Types of available credit in the UK when you have bad credit

For decades, people in Britain who had a less than perfect credit score were denied access to loans, credit cards, and much more. The people who needed the money the least found it the easiest to get and the people who needed it the most had to jump through hoops with no guarantee of success.

It’s no wonder the old expression – “a bank is happy to lend you an umbrella when it’s sunny but they want it back as soon as it starts to rain” – had more than a ring of truth to it.

It’s still easier for people with high credit scores to get access to credit but things have changed a lot in the last ten-or-so years for those who have had the odd struggle with money in the past.

6 types of finance you can apply for if you have a bad credit history

There are now multiple ways that people with bad credit histories can get access to finance and the 786 Loans team has put together this handy 3-minute guide on the type of finance that’s available together with their pros and cons.

Short-term loans

Short-term loans, sometimes called instalment loans, are loans for usually between £100 and £1,000 that borrowers take out which they pay back over 1 to 12 monthly instalments.

Pros

You can lower the monthly repayments you make by stretching the loan out over a longer period of time so that it fits just within your budget (although you’ll pay back more in interest if you take out the loan for longer).
The cash can be in your bank account in as little as 15 minutes (this depends on the lender and on your bank).
You can pay off the loan early and that saves you money on interest.
Short-term loans are heavily regulated meaning there is a maximum to the amount you can be charged for your loan.
You can borrow smaller amounts of money, something that larger lenders aren’t set up to help you with.
The loans are unsecured meaning that you don’t have to hand over your home, car, or other personal possessions if you fail to make the repayments.
You should only take out a short-term loan to cover an emergency situation.

Cons

Typically, the interest rate is higher than for a loan or a credit card you’d get through a bank or a building society.
If you want to borrow more than £2,500, most lenders won’t be able to help you.
These types of loan are not suitable for debt consolidation.
Short-term loans are not recommended for anything other than essential or emergency spending.
If you default on a short-term loan, it will be very difficult to find another lender who will be happy to agree on a loan with you for a long time afterwards.

Payday loans

Payday loans are generally for amounts between £50 and £1,000. You pay the loan and the interest back in one instalment either on your next payday or within 30 days – whichever date you and your lender agree.

Pros

Payday loans can be deposited into your bank account within 15 minutes (this varies according to who you lend the money from and the bank your current account is with).
You can pay off the loan early and save money on interest.
Just like short-term loans, payday loans are heavily regulated meaning that there’s a maximum amount you can be charged for taking the money out.
You can borrow very small sums of money with payday loans. Most financial institutions are not set up to offer these types of loans.
You do not have to offer security like your home or your car to take out a payday loan.
Payday loans should only be used to cover emergency and unexpected spending that you can’t meet from your savings.

Cons

The interest rate on payday loans is a lot higher than for most standard types of loan and credit cards.
Most payday loan companies will not consider loans of more than £1,000.
Most payday loan companies prefer to lend smaller amounts of money to new borrowers before upping their limit later on. You may not be able to get all the money you need.
You should not use payday loans to consolidate your debts or to make repayments on existing debts.
If you fail to make your one-time repayment or if you default on the loan completely, it will be virtually impossible for you to find another loan company willing to work with you for a considerable period of time.

Guarantor loans

With a guarantor loan, someone else promises to pay any money you can’t pay back to the loan company. So, if you borrow £5,000 and you pay off half of it but can’t pay off anymore, the remainder of the loan must be paid by your guarantor.

Pros

You can generally borrow much more with a guarantor loan than you can with a payday loan or a short-term loan.
Repayment periods can be up to 5 years meaning that you can really bring down the amount you have to repay every month (although the longer you take the loan out over means that you’ll be paying more in interest).
Most guarantor loans can be paid off early so that you save on interest.

Cons

Your guarantor normally has to have a very good credit rating for your application to be accepted.
There is currently a lot of negative press coverage about the sector because guarantor loans do not offer the same level of consumer protection as payday loans or short-term loans.
The loans can be expensive compared to similar-sized loans from banks and building societies.
Your relationship with the guarantor may suffer greatly if they are called on by the loan company to settle your debt.
The Financial Conduct Authority is currently investigating companies in the sector because of worries about the level of interest charged, very high default fees, and poor customer service.
If you and your guarantor cannot pay the loan back, you will both be taken to court and end up with either a statutory demand (a bankruptcy petition) or a County Court Judgement. This will cause both of you a great deal of difficulty in being approved for credit for a long time afterwards.

Logbook loans

Logbook loans are a newer type of loan here in the UK where the loan is secured against your car. In other words, if you default on the loan, the logbook loan provider takes permanent possession of your car.

Pros

You can borrow up to 75% of the value of your car (loans generally start at around £250 and they can go as high as £50,000.
Some logbook loan companies can pay out your loan in an hour or so.
Most logbook loan providers allow you to pay off your loan early with no penalty offering you a saving on the interest you would have paid had the loan gone to term.

Cons

If you rely on your car for work or for family duties, the loss of your vehicle may cause your great distress and inconvenience. Your car belongs to the logbook loan company as soon as you take the loan out and ownership is only transferred back to you when the loan is settled in full.
Citizens Advice have warned consumers about logbook loans and their dangers – (please see this BBC News report). A major car advice website has also advised its readers not to take them out.
As with guarantor loans, the Financial Conduct Authority is monitoring the sector because of interest rates, very high fees, and poor customer service.
Interest rates are often a lot higher than an equivalent loan you might get from a bank or building society.

