Bad credit is the result of being unable to pay off the debt on time. When you borrow money, you promise your lender to pay off the debt on time as agreed, but missing payments and defaults pull your credit points.
The more defaults your credit report has, the worse your credit score will be. A poor credit rating does not get in your way of borrowing money, but lenders may put a cap on the borrowing amount and will charge higher interest rates.
A bad credit score is perceived as irresponsible borrowing. Of course, it is unfair to borrowers with good credit scores to lend you money at the most attractive interest rates.
Lenders follow approval criteria that apply to everyone across the board. Most of the lenders do not ask you to arrange a guarantor with a good credit rating at the time of applying for a bad credit loan, but it can help you get a loan at a lower interest rate.
Unfortunately, it is not too easy to arrange a guarantor because nobody would be willing to serve as a guarantor after knowing that they will lose their credit points despite paying off the debt when they make a default.
Mostly, a spouse or any other family member will be your guarantor. Still, sometimes their finances are not in good condition, and their credit score might be already bad as well. As a result, you look for loans for bad credit with no guarantor.
Caution to take while applying for bad credit loans with no guarantor
These loans are very convenient to apply. As there are not too many formalities, you can get approval almost the same day you fill in the application form. However, you should be careful while taking out these loans from a lender. There are a lot of things that are not advertised that can influence your borrowing decision:
- Interest rates are very high
It will not come as a surprise to you that lenders charge higher interest rates when your credit rating is not stellar. Interest rates and APRs are different. The rate you are charged is actually the APR, which involves interest rates and associated fees. These fees can be monthly fees, loan origination fees, processing fees and hidden fees.
Lenders are not bound to disclose all fees. Bad credit loans with no guarantor seem to be very convenient based on the fact that you can get rid of them at once, but if you roll over the loan for a full year, you will find yourself paying at least five times the principal amount, thanks to the high APR.
For instance, if the APR is 500%, it means you will have to pay £500 as annual interest on top of the £100 you borrowed. Even though the lender advertises these loans as very affordable and emphasises looking at the interest rate for a repayment period, this cannot make them cheaper at all.
- You can borrow only a small amount of money
Bad credit loans with no guarantor will not let you borrow a larger sum. Chances are you come across some big emergency. You may need to borrow a larger sum in case you do not have enough savings. For instance, you may need large funds due to an unexpected medical bill.
Even though you need money for urgent reasons, your lender will not let you borrow a larger sum. The lending amount is capped at £1,000. In rare cases, it can go beyond that. A few lenders can be willing to lend you up to £3,000, but you must have a strong repaying capacity.
Since the loan amount is not so big, you will have to pay off the debt in full on the due date. This increases the risk of falling into a debt trap in case you roll over the loan.
- These loans do not build your credit history
There are people who fail to avail of lower interest rates and borrow a larger sum because they do not have a credit history. The absence of credit history will call your credibility into question, and as a result, you will get money at a higher interest rate.
Whether you are a borrower with no credit history at all or you are a borrower with a bad credit rating, these loans cannot help build or improve your credit rating. This is because these loans are paid back in full on the due date, and this is not enough for a lender to assess your financial loyalty and commitment.
You should instead apply for credit builder loans from a direct loan lender. As these loans are paid back in monthly instalments, you have a chance to prove to your lender that you manage your debt responsibly.
- You do not have wider options
The next thing that you might not be aware of is that you will not have access to many lenders to borrow money. As a result, the chances of getting money at a lower interest rate are bleak. When you have a good credit history, you can apply to as many lenders as possible, and you can compare interest rates. This helps you get the loan at the most competitive interest rates.
Tips to avoid having a bad credit score
Here are some of the tips you should follow to protect your credit score:
- Avoid multiple applications that result in multiple inquiries.
- Use your credit card sensibly. Pay off the balance in full on time.
- Keep your debt-to-income ratio lower than 30%.
- Keep your credit-utilisation ratio up to 30%.
To sum up
Bad credit loans with no guarantor are easy to apply but involve certain risks. You should be aware of them before using these loans. Do proper research, compare interest rates, and assess your repaying capacity. If possible, focus on improving your credit history.
