You may not realise that you have a bad credit rating until you actually apply for a loan and are turned down. When this happens it can come as a shock, particularly when many applicants who are turned down do not have county court judgements or defaults registered against them. It could simply be because you have not applied for credit before and so there is no information available for lenders to judge your ability to repay a loan.
For those with a bad credit rating due to previous debts, it is advisable to fix up your credit score prior to executing any loan applications. A good way to have this done is to stop further denting your existing credit report and suspend any credit or debit cards usage immediately, something that a prepaid Visa Cards could potentially help with.
For those seeking a more immediate financial assistant, they must first understand that the criteria by which lenders judge those applying for loans are complex and can be opaque.
When the bank turns you down
The good news is that there are a variety of options available for those wanting to borrow money but, for whatever reason, have been turned down by traditional high street lenders.
Although you may have to be prepared to pay a higher price, the days where you will always be charged an extortionate interest rate for borrowing with a bad credit rating are gone. So here are five ways to get a loan when you have a bad credit rating:
Unsecured personal loans. If you’ve been turned down for credit elsewhere but believe your credit rating to be impaired instead of bad, you may be successful when applying for a personal loan that charges a higher interest rate than an equivalent financial product from a mainstream lender.
Credit checks are still carried out but lenders’ criteria are usually slightly more relaxed than those of the major banks. This is a part of the market that is growing rapidly as the banks continue to withhold credit from millions of ordinary people.
Interest rates for unsecured personal loans vary from between 35% and 60% with fixed repayment periods of between one and seven years. The sums on offer range from £1,000 all the way up to £25,000. An advantage to many of these loans is that the APR you are charged is usually fixed so a borrower will know exactly how much he or she will have to repay over the term of the loan.
Guarantor loans: These are a popular way of borrowing sums of up to £12,000 because a family member or a friend is used to support your loan application by guaranteeing the repayments.
There is usually no credit scoring carried out by the lender and these are often offered with no penalties for repaying the loan early. Tenants as well as homeowners can apply for a guarantor loan and there is a quick response with payment into your bank account in as little as 24 hours provided your guarantor is accepted.
For those wanting to borrow smaller amounts – between £50 and £750 – guarantor loans are an attractive alternative to payday loans with repayments made in instalments. If you repay quickly, you can keep your costs down because the interest is charged daily.
Homeowner loans: Typically sums ranging from £5,000 to £250,000 or more, homeowner loans are secured against your property if you own your own home – either outright or with an existing mortgage. They are not available to tenants, those in shared ownership housing association schemes or council housing.
Homeowner loans can have long repayment schedules – from between five and 25 years – meaning that you can access money for home improvements, debt consolidation, a new car or for other reasons without having to make very large repayments over a shorter timescale. Because the loan is secured against the equity in your house, the lender will have greater confidence that the credit will be repaid and so you will probably benefit from lower interest rates than with other forms of borrowing. Those interest rates are variable so you may face higher payments if the bank rate goes up or there are other economic changes.
As with your mortgage, you should bear in mind that you are offering your home as security for the loan and the lender could exercise its right to take possession of it or oblige you to sell it if you fail to keep up with repayments.
Credit unions: These are cooperatives, usually run by local communities, which are owned by their members. They offer an alternative to the high street banks. Their capital for lending comes solely from members’ deposits and anybody applying for a loan must become a member first.
Credit unions are often able to offer loans to people with bad credit who have been turned down elsewhere and they do not generally charge a penalty for early repayment of a loan. A major advantage of credit union loans is that they usually come with lower interest rates than other forms of lending for people with poor credit statuses.
Loans are generally for amounts between £50 and £3,000 with repayment periods of up to five years. An increasing number of credit unions are now offering current accounts and mortgages.
Payday loans: If you’re looking for a smaller sum – typically up to £1,000 – and can repay what you borrow within one month, then you may want to take a look at a payday loans. These types of loan are available even to people with seriously impaired credit ratings, the application process is quick and easy and the loan can be in your bank account within hours.
Be aware that interest rates on payday loans are very high and you could run up significant debts if you start taking out others to pay off ones that you already have.
However, should you choose to repay the amount you have borrowed early, then there are no charges or early redemption fees. Payday loans should be treated with caution as, despite changes to Financial Conduct Authority (FCA) rules governing them, missing a payment can quickly get a borrower into deep financial trouble with interest charges running into hundreds of pounds. However, despite the rule changes and the negative publicity surrounding payday loans, many people continue to use them sensibly to tide themselves over short-term money difficulties.
Article provided by Solution Loans, a technology-led finance broker specialising in a broad range of personal finance products and in providing the tools to help source the most suitable type of credit.