If you have a bad credit score, applying for a loan can be an arduous process. Luckily, lenders in the UK provide bad credit loans for people with bad credit scores and records. There is a catch though. Such loans come with fairly strict terms and conditions, and substantially higher interest rates. If you know how to manage your finances, you should benefit from these loans. Also, bad credit loans may be your best shot at improving your credit score.
What is a Bad Credit Score?
As you know, you will probably find it hard to apply for a loan with a low credit score as lenders will perceive you to be a high-risk applicant. However, each lender has varying eligibility criteria and conditions.
Lenders generally consider your credit record, history, and credit score. Here are a few factors that affect your credit score:
- Defaulting on your loan payments
- Making late loan repayments
- Having Individual Voluntary Arrangements (IVA)
- Filing for bankruptcy
- Performing too many hard searches in a short timeframe
- County Court Judgements (CCJ)
Sometimes, lenders are unable to decide if the applicant is eligible because they may not have the minimum required credit record,
in the first place. The following types of applicants usually encounter these problems:
- A young adult who probably never had the time to build a solid credit record.
- Someone who may have never applied for credit or opened a bank account.
- A person who may have recently shifted to the UK, in which case their credit history does not exist.
How can you get a loan if you have a bad credit score?
Keep in mind that you have the option of loans for bad credit if you have a bad credit score. However, you need to handle your finances and figure out how much you will be able to repay every month. Before you apply for one, you will need to look up as many options as possible, check if you qualify, and compare them.
Also, every hard search that you conduct gets recorded on your credit file. Loan providers generally make use of this information and evaluate you accordingly. If they consider you to be highly dependent on credit, chances are you probably will not get loans. The ideal solution to this is to conduct soft searches.
You may conduct as many soft searches as you want to, and these will not get recorded in your credit file. You may conduct soft searches to see if you are eligible for the loans you want. This way, you get a decent idea of the loans you will probably secure.
There are three main Credit Reference Agencies (CRA) in the UK namely Equifax, Experian and TransUnion. These agencies are known to assign every UK resident with a credit score according to their financial history. They do not offer loans, but they help you compare the bad credit score loan options that you qualify for.
What other loan options do you have?
As mentioned, lenders who offer bad credit score loans in the UK charge fairly high-interest rates. If you do not think you will be able to repay the loan amount on time, you may want to avoid these loans to avoid damaging your credit score. Instead, consider the other loan options you have at your disposal and see which one works better for you:
Secured loans are loans that require the applicant to place an asset (car, home or property) as collateral during application. By pledging collateral, the lender minimizes the risk of losing that loan amount.
Also, the applicant can get this loan at a lower interest rate. However, if the applicant is unable to make timely loan repayments, they will have to forfeit the asset to compensate the loan amount they owe the lender.
Guarantor Loans need someone close to the applicant like family or friends to guarantee that they will repay the loan amount if the applicant is unable to make the payment. If you apply for a guarantor loan, you need to make sure you find a guarantor with a solid credit record and credit score to improve your chances of getting the best deals on the loans, including reduced interest rates and a higher loan amount.
If the applicant cannot repay the loan amount, the guarantor will have to do it. In other words, the guarantor is putting himself on the line since he could end up losing some assets if the payments do not go through.
What can you do to improve your Credit Score in the UK?
Now, you know that you have to find a way to improve your credit score to get better offers on loans. You will need to focus on how to build credit and handle this in due time. As you may have gathered, there are a slew of advantages to having an excellent credit score, some of which are better loan terms and being considered a low-risk applicant by your lenders.
Another big plus point is that loan providers are more likely to lend larger loan amounts, which means you can accomplish your financial goals faster. However, you must know that this is not an overnight process. Many factors come into play as you improve your credit score.
One of the most effective ways to improve your score is making loan repayments on time. Sometimes, you may not be able to do so. If that happens, be sure to let your lender know as early as possible.