Bad Credit Interest Rates Explained

People with little to no credit history or those whose credit reports are less than spotless, often find it difficult accessing mainstream loan facilities. This is because of the high-risk borrowing profile that makes them more likely to default or make late payments. 

To ensure this class of borrowers is not left out, lenders have designed bad credit loan facilities such as instant guarantor loans, unsecured loans, emergency loans and other types of credit arrangements.

Because of the risk that bad credit lenders take, the interest rates they charge are generally higher than normal. However, the rates vary from one lender to another and are based on the loan amounts and duration. This article looks at bad credit interest rates, their structure, and how they work.

Risk-Based Pricing and Bad Credit Loans

Lenders usually set loan prices depending on the borrower risk level. If the borrower is a high risk, they will be charged higher interest rates. 

Generally, lenders consider a borrower’s financial red flags over the past 3-5 years when calculating the rate at which to price a loan. Some of the common risk-based pricing factors include foreclosure, late payments, charge-offs, and bankruptcy.

Some lenders may also look at the length of time you’ve worked at your current job, how long you’ve been living in your current home, your debt-to-income ratio and so forth. For instance, borrowers who have been living in their current residences for less than three years may be considered risky. 

Risk-based pricing allows borrowers whose loan applications would otherwise have been declined to get approved. 

The Structure of Bad Credit Interest Rates

Whether you are buying a home or a car and are looking for the best loan offers for bad credit in the market, you need to first understand the structure of interest rates. Bad credit interest rates are usually expressed in terms of APR which is an abbreviation for Annual Percentage Rate. 

APR is the total cost of borrowing including standard fees and interest rates over one year. Having a solid understanding of APR will give you a quick way to compare bad credit loan offers from different lenders and credit brokers.

The main cost of a bad credit loan is the interest you get charged on the principal amount. However, in practice, the actual amount charged could be a little higher than the stated interest because of compounding and other fees such as origination and closing charges. 

Every month, you will make a payment that comprises interest on the loan and a part of the principal. For instance, a three-year loan of £3,250 at an APR of 41.16% p.a (fixed) may see you pay about £158.57 every month for the 36 months. 

Because of how the interest is calculated, your monthly instalments will be the same every month. At the beginning of the loan term, your instalments are structured in a way to include more interest but less of the loan principal. However, towards the tail end of the loan term, your instalments will consist of more principal and less interest.

Representative APR

Using the APR, you can compare loans on a like-for-like basis hence enabling you to rank bad credit loans. The term representative APR means that at least 51% of borrowers will get a rate lower than or same as the representative rate.

So, when you see a guarantor loan with an advertised representative APR rate of 49.9%, just know that some of the borrowers could get that rate and others may get rates as low as 41% depending on their borrower profiles. 

Personal APR

When you apply for a bad credit loan such as an instant guarantor loan, you will be assessed based on how much you want to borrow, your credit history, finances, and a lot of other factors. 

As you shop for the best lender, the representative APR is such a crucial comparison tool that will act as your guide. However, chances are that the rate of interest you finally get could be higher, lower, or same as the representative APR. The individual rate you finally get is known as the personal APR.

Typically, bad credit loan lenders will not give you a personal APR until you make the loan application, or you submit your request for assessment. For instance, using onsite loan calculators, you can choose your preferred loan type such as guarantor loan or personal loan, the loan amount, and repayment duration. You can get loans of up to £25,000 payable over up to 72 months.

The Type of Loan and Interest Rates

The type of bad credit loan you apply for will determine the interest rates you get charged. There are various types of poor credit loans you can be approved for depending on your preference and need. Here is an overview of the two main types of loans you can apply.

Guarantor loans: Instant guarantor loans usually require that a guarantor who could be a family member or close friend co-signs the credit agreement with you. In short, they are guaranteeing that you will honour your repayments as they fall due. You can get fast guarantor loans at APRs of as low as 39.90%.

Personal loans: These are unsecured loans that you take without a guarantor co-signing the credit agreement. There is no need to provide collateral hence no risk on the part of the borrower should they fail to honour their financial obligations. Because of this risk, the representative APR for these loans is higher than that of guarantor loans. For instance, you can get personal loans at APRs of about 50.00%.


Before you apply for a bad credit loan, think about the amount you need to borrow, your preferred loan duration, and the amounts you can be able to pay each month. Generally, large loan amounts attract lower interest rates while longer loan repayment terms make you pay more in interest. While repaying the loan faster could have an advantage for you, ensure that you don’t bite more than you can chew as missed payments can further hurt your credit score.  

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.