Sometimes unexpected costs arise that are more than our savings can cope with and borrowing some cash via a personal loan can seem the obvious solution. But how do you know which is the best loan to choose? And what happens if your credit record is poor – can you still be accepted? Find out what lenders are seeking, what you should look out for, and how to find easily approved loans.
Personal loans are one way to borrow a lump sum of money (typically up to £25,000) for a fixed period. These loans are unsecured, meaning they are not secured with an asset such as your house or car.
You specify how much you want to borrow, the lender calculates how much interest it will charge (and add to the lump sum) and you then make monthly payments for a fixed period to repay the debt.
Personal loans can be compared by looking at their APRs. This is the total cost of the loan over a year, including interest and charges. Loan adverts tend to feature tantalisingly low APRs, designed to make borrowing look affordable.
However, these low rates are frequently the lenders’ “representative APRs” - the rate that is offered to (at least) 51% of the applicants. Naturally, these are the ones with a good credit record.
The other 49% (often those with a poorer credit history) will be offered a higher rate if they are offered one at all. So how do you know the rate you will be offered?
When you apply for a loan, the lender will spend some time looking into your finances and will usually contact one or more of the UK’s three main credit reference agencies: Experian, Equifax and TransUnion to do this.
The role of these agencies is to compile information on individuals’ financial history. This information is then used to create your personalised credit report, from which they generate a credit score or credit rating.
Lenders want to know how reliable you have been in the past at repaying money, so will look at your credit report when you apply to them to determine if they are happy to lend you money.
Confusingly, there is not a standard method used to create these reports and each of the three agencies does things slightly differently. Once the lender has looked at the information supplied by the credit reference agencies and compared it with its own lending criteria it will decide whether to lend you the money.
The information the credit reference agencies use to create your credit report can include:
Credit agreements – any overdrafts, credit cards or loans you have had in the past will be included. Utility bills for things like Sky, phone and water bills can also play a part
Credit repayment history – have you kept up with all of your repayments? If you have missed even one over the past six years this will affect your score
Public records – are you registered on the electoral roll? Have you ever had a county court judgement (CCJ)?
Recent applications for credit
If you are on the electoral roll and have credit cards or other borrowings that you have never missed a payment on, your credit score is likely to be high.
Someone with a CCJ who tends to pay their bills late, if at all, is likely to have a very low credit score and struggle to get approved for credit.
Additionally, if you have never borrowed a penny in your life, you could find it tricky to be approved for credit – simply because you have no credit history for lenders to look at.
If you are unfortunate enough to be rejected, your first thought is likely to be to simply apply to another lender. However, every time you make an application for credit it is recorded as a ‘hard search’ on your credit record. This search can be seen by lenders when you next apply for credit.
While the odd hard search is fine, too many in a short period of time can make you look desperate for credit, which tends to concern potential lenders. This typically means they will offer you a higher rate or turn you down.
Fortunately, there are a few things you can do to find out how you stand before making that all important loan application.
For a start, you can apply to the three credit reference agencies to find out your credit score with each and obtain a copy of your credit report.
Indeed, regardless of whether you wish to apply for credit or not, it’s a good habit to regularly check your credit reports – and this is far easier than it sounds.
Each of the credit agencies will allow you to check your report for free. Once you’ve got your report, check it to make sure there is no false or misleading information. Before you start, ensure you have:
Your addresses for the past six years
Current account details
Any credit or store card agreements
Mobile phone contract (if you have one)
Your credit reports will show how much money you owe on store or credit cards, your mortgage, how many credit accounts you have and whether you share finances with anyone.
Importantly, if you spot any errors in the report, you can apply to have them fixed or amended, which may improve your credit score and likelihood of being approved for a loan.
You have a right to see a copy of your credit report, but agencies can charge a small fee for this - and frequently try to sign you up to an ongoing product that will cost you money each month.
There are also services that let you see your full report without paying anything, such as ClearScore, although these are generally provided by third parties.
If you’d like to find out how likely you are to be accepted for a particular personal loan, using an Eligibility Checker, available from credit reference agencies, banks and other financial sites could help. Money.co.uk has eligibilty checkers for secured loans and unsecured loans.
This will check how likely you are to be accepted for a specific credit deal, based on how your credit information matches up with the lender’s criteria. Eligibility checkers only leave a ‘soft search’ on your credit file which does not affect your credit score and isn’t visible to lenders. Soft searches can indicate whether a lender prefers borrowers to:
Have been UK resident for a set period of time
Earn above a minimum income and have a UK bank account
Be in a certain age group
Have a good credit rating
If you discover your credit scores are low, you may feel you will never be approved for credit again.
But the good news is, there are many things you can do to improve your score and the sooner you start, the better. You need to show how stable and reliable you are at repaying money so:
Get on the electoral roll at your current address (if you aren't already)
Start building up a history of making payments on time (ensure all direct debits and bills etc are paid on time and don’t switch bank account)
If you have never borrowed money, consider taking out a simple contract, such as a mobile phone contract, and make repayments on time to build up some credit repayment history
Stay well below your overdraft or credit card limit
Check your credit report for errors and get them corrected
So how do you find the easiest legitimate loans to get approved for?
Your first port of call should be your bank. As it has first-hand knowledge of your financial history, it may be able to make a decision on whether it will lend you money without leaving a hard search on your credit file.
What’s more, if you have banked with the same bank for many years or have certain other products already, you may even be offered a personal loan at a preferential rate.
If you’ve taken the time to apply for your credit report, you will now know your credit score. If your score is high, lenders are more likely to lend you money – so take a look at the Best Buy personal loan tables. With rates currently as low as 2.8%APR (representative) this is also likely to be the cheapest way to borrow. Once you have found the product you are interested in, you could use an eligibility checker to check how likely you are to be accepted.
If you have a less than perfect credit score, lenders are likely to be stricter regarding how much they will lend you. They may also charge you an extremely high APR for a bad credit loan - some are as high as 99%APR. This is because lenders are worried that you may default.
This doesn't mean that you can’t get a loan, you must simply accept you will pay a lot more for one - so make sure it’s worthwhile before you apply.
If you have an especially low credit score and few other options a guarantor loan could be worth considering if you have a family member who’s willing to help. Just bear in mind your family member, who will be named as the guarantor on the loan, will have to promise to pay back the remainder of the loan if you fail to make your payments. Again, you could be looking at eye-watering APRs (49% is not uncommon) so think very carefully before choosing this option.
Secured loans are another alternative, although you will need to be able to put up a valuable possession, such as a house or car, as collateral (which can be repossessed if you default on your loan payments). Alternatively, peer-to-peer lending may be worth considering, although there are more risks involved.
There are always unscrupulous lenders out there willing to take advantage of desperate people, offering seemingly great deals that hide truly frightening rates of interest.
Easy approval often equals painfully high costs. Always ask yourself ‘what do you need the loan for?’ Could you wait and save up? And remember there are other, often cheaper alternatives to personal loans, such as a 0% credit card (if you have a good credit rating) which can offer up to 23 months at 0% on new purchases, or an agreed overdraft with your bank.
If you are struggling to pay your bills, particularly if this is due to the COVID-19 pandemic, speak to the companies involved as soon as possible.
Explain your situation and they should offer you ‘tailored support,’ either in the form of a payment holiday or help you come up with a manageable payment plan. Remember, if you don’t tell them, they can’t help.