While banks do not accept applications from borrowers with abysmal credit reports, direct lenders have made it their unique selling point, an attempt to make profits by targeting borrowers who have been refused elsewhere.
Indubitably, a subprime credit score is an acknowledgement of your irresponsible past repayment behaviour. Still, an extremely poor credit score reflects a way worse scenario about your repayment comportment, which results in repudiation most of the time.
However, a few direct lenders are out there who do not shy away from accepting applications from borrowers with terrible credit histories. There is no denying that extremely bad credit loans in the UK charge exorbitant interest rates.
One of the reasons why these loans are expensive is that they involve a high default risk. A subprime credit file calls your credibility into question. Lenders will likely assume that you might default on repayment this time, too.
What are extremely bad credit loans?
Extremely bad credit loans are small loans aimed at helping you tide you over during financial emergencies. These loans come with a small amount of money, not more than £700, and therefore are required to be discharged in full once and for all. The repayment length of these loans cannot be more than a month. In some cases, it is only about two weeks.
While these loans seem more affordable than instalment loans, when the loan becomes due, you eventually find yourself running out of money. The loan that seemed to be a one-off payment has accumulated to the size of hundreds of pounds.
This should not come as a surprise because you are to pay back within the same month the whole of the debt. Now you are required to pay interest in addition to the principal, and your income will not proportionately rise. Of course, you would struggle with the settlement.
When you miss a payment, you will end up rolling it over. As a result, your late payment fees and interest penalties are accrued. This accumulates the size of the debt quickly. Unfortunately, each time the loan is rolled over, you are expected to pay it off in full, making it even more challenging to settle the debt.
Hidden costs of very bad credit loans
The cost of a loan is not the rate of interest. It is rather an APR, Annual Percentage Rate. It includes interest rates and associated fees and charges. While interest rates for these loans, for example, are 48%, the APR will be 125%. If you are looking to take out payday loans, the APR could go up to 1500%. It means you will be paying a lot more than you borrowed if the loan amount remains accrued for a full year.
The APR could be even higher when you apply for extremely bad credit loans in the UK with guaranteed approval. Such loans are exorbitant, as loans are approved regardless of your financial circumstances. You should be wary of these loans as loan sharks generally offer them. No authorised lender could guarantee approval without running an affordability check. There is a high risk of plunging into an abyss of debt.
Interest rates of very poor credit loans are high, but additional fees and charges also make them expensive. Fees that these loans include are:
Processing fees
All lenders charge processing fees whether or not they accept them. These fees vary between 1% and 5%, which is usually deducted from the loan amount you receive in your bank account. It is important to bear in mind that you will be expected to pay processing fees every time you apply for a loan. So, when you end up rolling over the debt, you will have to pay processing fees.
Late payment penalties
Late payment fees are inexorable. If you miss a payment, late payment fees will be added, which are not less than £15. Do not forget that interest will be levied on them too. This will rapidly increase the cost of the debt.
Early repayment fees
If you decide to settle your debt early, you will be charged early repayment fees. These fees could be so high that they offset the interest you save by early settlement.
Risks related to extremely bad credit loans
Here are the risks pertaining to loans with terrible credit history:
Credit score damage
It is important to ensure that you do not struggle to keep up with payments. Missing payments will be reported to credit reference agencies to be recorded on your credit report. As a result, your credit score will further go down. This will reduce your chances of borrowing money at lower interest rates.
The risk of getting into debt
If you fail to pay off your debt on time, you will have to roll it over. This will accumulate the debt because of late payment fees and interest charges. As a result, you find it even more complicated to repay your debt. Chances are, you keep rolling it over, and this will quickly snowball the total amount of debt. In the end, you will find yourself in an abyss of debt.
Fall prey to loan sharks
While direct lenders offer bad credit loans, most lenders do not accept applications from borrowers with an extremely bad credit rating. Those who lend you money despite a very bad credit rating could be loan sharks. You should always try to avoid borrowing money from them because they can charge very high interest rates. Further, you cannot make an affordability complaint against them because you borrowed money from them in the first place.
The final word
If your credit rating is worse and you are looking to borrow money, make sure that you manage to repay the debt on time. It is enjoined that you should improve your credit score as it will increase your chances of getting a loan approved. At the time of borrowing money from a lender, you must check the authenticity of the lender. Never borrow money from an unregistered lender.
