What is a personal loan?
A personal loan can be a convenient way to borrow a large sum of money for a short period of time (usually up to £25,000). These loans do not require collateral in the form of a house or automobile.
You apply for a loan, the lender determines the interest rate it will charge (and adds it to the principal), and you pay back the loan in equal monthly installments for a predetermined number of months.
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The annual percentage rates (APRs) are a useful metric to use when comparing different personal loans. To put it another way, this is what you may expect to pay in interest and fees for a loan over a year. In order to make taking out a loan more appealing, lenders often advertise rates with enticingly low annual percentage rates (APRs).
However, the “representative APRs” of these lenders (the rates offered to at least 51% of applicants) are often far higher than these advertised low rates. This group includes only those with stellar credit histories.
In contrast, the other 49% (often those with a lower credit history) will be offered a higher rate, if they ever receive an offer. The question then becomes how you might anticipate being presented.
What is a credit score?
The lender institution will investigate your current financial situation and may even go out to credit agencies when you apply for a loan. These agencies’ job is to gather data on people’s past financial dealings. Next, they’ll use this data to compile a credit report unique to you, from which they’ll determine your credit rating.
Lenders check your credit report to see if they are comfortable lending you money based on your track record of making payments on time in the past.
Unfortunately, these reports are not generated utilizing a unified process, and instead each of the three agencies has its own unique approach. Lenders will make a decision on whether or not to lend to you based on the information provided by credit agencies and how it compares to the lender’s own set of lending criteria.
What information is used to create my credit score?
In order to compile your credit report, credit agencies may use information such as:
- Loan, credit card, and overdraft loans from the past will all be included in your credit report. Sky, phone, and water bills are just few examples of utility expenses that might play a role.
- Have you made all of your payments on time for your credit accounts? Your score will suffer if you have skipped any of the tests during the preceding six years.
- Do you appear on the voter registration rolls? Do you have any CCJs (judgments from the county court) on your record?
- Recent credit applications
A high credit score is typically associated with being a registered voter and having a history of timely payment on credit card and loan accounts. Someone with a CCJ who pays their bills late or not at all is likely to have a very poor credit score and have a difficult time obtaining credit.
It may also be difficult to get authorized for credit if you’ve never borrowed money before. This is because lenders evaluate applicants based on their credit histories.
What happens if I am turned down for a loan?
If you are rejected, your initial instinct may be to apply at another financial lender. However, a ‘hard search’ is recorded as part of your credit history whenever you apply for credit. When you apply for credit again, lenders will notice this search.
While it’s acceptable to conduct a hard search every once in a while, doing so frequently can make you appear to potential lenders as someone who is “desperate” for credit. It usually signifies they will counter with a larger offer or refuse you altogether.
How can I find out if I will be approved for credit?
Thankfully, there are several steps you may do before applying for a loan to determine your eligibility.
1. Apply for your credit reports
To begin, you can submit an application to each of the three credit reference agencies to receive a copy of your credit report and your credit score. Indeed, checking your credit reports on a daily basis is an excellent practice to get into regardless of whether or not you plan to apply for credit in the near future.
You can get a free copy of your credit report once per year from each of the three major reporting agencies. It is important to verify the accuracy of the information in your report after you have received it. Get these ready before you get started:
- The last six years’ worth of your home addresses
- Information about a current account
- Instances where an agreement exists to use a credit or store card
- Contract for a mobile phone (if you have one)
The amount you owe on shop or credit cards, your mortgage, the number of credit accounts you have, and whether you share finances with anyone will all be shown in your credit reports.
Importantly, you have the right to request corrections or amendments to your credit report if you discover any inaccuracies that could affect your credit score or loan eligibility.
You have the legal right to a copy of your credit report from any credit reporting agency, but they may charge a fee and may also pressure you into signing up for a paid subscription service. ClearScore is one such service that gives you access to your whole report for free, albeit it is offered by a third party.
2. Eligibility checkers and soft searches
An Eligibility Checker, which can be found on the websites of financial agencies like banks and credit bureaus, can tell you whether or not you are likely to be approved for a personal loan.
This will determine if your credit profile is in line with the criteria used by the lender offering the credit product you’re looking at. An eligibility checker will only leave a “soft search” on your credit file, which will not show up on your credit report and will not be visible to lenders. Lender preferences are revealed through soft searches if:
- Make more than the required sum
- You must be within a specific age range
- Maintain an excellent credit score
What if I have a bad credit score and credit rating?
In the event that you find out your credit scores are low, you may worry that you will never be able to get credit again.
The good news is that there are many of things you can do to boost your grade, and the earlier you start, the better. Your ability to consistently and reliably repay money is something you’ll need to demonstrate.
- If you aren’t already, you should register to vote at your present address
- Establish an on-time payment record by staying with the same bank and paying all invoices and recurring charges on time
- If you’ve never borrowed money before, you may establish a good credit history by signing up for a simple contract, like a cell phone plan, and sticking to your payment schedule
- Don’t go above your bank or credit card limit
- If there are mistakes on your credit report, you need to have them fixed
Where do I find the easiest personal loans to get approved for?
How can you find the easiest legitimate loans to get? Bank first. It may be able to lend you money without a credit check because it knows your financial history.
Additionally, if you have banked with the same bank for a long time or have particular products, you may be offered a favorable personal loan rate.
You know your credit score if you requested a credit report. Check the Best Buy personal loan tables if your score is high. This may be the cheapest way to borrow with rates as low as 2.8%APR (representative). Use an eligibility checker to see if you’re eligible for the product you want.
Can I get approved for a loan if I have bad credit?
If you have a poor credit score, lenders may limit how much they lend you. Bad credit loan APRs can reach 99%. Lenders fear default. You can still receive a loan, but you’ll pay extra, so make sure it’s worth it before applying.
If you have a willing family member, a guarantor loan may be worth considering if you have a low credit score and few options. Just remember that your family member, who will be the loan’s guarantor, must guarantee to pay back the rest of the loan if you stop paying. Again, you may face high APRs (49% is common), so consider this choice carefully.
Secured loans require collateral like a house or car (which can be repossessed if you default on your loan payments). Peer-to-peer lending may be riskier yet worth exploring.
Conclusion
There will always be predatory lenders who prey on the financially vulnerable by advertising attractive loan terms that conceal exorbitant annual percentage rates.
Quick approval usually means hefty fees. The question “why do you need the loan” must always be asked. Will you be able to wait and save up? Also, don’t forget that there are other, often cheaper alternatives to personal loans, such as a 0% credit card (if you have a strong credit rating), which can give up to 23 months at 0% on new purchases, or an arranged overdraft with your bank.