Long-Term Loans for Challenged Credit: A Comprehensive Overview

Borrowing money can be challenging when your credit score is not up to scratch. While some lenders accept applications from subprime borrowers, your credit score should still be up to their level of acceptance criteria. Lower than that will result in refusal.

Poor credit borrowers do not struggle with approval, as the loan amount is small and is to be paid off in one fell swoop. The lending decision is made solely based on your affordability. However, long-term loans have a complicated scenario to follow.  

What are long-term loans?

A long-term loan is a loan that is paid down over a period of 12 months or more. The repayment term of these loans could be either 12 months or 20 years, depending on the size of the loan. They are of two types: unsecured and secured.

The former includes small instalment loans, while the latter includes car loans and mortgages that are backed by collateral. Here is the difference between unsecured and secured large loans:

• The risk with secured long-term loans is quite high, as you will lose your secured asset in case you default.
• Interest rates for unsecured loans are higher than secured loans, as lenders cannot repossess your personal assets to cover their money in case of default.
• The maximum amount you can borrow without putting down collateral is up to £10,000, depending on a lender’s policy and your affordability, and you can borrow up to 4 or 5 times your income as a secured long-term loan.

Here are the features of long-term loans:

• Long-term loans are paid down over an extended period of time, and therefore, they help boost your credit score.
• In order to apply for unsecured long-term loans, you must have a good credit rating. However, a subprime credit rating is accepted for secured long-term loans.
• Since the repayment term is long, the size of the monthly instalments will be smaller than those of short-term loans.
• The total interest payment will be high if you choose a longer repayment length.
• You can use long-term loans for a variety of purposes, such as buying a car and house, refurbishing a home, consolidating debts, and funding a business, wedding or any other big event.

Ways to qualify for long-term loans with a weak credit history

If the loan amount is small enough to be paid down within a period of less than 12 months, you can easily qualify for a bad credit long-term loan, but secured long-term loans have difficult criteria. As compared to banks, it is easy to qualify for long-term loans from a direct lender.

If your credit history is not stellar, you cannot offset its impact by having a strong income source. It could be surmised that you have a propensity to avoid making payments on time. Lenders perceive your poor credit score as negligence. They will not be able to lend a large amount of money and charge high interest rates.

If your credit score is not so impressive, you still have a chance to increase your qualifying rate.

• Try to improve your credit score

Mortgages and car loans are planned loans. You start arranging a deposit for them months before. Now that you know that you will need a good credit score to qualify for lower interest rates. You should start making efforts to ameliorate it.

• Consider credit builder loans. They are small loans to be paid down in six months. If you pay it off on time, your score will go up.
• Pay your credit card bills before the balance is reported to credit reference agencies. This will prevent credit score damage due to a high credit utilisation ratio.
• You should avoid having multiple short-term debts, such as payday loans. Recent queries can call your credibility into question.

Bear in mind that credit score improvement is not an overnight process. You will have to make efforts to ameliorate it now.

• Reduce the debt-to-income ratio

Lenders will also look into a debt-to-income ratio, which suggests the amount of debt you borrow against your income. An ideal ratio is 30%. More than that will raise doubts about your affordability and repayment capacity. Long-term loans involve a lengthy repayment term. Having a lot of debt could make it difficult for you to keep up with your payments.

A golden rule of thumb says that you should lower your debt-to-income ratio. It should not be more than 30%. At the time of taking out long-term loans, you should avoid having any amount of debt, especially short-term high-interest debts.

• Arrange a guarantor

Sometimes, your lender can expect you to arrange a guarantor with a good credit history. This is true when you consider unsecured long-term loans or small business funding with bad credit. The guarantor you arrange must have a good credit rating and will be responsible for the debt settlement in case you default.

It is worth noting that the guarantor will also lose their credit score in case you fail to meet your obligation. Make sure that the guarantor knows the consequences of acting as a guarantor. Your relationship with them could also be affected.

What are the advantages and drawbacks of unsecured loans?

Here are the merits and demerits of unsecured loans:

Should you take out long-term loans with a challenged credit score?

This is an irrefutable fact that you cannot qualify for lower interest rates for a loan with a subprime credit rating. Lenders will charge high interest rates. In some cases, they can even reject you.

Only if you need money for something you cannot put off should you consider using long-term loans.

In addition, make sure that your credit score is not lower than the bare minimum score that lenders have set for approval. If you suspect that you will not be able to afford payments, you should not borrow money. Try to ameliorate your credit score and demonstrate a strong repayment capacity.