A busy schedule and different outgoings means it can be easy to overlook a payment. But you’re not alone. According to Clearscore 43% of people in the UK missed a payment in 2018.
A missed payment can affect your credit score and your credit score directly affects whether or not you can get a loan, or what type of loan you can get.
Another reason you might have a poor credit score is that you just haven’t had the chance to build up a financial history. If for example you haven’t taken out much in the way of loans, or you have recently finished full-time study, you will probably have a ‘thin’ credit history.
Unfortunately, when creditors don’t have a great deal of information on your credit history the loan options can be reduced. When a creditor loans they off-set the risk of a borrower defaulting on payments by adjusting the interest rates.
The higher the risk, the higher the interest rate is likely to be in case the borrower stops making payments.
Do You Really Need a Loan?
Common reasons for taking out a loan include borrowing to purchase a car or needing to make urgent repairs around the house.
Some people take out loans to consolidate their debts into one monthly payment because it’s easier to manage a single payment.
The first thing you should ask yourself is do you really need a loan? If you have a thin or poor credit history any loan you take out will typically attract a higher interest rate.
Taking Out a Poor Credit Loan
Having a poor credit history doesn’t mean you can’t borrow money but you may find it harder to find a loan with a low interest rate.
Always read the small print, and always ask any questions to be fully aware of the advantages and disadvantages of taking out a loan.
What Type of Loan Should You Consider?
Here we look at three common loan types: guarantor loans, secured loans and peer-to-peer lending. Each has its advantages and disadvantages depending on your personal circumstances.
A responsible lender will look at your income and expenditure and assess the right loan amount for you, what the repayment terms should be that best suit your circumstances.
Guarantor Loans
When you take out a loan with guarantor requirements another person (the guarantor) agrees to fulfil the financial obligations of the payments if the borrower can’t pay.
Guarantors are often close friends or family members who are agreeing to accept financial responsibility if the borrower defaults. By agreeing to be a guarantor the person is accepting responsibility for the debt until it’s paid.
Things to consider:
- Having a guarantor can allow you to borrow more than another loan type, especially if you have a low credit score.
- It’s a viable loan option if you have a ‘thin’ credit history.
- You can increase your credit score, as long as you don’t miss any payments.
- Guarantor loans often have very high interest rates.
- If you have any repayment problems, it can damage your relationship with the guarantor.
Secured Loans
If you have a high-value asset such as a car or house, you can take out a loan using the asset as collateral.
With a secured loan the lender is using that item as security and if you fail to make the repayments the assets may be repossessed to cover the costs of the payments.
Things to consider:
- Secured loans usually have lower interest rates.
- You can get a secured loan without the need for a perfect credit rating.
- Longer repayment terms, giving you time to pay off the debt.
- Longer repayment terms mean more interest.
- You could lose the assets secured against the loan
Personal Loans
A personal loan is an unsecured loan so you won’t have to put up any assets as collateral. But depending on your credit history you may find you have limited choices in choosing a lender.
- Higher interest rates.
- Fewer lenders are likely to offer credit.
- You won’t need assets as collateral.
Peer-to-Peer Lending
Peer-to-peer lending is when you borrow from an individual rather than a bank or financial busines.
There are a number of peer-to-peer sites. As with other lenders the amount borrowed is based on your credit score and history.
Things to consider:
- Possibility of borrowing larger amounts with lower interest rates.
- But also the possibility of having higher interest rates, depending on your credit history.
- Credit history will affect your borrowing power.
- If you’ve been turned down elsewhere you can still qualify for peer-to-peer loans.
Final Thoughts
If the loan is for a person with a low credit score certain charges might be waived. Things like an early repayment charge, for example, form part of most financial contracts but might be removed for a poor credit loan.
Also lenders for those with poor credit scores might take a better view of borrowers with court judgements against their name. With guarantor loans the credit history of the guarantor would also need to be considered.
The important thing is to be fully aware of what the loan means for you and not to sign anything before you’re entirely happy with the situation.