst credit rating.
The loans offer a small amount of money to pay off some of the urgent expenses. However, there is no constraint on how the borrower can use the funds. Money can be used to pay off some small debts completely.
Loans with very bad credit scores have no obligation of guarantor and collateral. However, the fund seeker can include any of these by choice only to borrow a larger amount at a lower rate of interest.
Due to being available to the worst credit score people, the loans have a high interest rate. Hence, the lenders check affordability before they approve funds. Such loan solution is offered by direct lenders only due to their flexible policies. However, in that case, too, the applicant needs to prove affordability.
Why do very bad credit loans have higher interest rates?
For some potential reasons, loans with very bad credit ratings have a higher rate of interest. Let us read the reasons below.
- Higher lending risk – Lenders take a huge risk while lending a very bad credit score person. Despite knowing that the applicant has made defaults in past debts, if they approve funds, they need to compensate for that. A high interest rate is that compensation.
- Lack of security – Many very bad credit score loans have no obligation requirement of collateral. Hence, that increases the risk even more. Considering this situation, loan providers have no assets to claim if the borrower defaults.
- Limited access to lenders – Mainstream lenders or banks right away reject the worst credit score people. In fact, they don’t have any loan products for very bad credit rating applicants. Only direct lenders offer loans, but they, too, have to think about their risk level.
Understanding Annual Percentage Rate (APR)
APR, which is the Annual Percentage Rate, shows the yearly cost, including the rate of interest and fees on a loan. For a worst credit score borrower, the loans are available at a higher APR.
Example – A good credit score borrower gets personal loans at an APR of 7.5%. At the same time, a borrower with a very bad credit score gets the same loan at an APR of 49.9%.
Some loans, like payday loans or other short-term loans, can have a much higher APR in the hundreds.
Types of very bad credit loans
Borrowing options available for the worst credit score people are not many. But few are there, which you can avail in case you are struggling with such a situation.
- Guarantor loans – Involve a third-party guarantor, including family and friends, to repay the loan in case the borrower defaults. This allows the applicant to borrow a desirable amount.
- Secured loans – This needs collateral such as a home or a vehicle. Due to adding security, the loans can be obtained at a lower interest rate. As a result, the instalments are affordable.
- Instalment loans – Short-term, small-amount instalment loans without any guarantor or collateral obligation. The interest rate is higher despite customization due to the risky credit profile.
- Payday loans – These are used to cover urgent expenses. The loans are paid back on the next salary day of the borrower. Very high interest rate but is accessible in emergency circumstances.
Types of fees applicable
The very bad credit loans come with multiple fee types, and all are vital to be paid. The following are the primary fee types a borrower needs to bear.
- Late payment fees – Paying an instalment late invites a heavy late payment fee. It can be from £15 to £30. Also, credit score degrades a few points, complicating finances even more.
- Origination fees – It is an upfront fee that is charged to process the loan request. It is equivalent to a percentage of the loan amount.
- Prepayment penalties – Not every direct lender charges a prepayment penalty such as 24Cashflow. However, few direct lending companies charge for paying off the loan early.
- Broker fees – In case the borrower hires a broker to find relevant and affordable deals, a broker fee is applicable. Borrowers can avoid this fee if they don’t want to lower the cost of borrowing.
- Collection fees – In case the borrower defaults, a collection fee can be applicable in exchange for debt collection efforts. This work can be passed on by the lender to the third-party collection companies.
Ways to lower the cost of your very bad credit loan deal
Yes, despite the worst-case scenario in financial life, you can lower the cost of the loan. Follow the tips below; they are practical ways to borrow funds at a cheaper rate.
- Improve your credit score – This can be the best way to get a cheaper loan at a lower interest rate. Yes, the worst credit situation is complicated. However, if you can manage to pay off some debts or pay them on time, your credit score rises. Do this before applying for very bad credit loans to get an affordable deal.
- Borrow less – In the desperation to handle the scattered finances fast, borrowers sometimes borrow a large amount. With already high interest rates, borrowing a larger amount will raise the cost of the loans for the worst credit score. Be sure about your needs and check your repayment capacity. Try to borrow a smaller amount.
- Use a guarantor – Using a guarantor gives the opportunity to borrow bigger at a lower rate of interest. This can help to get long term loans for bad credit. However, the guarantor should have a good credit score with a regular income and correct debt-to-income ratio.
- Take shorter terms – Shorter tenure means you will pay off the total amount faster. This means having a lower rate of interest on the total amount of money you borrow. As a result, you can plan your budget easier making things simpler.
- Avoid roll-overs – Rollovers or renewing your loan only adds more interest and fees to your debt. This means that with an already very bad credit score, you will have a bigger debt to manage. Hence, avoid renewing the loan, as it is not good for your financial health.
Conclusion
The information above reveals the ways to get very bad credit loans at a lower rate. Financial circumstances can be messy sometimes. But with the presence of relevant solutions, it is possible to bring back things on track.
The core solution to the issue can be working on your earning capacity. The more you earn, the faster will be the speed of paying off other debts. Very bad credit loans can support you during bad times. However, if the pending debt size is so big, you also need to work on improving your financial capacity.
