Just because people have bad credit, that doesn't mean they can't borrow any money. Adverse credit means that people have a poor credit rating, perhaps because of:
- defaults on loans or credit
- arrears on loans of credit
- County Court Judgements (CCJs) because of defaults or arrears
But even this doesn't mean that people are barred from getting credit. While it can be difficult and interest rates won't be the best, there are many credit products that target people with adverse credit. Here are some of the loans people with adverse credit can get.
Payday loans are loans of small amounts (usually up to £ 800) intended to help people manage short term financial difficulty. There are no credit checks. All people need to qualify is to be able to prove that they are employed and that their salary has been paid into their bank accounts for the last two or three months.
For every loan, a fee is added to the amount to be repaid. This may not seem like much, but it equates to a high annual percentage rate (APR). This gets even higher if borrowers miss payments or extend the loan. Payday loans are intended to be repaid within the next pay period of two weeks to a month. Any extension results in an additional fee until borrowers could end up owing several times the original amount. Payday loans must be repaid before another one can be issued.
People can borrow even more from doorstep lenders. These are lenders, sometimes based in the high street, who come round to people's homes to discuss what they need to borrow and hand over the cash on the spot. At the same time, they agree on the interest to be paid and the repayment terms. These loans are often repaid in weekly instalments.
The interest rate on doorstep loans is prohibitive, and can be upwards of 250%. However, the people who take out doorstep loans may feel they can't get credit anywhere else. If payments are missed, doorstep lenders are likely to seize possessions and to resort to threats and violence. Meanwhile, the amount owed continues to mount up. In one case, a doorstep loan of £ 5,000 became an enormous debt of £ 300,000. The borrowers were able to prosecute the lenders with the help of the Office of Fair Trading. Illegal loans carry a fine of £ 5,000 and a prison term of up to two years.
Secured loans offer perhaps the biggest loan amount. These are available to homeowners and are secured on the value of the equity in the house. This is calculated minus any existing debt. Because the lender has a charge on the house as security for the loan, interest rates are often lower than with unsecured loans and loan amounts are higher. Some people are able to borrow up to 125% of the value of the equity in the home. This works well as long as property values continue to rise. Loans of this size are not regulated by the Financial Services Authority. Although secured loans offer the most money to people with adverse credit, they are also risky. This is because poor repayment of the loan could result in the loss of the borrowers' homes.