Credit cards

For every man, woman, and child living in Britain, there are three credit cards. It’s a huge industry and there are specialist card providers who are happy to work with people with less than perfect credit histories.

This is how they work. When you get a credit card, you can use that credit card to buy goods and services in the real world and online – there are tens of millions of companies which accept them. Your credit card has a limit – that’s the amount of money you can spend up to. You pay interest on your balance – that’s the amount of money you’ve actually spent on your card which you have not paid back yet.

You make a repayment to your credit card once a month. You can choose to repay the entire balance (taking it back down to zero) or the minimum sum every month (normally 5% of the balance or £5, whichever is more). You can also make ad-hoc money transfers to your credit card account to pay the balance down – you choose when and you choose how much.

Pros

If you need to convert some of your balance into cash, you can use a “money transfer”. Simply log on to your card provider’s website and follow the instructions. The money will be in your current account within minutes. Some card providers charge for this service.
You can clear your balance every month and not pay any interest
There are credit-score-builder cards which allow those with poor credit histories or no credit histories to improve what’s on their credit report over time
You don’t need to ask for permission from a credit card company to buy something as long as you’re keeping within your limit
Credit cards are unsecured meaning that you’re not at risk of losing your home, car, or anything else of value if you default on your account.

Cons

If the person or company you need to make payment to does not accept credit cards, you won’t be able to use a credit card to meet that expense.
If you need money now to cover an emergency situation or bill, you will not be able to get it within hours by applying for a new credit card account. You will have to wait up to a week for your credit card to arrive.
You can draw money out of a hole-in-the-wall with your credit card but the charges are very high for doing this.
If you make the minimum repayment every month, it will take years to pay back and cost a lot of interest. For example, if you have a balance of £2,000 on a credit card with an APR of 29.9% and you only make the minimum repayment, it will take you 7 years and 10 months to pay back at a cost of £886 in interest.
Many people find credit cards too difficult to resist spending money with and they end up running up very large balances. Credit card companies tend to put up people’s limits without first asking them if this is what they want and this has been blamed by debt charities for causing people to build up to unmanageable debts on their cards.
Credit cards should not be used for day-to-day spending.
If you miss a repayment date, default fees and other penalties can be very expensive.

Bank overdraft

A bank overdraft is a type of loan you can dip in to and out of. Overdrafts are applied to current accounts and all overdrafts have a limit personally agreed by you and your bank. If your overdraft has a limit of £1,000, you can spend all the money in your account plus up to an additional £1,000 – this is your authorised overdraft. Sometimes, if you try to spend past your overdraft limit, the bank will allow you to do so but then you’ll be in an “unauthorised overdraft” which means hefty, additional fees to you.

Pros

Interest rates on authorised bank overdrafts can be cheaper than credit cards and many types of loan.
Many banks are willing to provide temporary extensions to overdraft limits in the case of an unexpected financial emergency.
You don’t have to get the go-ahead from the bank to spend your money on something as long as it doesn’t push you past your overdraft limit.

Cons

You have to have a current account with a bank in place to benefit from an overdraft.
Over time, people have a tendency to get trapped in their overdrafts. Over 2m British people, once their wages have been paid into their account, are still overdrawn.
Unauthorised overdrafts can cost substantially more than payday loans or short-term loans (Independent).
Bank overdrafts can be withdrawn at any time with just 30 days’ notice.
Unauthorised bank overdrafts, as with logbook loans and guarantor loans, are under investigation by the Financial Conduct Authority for the high levels of interest and fees charged.

The protection offered on payday loans and short-term loans

Out of the six types of finance we’ve looked at, two are protected by strict Financial Conduct Authority rules and the rest are not. The Financial Conduct Authority requires all companies that want to lend money to people to work hard for a specialist license. Without that specialist licence, those companies can’t lend money.

Payday loans and short-term loans are covered by special Financial Conduct Authority rules. Those rules state that:

no borrower can be charged more in interest and in fees than the amount of money they’ve taken out (so if you borrow £250, you’ll never pay more than £250 in interest and fees)
no borrower will pay more than 0.8% interest a day (that’s 80p per day on a £100 loan)
no borrower will pay more than £15 in fees if they miss a payment or default on the loan
no borrower should be denied the chance, if they can’t pay the loan back, to work out other arrangements with their loan company and the borrower can even bring in outside help if they feel they need help

These rules have been widely considered to be a success since they were first introduced back in 2015 and the Financial Conduct Authority is considering introducing similar rules to three of the types of credit we discussed in this article so that consumers enjoy the same protection.

Find the cheapest ‘bad credit’ loans with 786 Loans

At 786 Loans, we help customers with bad credit find their perfect loans every day. Whether you’re looking for a loan you’re likely to be accepted for or you are trying to improve your credit rating, we can help you find the best lender to suit your needs.

We’re a broker, not a lender, so it’s not us you’ll be borrowing money from. We have a panel of lenders (all Financial Conduct Authority-approved, just like 786 Loans) and all of them have their own specific type of borrower that they like to work with. We’ll match the details that you give us on your application and that are on your credit report with the information our lenders give us on the types of customers they’re most likely to lend money to. That way, you’re assured of the cheapest loan on the most attractive terms.

To find bad credit loan deals from some of the UK’s top payday loan and short-term loan providers, apply with 786 Loans today.