Why Bad Credit Loans Can Help Improve Your Credit Rating?

Building your credit score can often be a vicious circle. You apply for loans in order to pay off debts and repayments on said loan to build your credit score, but end up getting rejected which can negatively affect your rating.

Bad credit loans are a perfect way for those struggling with a bad credit score to gain a loan whilst boosting their credit rating at the same time. But how exactly is this done?

What is a Bad Credit Loan?

A bad credit loan is a way to borrow money if you have been refused from previous lenders in the past. If you have a low credit score or no credit history at all, it may be easier to gain a bad credit loan, as opposed to a traditional personal loan.

Typically, such loans come with a higher interest rate than normal loans, as well as mostly requiring another way to secure the credit. This could be by securing it against a personal asset such as a house or a car, or by asking a friend or family member to guarantee the loan. This helps to give the lender peace of mind that the repayments will be made one way or another, meaning they are more likely to lend to you.

For a successful application, applicants must be over 18 years of age and in some kind of employment. Bad credit loans can be found at banks, credit unions, private business and private lenders.

The three main types of bad credit loans are;

  • A secured loan, which requires the borrower to secure the loan against an asset such as their home or car. The home or car can then be used a piece of security for the lender if the borrower cannot keep up with the loan repayments.
  • A guarantor loan, which requires another person to commit to paying the loan should the borrower fail.
  • A peer-to-peer loan, in which the borrower borrows from an individual as opposed to a bank or credit union.

Can a Bad Credit Loan Build your Credit Score?

As your payment history makes up 35% of your overall credit score, making payments on time can definitely help to improve and build your credit report. Payment history is a large section of your credit score, so paying bills and repayments on time is very important in boosting your report.

However, this will only work if the lender you are borrowing from reports the payments back to the credit bureau. By reporting the payments, they will be recorded on your credit report, which is then used to create your credit score.

Borrowing from a lender who requires the repayment in multiple instalments is the safest way to ensure that your payments are registered. By making multiple payments, it gives you more opportunity to pay on time and hence this will help to improve your credit score.

Payday and title loans are not likely to report your repayment to the credit bureau, as they usually require the repayment in one or two lump sums over a short repayment term. As well as this, it is advisable to avoid “no credit check” loans, as this often works both ways. They won’t do any checks on your credit history, but also will not report your repayments. This will then not impact upon your credit score. However, we do not advise that you use payday loans as a means of a short term financial solution.

Bad credit loans can indeed help to boost your credit score, as long as you ensure you take out a loan with a lender who will report your repayments back to the credit bureau. They can be a great way for those struggling with bad credit, but such loans should only be used for unexpected payments. Getting into more debt to pay off debt is sometimes not the best answer, no matter how it affects your credit score.