TL;DR
Bad credit loans are available in the UK through specialist lenders, credit unions and guarantor loan providers. APRs typically range from 20 to 99 percent. The FCA caps daily interest on high-cost short-term credit at 0.8 percent. Improving your score before applying is the single most effective way to reduce the cost of borrowing.
Last reviewed: June 2026
Having a poor credit score does not automatically mean borrowing is impossible in the UK. A range of lenders specialise in applicants with defaults, county court judgements (CCJs), or a thin credit file. The trade-off is cost: interest rates are substantially higher than mainstream personal loans, and some product types carry significant risk if repayments are missed.
This guide covers the main types of bad credit loan available in the UK, how lenders assess applications, what the borrowing genuinely costs, and the practical steps that can materially improve your options before you apply.
KEY FACTS
- The FCA caps daily interest on high-cost short-term credit (HCSTC) at 0.8 percent per day.
- The total cost cap for HCSTC means borrowers can never repay more than double the original loan amount.
- Credit unions can lend to members with poor credit at a maximum APR of 42.6 percent under the Credit Unions Act 1979.
- A soft credit search, used by eligibility checkers, does not affect your credit score.
- The FCA Consumer Duty (July 2023) requires lenders to demonstrate that products deliver good outcomes for borrowers, including those with poor credit.
- Guarantor loans involve a third party who agrees to repay if you default; the guarantor's credit score is also checked.
Types of bad credit loan available in the UK
The UK market for borrowers with poor credit broadly splits into five product types, each with different risk profiles, costs and eligibility criteria.
Personal loans from specialist lenders. Lenders including Likely Loans, Bamboo and Everyday Loans offer unsecured personal loans to borrowers with impaired credit. Loan terms typically run from one to five years, with APRs ranging from around 20 to 99 percent depending on credit profile and loan size. These are FCA-regulated under the Consumer Credit Act 1974 and must conduct affordability assessments.
Credit union loans. Credit unions are member-owned financial cooperatives regulated by the FCA and the Prudential Regulation Authority (PRA). They can lend to members who have been saving with them, including those with poor credit histories, at a statutory maximum APR of 42.6 percent. Many charge considerably less. The main limitation is that you must be a member, which usually requires living or working in a specific area or working in a particular sector. Find your nearest credit union at findyourcreditunion.co.uk.
Guarantor loans. A guarantor loan requires a creditworthy third party, typically a family member or close friend, to guarantee repayments. If you miss payments, the guarantor is legally liable. Lenders including Amigo (currently in scheme of arrangement) and TFS Loans have operated in this space. APRs are typically 40 to 60 percent. Both the borrower and guarantor are credit-checked. The guarantor risks their own credit score and finances if the borrower defaults.
Secured loans. If you own property, a secured loan places a legal charge on your home. Because the lender has collateral, rates are lower than unsecured bad credit loans, but the risk is significantly higher: your home can be repossessed if you default. Secured loans are regulated under the Mortgage Credit Directive and must be accompanied by independent legal advice in some circumstances.
High-cost short-term credit (HCSTC). Payday loans and short-term instalment loans fall under the FCA's HCSTC regime. The daily interest cap of 0.8 percent and total cost cap of 100 percent limit the maximum damage, but these products remain expensive and should only be considered as a last resort for genuine short-term gaps. Lenders must assess affordability and cannot roll over loans more than twice.
How lenders assess bad credit applications
Mainstream lenders use a combination of credit bureau data from Experian, Equifax and TransUnion, and their own internal scorecards. Specialist bad credit lenders weight the assessment differently, placing more emphasis on current income stability, employment status and recent payment behaviour rather than historic defaults.
Key factors that specialist lenders consider include whether defaults are satisfied or unsatisfied, how recent any CCJs are, current debt-to-income ratio, evidence of recent on-time payments on any credit product, and whether the applicant is on the electoral roll at their current address. A CCJ that is more than two years old and has been satisfied carries significantly less weight than a recent unsatisfied one.
Almost all FCA-regulated lenders are required to conduct an affordability assessment under the FCA's Consumer Credit sourcebook (CONC). This means verifying income and expenditure, not just running a credit check. Lenders who approve loans without genuine affordability checks risk FCA enforcement action under Consumer Duty.
What bad credit borrowing actually costs
The representative APR is the rate at least 51 percent of successful applicants receive. For specialist bad credit lenders, this is often in the range of 40 to 70 percent. In practice, applicants with the most impaired credit will be quoted the highest end of the range or be declined.
