Should I borrow if I have a bad Credit Rating?

Apr 04

Debt is nothing to be ashamed of. It is the oil that ensures that the economy keeps growing by financing the purchasing and investment decisions of millions of people, companies and other organisations across the country. Without debt, there would be no growth and there would be no income for savers because the banks and other lenders would not be making money on interest repayments.

But debt can be a bad thing if you have too much of it or if you have a very poor record of financial management. Handling debt is a skill which is rarely taught in school or by parents and so it is little wonder that so many people get themselves into difficulty with loans and credit cards. But while very few people are taught to handle debt, it is something that they can easily teach themselves by applying a few commonsense rules when applying for credit.

The first rule is to ask yourself whether borrowing more money if you’ve made mistakes in the past is actually a good idea. You may be struggling with your existing commitments or may be facing uncertainty when it comes to your job. If either of these describe your present circumstances, then you should ask yourself some searching questions about your ability to repay more debt should you take it on.

Before you make the decision to start applying for credit, take some time to think about the mistakes you may have made which have led you to this point. Being hasty may actually be storing up yet more trouble for the future unless you are fully on top of your financial circumstances before you start applying. Remember that taking on more debt may make the situation worse rather than helping you out of the hole that you already find yourself in. In this article, we’re taking a look at whether borrowing money with a bad credit rating is a good idea and how to do so safely and without repeating some of the mistakes that you may have made in the past.

Do You Need to Borrow in the First Place?

This should be the number one question on your list. While there are plenty of lenders who will probably offer you credit even if you have a bad record of financial management, borrowing may not be such a great idea in your particular circumstances. Easy credit makes it much more tempting to buy things like smartphones, tablets, new cars… even houses. But just because credit is easy doesn’t mean that it is your best option.

If you have a host of other debts which you are struggling to manage, then adding to that liability could be disastrous – tipping you over the edge from merely finding it hard to get by to no longer be able to pay for the basic necessities of life.

So, before you jump in and sign up for that monthly instalment plan or payday loan, think about what you’re borrowing money to pay for. If it’s a consumer good, then if you give yourself a break from thinking about it, the chances are that the urge to splash out will have gone in a day or two.

Credit should never be used to buy things that you really cannot afford in the first place. That means that anything which is not going to accrue in value at a higher rate than the cost of the interest on the credit should be off the agenda. That’s why most people are comfortable borrowing to buy a home while interest rates are so low and house prices continue to rise strongly.

If, after this period of reflection, you still think that you really need to buy that item, then you should ask whether you would be able to afford it in a few months’ time by saving the money rather than borrowing it. If the answer to this question is ‘no’ then you probably cannot afford to borrow the money because you are going to struggle to keep up with the repayments.

Applying for Loans With Bad Credit

That doesn’t exclude borrowing altogether. It is just to focus your mind on what would be reckless and what would be sensible given your particular circumstances. People who are confident that they will be able to meet the repayments on a new loan but have bad credit records still have plenty of options when it comes to borrowing money.

Let’s consider an average person, earning a reasonable salary but who has made some mistakes in the past that have affected their ability to get credit. They have just got a new job which will pay them a higher salary but involves driving further every day to get to their place of work. It means that they will have to buy a new car to get them to the office.

However, the higher salary will mean that they will be able to comfortably afford the repayments on the car over time. This would be an example of sensible borrowing with bad credit.

If you are in this sort of position, then don’t just jump in and start applying for the first loan you see advertised. Make sure that you take the time to shop around and consider the different finance options for your purchase.

You need to consider the interest rates (APRs) that the loans charge as well as the monthly repayment amounts. Remember that with a lot of loans, the headline APR advertised is only offered to a certain proportion of successful applicants with better credit records. That may not describe you, so you may actually end up being offered a higher interest rate meaning that you will have to pay back more money than you had originally bargained for.

Also look at the ‘hidden’ charges like early redemption penalties. If you plan on repaying the loan early, these charges may mean that you have an unplanned cost to add to the total repayable amount when you come to settle it.

Article provided by Mike James, an independent content writer working together with technology-led finance broker Solution Loans.