Getting a bad credit secured loan with a poor credit profile, CCJ’s or arrears.
What do secured loan lenders think about bad credit?
If you are thinking of taking out a secured loan but have got a bad credit profile, the first thing to understands is “what is bad credit and how will lenders react to it?” Well there are lenders who provide bad credit secured loans which could help you.
What’s different about the secured loan market is that lenders have been offering loans for people who’ve got poor credit for along long time. They’re very comfortable with it. We have been in the industry well over 30 years and as far back as I can remember there were lenders doing loans for bad credit.
The secured loan market is not the same as the first mortgage industry which is more restricted – so there’s not much as much of an appetite there for for bad credit mortgages In the unsecured sector that’s not great either because there isn’t any security being offered so the rates are incredibly high and the loan amounts very small. So secured loans are good for people who are homeowners, have equity in their homes and they’re thinking of taking out a loan to deal with bad credit
Have you really got bad credit?
There are a number of factors that lenders will take into consideration when assessing your credit history.
Firstly the loan needs to be affordable and they are going to look at this very closely. But when it comes to the specific issue of bad credit there are two key thing they will look at.
One is the loan to value (LTV) – this is how much of the of the value of the property they’re going to be lending against.
The other is the state of the borrowers credit history
As a broker we see a whole myriad of circumstances and very often customer and other brokers will say to us “I’ve got bad credit can you help me? The first thing to understand is what they mean by “bad credit”. Heres some examples:
My credit score is low – well that’s not really bad credit. Some people have a low credit score simply because they have not taken out any credit.
I’ve got some unsecured arrears – that might be a factor but it depends on the type of account and seriousness. In most cases its not a significant issue.
I’ve got a default from my phone supplier – this is really common and generally its a small amount. Many secured lenders ignore them.
How do secured loan lenders accommodate bad credit?
There are different catagories of borrowers or credit types
Super prime – a really high credit score – never missed a payment.
Prime – still a fairly good credit score but with some historic missed payments or small CCJ’s or defaults which many lenders will ignore.
Near prime – the credit score isn’t great plus there are some incidents or more recent and occasional CCJ’s, defaults or arrears which cant be ignored.
Heavy adverse – significant missed payments or defaults / CCJ’s. These have occurred in recently and suggest a breakdown in the borrowers ability to manage their financial commitments.
In the industry, when we’re talking about bad credit we are referring to serious mortgage arrears and county court judgements. If you’ve got a few small glitches on your credit history some lenders actually will ignore them all together
Firstly some lenders don’t even do a credit score. They will work on manual underwriting and some lenders will disregard unsecured arrears and small CCJ’s. This especially happens if they’ve been satisfied or if they’re over 12 to 18 months old. If you have had a few minor credit problems in the past, you’re not necessarily dragging your credit history around with you because a lot of lenders will ignore it after a certain period of time.
In the secured loan market, lenders understand that things happen. If you’re borrowing now because you’ve got past the episode which caused the bad credit, we find lenders pretty sympathetic. Many of the lenders offer a range of products from super prime to near prime with interest rates and LTV’s aligned to their perception of the risk involved.
Within the lenders policies they might ignore mortgage arrear or judgements over 12 months old. Another lender may accept two missed mortgage payments in the last 24 months but only one in the last 12 – and nothing missed in the last 3. The point here is that each lender has a different approach and what one lender considers a risk, another may accept. Each will price its products based on the perceived risk, and will have their own ideas about when the risk becomes more than they are prepared to accept.
Can’t pay? / Won’t pay?
Lenders have become cynical – or you could call it experience.
There are people who have experienced a life event which meant they couldn’t maintain their credit repayments. That event has passed and the applicants now demonstrate an ability and willingness to pay their debts as they fall due. In this scenario lenders tend to be sympathetic and will help as much as their policy will allow if people were previously in a position where they “can’t pay”.
There are also people who demonstrate an ability to afford the repayments but have a long history of not paying their debts as they fall due. Not because they couldn’t afford the payments – but because they made a decision not too. Unsurprisingly, lenders tend to be less willing to take on this type of borrower.
We have a large percentage of applications where people come with scenarios such as “something has happened in my life and it’s caused a massive problem. I’ve got arrears on my mortgage, I’ve got court judgements – but I need to borrow to now get myself back on track”.
This is common and lenders will look at what caused those things to happen whether than the problem has not gone. An obvious concern for the lender is if the problem comes back and a new loan simply makes the situation worse.
Loan to value – LTV
If a lenders underwriter is considering a really bad credit situation they are not going to be lending up to 85% or 100% loan to value. The risk is too high. Generally these LTV’s are only available to applicants who fall in to the super prime or prime category. However, there are lenders which will consider lending at 100% LTV even if there is a historical CCJ or mortgage arrear. What they are more interested in is the last 18 months or so and how you have conducted your credit – so missed payments on your credit cards in the last few months may be more detrimental to your application than some court judgements 3 years ago.
70% to 85% LTV
This is the zone where knowing the lenders really makes a difference. If you have had problemes in the past or even recent minor issues a good broker may be able to find a decent loan for you.
Up to 70% LTV
The perfect customer profile for a secured loan lender is a borrower who wants to borrow up to 60% of their property value and has no credit issues at all. But thh reality is that most customers have some form of credit glitch which will determine the rates available.
