Bad credit refers to imperfect credit history. Someone may gain a bad credit history by failing to make payments on credit card bills, utility bills, mobile phone bills, or a mortgage.
When a lender notes a missed payment, they will usually report this issue to the UK credit reference agencies which include Equifax, TransUnion UK, and Experian.
Once this information is updated on their databases, any future lender who makes enquiries with them (via a soft or hard credit check) will be informed of your non-payment. This information may be used when a future lender makes a decision whether to accept a loan application and it may guide what interest rate they can offer you.
In other words, a credit history will follow you for a period of time. At any moment, millions of Brits are labelled as having ‘bad credit’ and may find it difficult to qualify for an affordable mortgage or loan for any purpose.
Why Do “Bad Credit” Lenders Exist?
Mainstream lenders such as the major UK banks and credit card companies may issue a simple rejection to any applicant who doesn’t meet their standards.
To lend effectively, banks need to make reliable estimates of non-repayment to be able to forecast how much they need to charge to make a profit.
If they willingly accept people with a bad credit history, they will need to factor this into the interest rate on the loan. This causes a problem because the higher interest rate will become uncompetitive in the market. Borrowers with a perfect credit history will not accept an interest rate that involves them paying for the mistakes of others. That’s why banks set a fairly high bar in terms of who they will lend to.
This presents a serious issue to individuals with bad credit. They begin to wonder “how can I actually get a loan with this history?”
The answer is to look for lenders who specialize in bad credit loans. Bad credit specialists expect to cater to purely those with an imperfect credit history who are prepared to pay a higher rate of interest. Therefore by focusing on this market segment, they can price the interest rate high enough to cover their risk, while still appealing to their customers.
We will round off this article by explaining why these bad credit lenders are useful and play an important role in the economy.
Personal Insolvency Would Rise without Bad Credit Lenders
Bad credit loans carry a higher interest rate, but according to credit regulations they must still be only offered to individuals who can afford them. Bad credit loans are not a one-way ticket to bankruptcy, in fact, they’re the opposite.
Without access to a short term finance solution, many UK households would be immediately bankrupt. This would have a negative effect on the UK economy, as a bankrupt individual will be released from their requirement to make good on any of the loans they cannot afford to pay.
By allowing people with imperfect credit histories to still access finance to help them weather short term financial shocks, these lenders can provide people with the breathing space needed to continue to pay their obligations.
Bad Credit Disproportionately Impacts Those without Wealthy Support Networks
When someone in a wealthy, middle class, and well-educated family finds themselves in a personal financial crisis, they have many options. They would borrow money from parents, siblings, and even friends before they default on a payment. This support network of cash acts as an insurance policy that prevents a black mark on their credit history.
Those who come from poorer families, or have a tiny support network (for example, a refugee arriving in a country) will likely have fewer short term options. Therefore, people with a bad credit history will be disproportionately disadvantaged members of society.
Bad credit lenders ensure that these people still have access to the cash they need to run their day to day lives and aren’t totally shut out of the economy just because they don’t have access to the bank of Mum and Dad.
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