How to get a loan if you have bad credit
Friday, 23 September 2011 11:17
By Kate Saines
Having a ‘poor’ or ‘bad’ credit rating means you will probably find it incredibly difficult to take out a loan.
And it’s a vicious cycle because the more loans or credit you attempt to apply for, the more footprints are left on your profile and the more damaged that profile becomes.
If you can deal with the problem before tarnishing your credit report further, you will be saving yourself a lot of trouble.
So we’ve come up with a few solutions to help those of you who are in need of a loan – whether now or in the future – and want to make sure you can secure it without too much difficulty and no further pain to your credit rating.
Payday Loans
Controversial they may be, but payday loans can be a salvation for those struggling financially and anyone who needs urgent cash for an emergency.
They are small, short-term loans of between £100 and £1,000. The idea is they are paid back when the borrower receives their next pay cheque – hence the name ‘payday’ loans.
Because these loans cater for people who need to find money fast, to bridge the gap between paydays, they are perfect for anyone who can easily pay this back next month.
And, provided your application is successful, you’ll receive the money the same day.
Crucially, many payday loan providers do not run credit checks, so your previous record will not necessarily be taken into account and your credit profile will not suffer a further bashing.
All you need is a bank account, a job and therefore the guarantee you receive a wage.
The problem is, there are certain pitfalls of which you need to be aware with payday loans.
For starters they have high interest rates which can soar to as high as 2,000 per cent APR. Although this might sound horrendous, the nature of payday loans means you will not be repaying them over a year, the period of time over which APR is calculated.
Moneysupermarket.com said it’s typical for customers borrowing £100 to pay back around £125. So, with a typical loan term of 31 days, and an average loan amount of £300 you would be looking at paying back £375 – still a big chunk of interest.
The other problem with payday loans is borrowers tend to become too reliant on them, taking them out too frequently.
And the fact they are so readily available makes them dangerous to people with money troubles, as they can often fall further into the debt trap.
In fact, the government recently announced proposals to cap high cost credit and Consumer Focus suggested this could – and should – go further by putting a limit on the number of payday loans people are allowed.
“The number of payday loans should be limited to five a year,” said Marie Burton, Consumer Focus’s financial services expert.
“If someone comes back for a fifth loan it should be seen as a sign they need independent debt advice to stop them heading into financial difficulty.”
Despite being controversial, few organisations see any benefit to scrapping the loans as they provide a vital service. Without them, there are fears more people would turn to loan sharks.
However, if it’s an option you are considering it’s essential you use payday loans for emergencies only and ensure you pay back the cash instantly. Make sure you do lots of research into payday loan providers to get the best rate and ensure the lender is legitimate.
Consolidating debts? If you want to calculate the repayments on a debt consolidation loan the calculator on this website may be useful.
Credit Unions
Consumer Focus believes before people jump into payday loans, or other high cost credit, they should consider all other options available. One such avenue to try is Credit Unions or other social lenders.
Credit Unions are financial co-operatives which run on a non-profit-making basis. There are thousands across the country, based in communities and run by the members themselves. They provide a place to save money, borrow money and have just announced they are to offer current accounts.
Savers pool their money into the union and this is used to lend to borrowers. The savers earn interest from the borrowing, but there are no outside shareholders benefiting – only members.
Unlike high street banks, Credit Unions offer small loans ranging from £100 up to £3,000. Interest rates vary from 12.7 per cent APR up to 26.8 per cent APR – not as great as high street banks but much better than payday lenders, for example. There are no hidden charges, fees or penalties for early repayments and most include free protection insurance.
Different credit unions have different sets of rules on lending and different interest rates. However, they all run along the same honest, straightforward principles. And while there’s no guarantee you will definitely get a loan through a Credit Union, they are fast becoming recognised as an affordable alternative for people being forced into high cost borrowing.
And a feasibility study is taking place by the government to investigate how money can be invested to modernise and expand the credit union sector.
Marie Burton of Consumer Focus said: “Social lending through credit unions and community initiatives is a key part of making affordable credit available.”
See our interview with Paul Aitken, CEO of borro.com
Improve your credit rating
One way you can guarantee to boost your chances of getting a loan if you have bad credit is to clean up your credit rating. Sadly this is not a ‘quick-fix’ answer to the problem, but it is probably the most sensible.
The first step in the process is to find out why your credit rating is poor. You can apply to see your credit report through one of the credit rating agencies such as Experian, Equifax and Callcredit.
It will provide a detailed breakdown of any credit agreements you’ve held - like loans, mortgages, credit card, mobile phone contracts, store cards – and your activity in terms of paying them back.
Some people’s credit rating will be bad because they have defaulted on a loan, repeatedly made late payments or have a County Court Judgement (CCJ) against them.
But less obvious financial ‘mistakes’ can also blemish your record including failing to inform a creditor if you move house, forgetting to cancel a contract (for example, with your mobile phone provider) or not being on the electoral roll.
In fact, even if you’ve never had credit in the past or have paid off any credit instantly on every occasion you may lose ‘points’ because you are not deemed to be a very profitable customer.
So make sure you are on the electoral roll, are up-to-date on all your admin if you have recently moved house and are generally on top of your finances. Then see if you can attempt to prove to future lenders you are a responsible customer.
Taking out a credit card and paying the balance back on time will help those who have never had any credit to begin creating an attractive profile.
But if you are a ‘bad credit’ customer because you have defaulted in the past you may still be able to prove your credit-worthiness by – believe it or not – taking out a credit card.
Kevin Mountford, head of banking at Moneysupermarket.com, said: “Those with a poor credit history have more limited options, but in many cases it is worthwhile considering one of the many credit builder products on the market as these can help rebuild credit files, as long as they are used correctly.”
This means using them modestly – not maxing them out to the limits- and repaying the balance on time and, if possible, in full. And you will also need to prove you are responsible in other areas.
Mr Mountford added: “Ultimately providers ask for evidence the customer is financially responsible, so things like paying bills on time, never missing payments and staying within their overdraft limits will all help consumers clean up their profiles and eventually secure the best deals.”
Find out more: Understanding the impact of debt and tackling its causes
Get help
If even these methods are out of your grasp, and there appears to be no solution to your financial worries then it might be time to seek help.
If you cannot repay your debts speak to your lenders. Alternatively, there are several debt counselling organisations out there which can put you back on track including Citizen’s Advice and the Consumer Credit Counselling Service (CCCS) and National Debtline.
Use the Myfinances.co.uk comparison tools to find the best deal on a personal loan
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