The good news is that up to 70% LTV there are lenders which will consider almost any bad credit scenario provided the loan appears to be affordable going forward. If there is plenty of equity in your property and they’re not lending , including the first mortgage, more than 70% to 75% of the value of your property, they are relatively relaxed. However, they’re going to charge you a rate which reflects the risk.
Interest rates for bad credit secured loans
Lenders will generally price their rates based on the amount of bad credit and the loan to value of the proposed loan.
Let’s take a scenario where perhaps the credit score is not so great, or there might have been the odd glitch. Maybe something happened a year to 18 months ago. At the time of writing, borrowers may well be able to get rates of below 4%. So, good rates are available which are similar to those that will apply to prime customers.
If the adverse credit is a little worse, but not significant or very recent, the rates may range from 4.5% to 6.5%.
For heavier adverse the interest rates are more likely to be between 8% and 12% with the LTV limited to 70% or 75%
Before you start thinking of applying, you really need to think about timing. If you’ve got bad credit right now, you could have a situation whereby in two or three months the impact of that credit may be less. This could mean lower rates. Let’s say it’s a mortgage arrear or a large county court judgment. In two or three months a lender might look at that differently because they are looking at recency. So if your court judgment is about to drop off that lenders radar, or you are about to satisfy it, you could be getting better rates and better products simply by waiting.
That’s why it’s important to speak to a broker. They’ll be able to advise you as each lender has different criteria and be able to compare between borrowing now or waiting a couple of months.
Is a secured loan the right option?
The other thing to consider is do you need to borrow at all? Borrowing your way out of a bad situation to put yourself in a worse situation is not a good idea. But if you’ve if you’ve overcome the problem and you are now looking to clean up your credit profile it may make more sense.
An example of this could be somebody with a bad credit profile because they have been on a debt management plan and have arrears on their credit profile. A consolidation loan for them might be a good idea because it means they can play off all the credit or arrears and going forward they can show a good credit profile. This could mean in 12 to 18 months time they can make plans to get back towards mainstream lending.
However, that’s not such a good strategy it they are not able to overcome the problem which caused them to enter a debt management plan in the first place. It could just put them into a worse situation.
Similarly, someone who has already got a bad credit history could make an agreement with their creditors where they will agree lesser payments now. This can help them pay some of their debt off by effectively paying a reduced amount over a longer period of time. Of course the downside for that strategy is it takes longer to get a good credit history as the missed payments remain on file throughout the agreement to make reduced payments. Hence, some prefer to consolidate all credit and sweep the decks clear with a fresh start so they know in 18 months time that their credit profile is starting to look better
Getting advice is a must
There are many factors to consider both personally and from a lending availability perspective so talk to an advisor about the options that might be available to you. Remember if you are consolidating debt or even if you’re taking out a secured loan for other purposes, whatever you borrow, your home is at risk just like on a mortgage. Make sure that you can maintain the repayments so whatever caused the bad credit be confident that that issue has been overcome.
If you aim is debt consolidation you may be in a situation where you’ve got so much credit that you can’t afford to pay your mortgage and your household bills. Consolidating that can reduce your repayments and bring your costs right down so you get into a better place. But that doesn’t mean, just because you’ve now got some more cash available, that you can rack up your credit cards again. You will probably be back to square one, with lenders and advisers not keen to risk helping people who keep making the same bad decisions.
Remember that if you consolidate unsecured credit you’re now securing against your home. Is that something you want to do? Also if you are consolidating credit and extending the repayments over 10 or 15 years then whilst that’s brought your monthly payments down, you are paying interest for a longer period of time. If you don’t make extra payments or refinance on to a shorter term in the future, you could end up paying more over the longer term. Getting advice will help you weigh up pro’s and cons to get the loan which is suitable for you both now and for the future.
2 out of 3 borrowers get a lower rate than our representative example of a regulated secured loan below:
Mortgages and Remortgages
£80,000 over 240 months at an APRC OF 4.3% and a discounted variable annual interest rate for two years of 2.12% at £408.99 per month followed by 36 payments of £475.59 and 180 payments of £509.44. The total charge for credit is £39,873 which includes a £995 broker / processing fee and £125 application fee. Total repayable £119,873.
Secured / Second Charge Loans
£63,000 over 228 months at an APRC OF 6.1% and an annual interest rate of 5.39% (Fixed for five years – variable thereafter) would be £463.09 per month, total charge for credit is £42,584.52 which includes a £2,690 broker / processing fee. Total repayable £105,584.52.
£4,000 over 36 months at an APR OF 49.9% (fixed) and an annual interest rate of 49.9% would be £216.21, total charge for credit is £3,783.56. Total repayable £7,783.56.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME
REPAYING YOUR DEBTS OVER A LONGER PERIOD CAN REDUCE YOUR PAYMENTS BUT COULD INCREASE THE TOTAL INTEREST YOU PAY. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Written terms available on request. Loans are subject to affordability status and available to UK residents aged 18 or over. Promise Money is a trading style of Promise Solutions Ltd. Promise Solutions is a broker offering products which represent the whole of the specialist second mortgage market and is authorised and regulated by the Financial Conduct Authority – Number 681423.
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