To illustrate: a 3,000 pound loan at 69.9 percent APR over 36 months produces monthly repayments of approximately 149 pounds and a total repayment of around 5,370 pounds. The interest alone is 2,370 pounds, or 79 percent of the original loan. At the FCA-capped maximum for HCSTC, a 500 pound payday loan can never cost more than 1,000 pounds in total.
Early repayment can reduce total interest significantly. Under the Consumer Credit Act 1974, borrowers have a statutory right to settle early and must receive a rebate of future interest charges, subject to a maximum early settlement fee of 28 days interest.
Steps to improve your options before applying
The most effective way to reduce the cost of bad credit borrowing is to improve your credit profile before applying. Even modest improvements can shift you from specialist-lender territory into mainstream personal loan eligibility within six to twelve months.
Register on the electoral roll at your current address. This is a straightforward step that costs nothing and has a measurable positive impact on credit scores with all three major bureaus. You can register at gov.uk/register-to-vote.
Check all three credit reports for errors. Around one in five credit reports contains an inaccuracy according to Which? research. Errors such as incorrect addresses, linked financial associations with ex-partners, or fraudulent accounts can be disputed directly with Experian, Equifax and TransUnion. All three offer free statutory reports and paid monitoring services.
Reduce credit utilisation. Using less than 30 percent of your available revolving credit limit (credit cards, overdrafts) is generally considered positive by scoring models. Paying down balances before applying can produce a measurable score improvement within one to two statement cycles.
Avoid multiple hard credit searches in a short period. Each hard search leaves a footprint on your file for twelve months. Use eligibility checkers that run soft searches, such as those on MoneySavingExpert's eligibility calculator or directly on lender websites, to assess your likelihood of approval before making a formal application.
Consider a credit-builder product. Secured credit cards from providers such as Aqua, Vanquis or Capital One allow you to build a positive repayment history by spending a small amount monthly and paying it off in full. Some credit builder savings accounts, such as those from Loqbox or Credit Kudos, also report positive payment behaviour to the bureaus.
Alternatives to bad credit loans worth considering first
Before taking a high-cost loan, it is worth exhausting lower-cost alternatives. The government's Help to Save scheme allows Universal Credit and Working Tax Credit recipients to save between 1 and 50 pounds per month and receive a 50 percent government bonus after two years. While this does not provide immediate cash, it builds a financial buffer over time.
Some employers offer salary advance schemes, allowing employees to access a portion of earned wages before payday without interest. These are not credit products and do not affect credit scores.
Local councils and welfare organisations sometimes offer emergency grants or interest-free budgeting loans through the Household Support Fund or the DWP Social Fund. These do not appear on credit files and carry no interest. Eligibility varies by council and circumstance.
For those in arrears on priority debts (rent, council tax, energy), specialist debt charities including StepChange, National Debtline and Citizens Advice can negotiate repayment plans and, in some cases, access emergency hardship funds on your behalf. Their services are free and confidential.
Frequently asked questions
Can I get a loan with a very poor credit score?
Yes. Specialist lenders, credit unions and guarantor loan providers will consider applicants with poor credit histories including defaults and CCJs. The rate you are offered will reflect the perceived risk. Credit unions are typically the lowest-cost option for members, capped at 42.6 percent APR.
Will applying for a loan hurt my credit score?
A hard credit search, which occurs when you formally apply, leaves a mark on your file for twelve months and can reduce your score slightly. Multiple applications in a short period are viewed negatively by scoring models. Always use soft-search eligibility checkers before making a formal application.
What is the fastest way to improve my credit score?
Register on the electoral roll, dispute any errors on your credit file, and reduce credit card utilisation below 30 percent. Most people see measurable improvement within three to six months of taking these steps consistently.
What is the difference between a soft and hard credit search?
A soft search is a background check that does not affect your credit score and is not visible to other lenders. It is used by eligibility checkers and pre-approval tools. A hard search is a full credit check that leaves a visible footprint on your file and may affect your score. Hard searches are conducted when you formally apply for credit.
Are guarantor loans a good idea?
Guarantor loans can provide access to credit at lower rates than payday loans, but they place significant financial and relational risk on the guarantor. If you default, the guarantor is legally liable and their credit score is affected. This type of product requires careful consideration by both parties.
