Regardless of whether you have great credit or terrible credit, everyone has come to the point at least once in their lives where they are struggling to make ends meet before the next pay cheque hits the bank. Because of this, short term loans came along, also known as payday loans. They allow flexible lending over short or long time periods depending on your application.
These loans have become increasingly popular, and more recently have been used as a tool for building up your credit score. With quick and easy approval, provided you meet the criteria, these loans give you a chance to prove to the bigger lenders that you can manage a repayment plan, and manage your money in a sensible and sustainable fashion.
With the majority of credit approval decisions coming down to the weighing up of borrowing risk against repayment potential, these loans can be incredibly powerful tools when it comes to giving your credit score a much needed boost in the right direction.
There is some risk associated with these loans, including high interest rates and the need for a guarantor, so we have taken the time to answer some frequently asked question on the subject below.
With a name like ‘Bad Credit’ it’s safe to say that having it is not the best thing. In short, it means that you credit score falls beneath the threshold that the majority of lenders class as ‘Good Credit’.
Having bad credit makes borrowing a hell of a lot harder than if you had managed your money better in the past and have built up a good credit score. As mentioned in another post on our site, your credit score effectively determines whether you will be able to affordably manage a repayment schedule for any money allocated to you by lenders.
Lenders want to lend money, but then also want to get it back and then some. They assume that a person with bad credit simply won’t reach the repayment levels required so they won’t lend to you. Bad credit is unfortunately very easy to come by.
Your credit score with decrease if you have a large amount of open debt, old credit accounts that you don’t use but are left open, and the one that catches everyone out at one point - missing repayments. Missing the odd payment won’t effect your score massively, however frequent shortfalls means that your credit score is plummeting to the bad credit zone.
Do not despair though, even though you may have gotten yourself into a bad credit scenario, there are still borrowing options open to you. Some can even help you build or improve on your credit score.
The loans that I’m referring to are called ‘no credit check’ loans, and are becoming increasingly popular. These loans are designed for people with either bad credit or no credit history whatsoever. Falling into either of these categories can make borrowing incredibly difficult, until now. No credit check loans give the opportunity to build your credit score, provided you meet the repayment plans. Depending on the lender, these loans are repayable over a period of days, weeks, months, or years so offer a much needed degree of flexibility when it comes to borrowing.
The loan isn’t listed on your credit file, so it can provide you with a great platform to build your score. Often referred to on UK TV as payday loans, with companies such as Wonga dominating adverts, these loans have high interest but flexible lending schedules.
They are achievable with poor credit when you list a UK based guarantor. Similar to someone you’d list on a housing application, a guarantor should be someone that you trust and trusts you, as they’ll be footing the bill if you fail to meet the repayment schedule.
The advantage of a guarantor is that they know you better than your credit score suggests, and enable you to borrow money to build your credit score, without the risk of getting declined.
The expansion of online services mean that more companies are available to offer you a no credit check loan than in previous years.
With price comparison sites able to provide you with comparisons on credit cards and bank accounts, money.co.uk offer a great comparison for loans. Here some information on their top 4 suggestions.
- Opal loans offer a loan broking service. With the lowest APR of the no credit check loans at 24.9%APR, they are a safe bet for any loan amount from £2000 to £10000. However, the do have some strict criteria, where only home owners making mortgage repayments and earning over £15000 per annum may apply. If you fall into that category then Opal Loans could be the right choice for you.
UK Credit Ltd:
UK Credit are one of the companies which offer guarantor loans. With an APR of 47.9% on any amount between £1000 and £7500 over a time period of 1-5 years, they are a flexible option. Compared to other companies the APR is relatively low, with some charging as much as 399.7%. UK Credit Ltd consider all bad credit applicants, provided their guarantor owns their own home.
Amigo Loans Ltd:
Amigo offer a flexible 49.9% variable APR loan on any amount between £500 and £5000, over a 1-5 year repayment plan. Variable APR means that they will negotiate their interest rate depending on the applicant. Amigo will offer you a loan provided that you have a UK guarantor ready to back up your application.
Achieve Credit help you do exactly as their name suggests. Offering guarantor loans at 53.8%APR on any amount between £1000 and £7500 over a 1-36 month repayment plan. Once again they require a UK based guarantor to back up your application.
Everyone has got to the point where they are a little short before their next pay packet, a month where the car’s exhaust has fallen off and the washing machine has flooded the kitchen.
This is where bad credit loans can really help, with a quick and simple approval process that guarantees you credit if you can provide an eligible guarantor. As well as their flexibility, these loans also help show to bigger lenders that you are capable of making repayments on schedule, and can manage your money to a satisfactory level for borrowing. They are particularly beneficial for those with no credit history, as they place you in a scenario where bills have to be paid, and you can prove your ability to do so.
Furthermore, as these loans are offered to those with poor credit, they aren’t listed on your credit file. This means that god forbid if things do go awry during the repayment period and your guarantor has to take over repayments, it won’t affect you when it comes to applying for credit in the future.
This makes these loans the ideal choice for those in need of a quick money fix, and looking to build their credit score to a sustainable level. The ultimate advantage of these loans when managed properly, is that they offer fast access to money, with a very easy to pass approvals process. With such a small percentage of applicants turned away from pay day loans, they have the potential to be the go to choice for unexpected bills as well as trying to rebuild a damaged credit score.
There are a number of steps you can take to make your bad credit a little bit worse, and they are simple to.
Firstly, take a look at your credit file, they have been made available no matter your circumstances for just £2, and checking no longer affects your credit score. Being able to see your credit file makes the rest of these steps a little easier to complete.
Basically, you want to go through and ‘clean up’ your credit file. This means closing down any unused credit card accounts, making sure that all of your addresses are listed correctly on each application, and lastly checking that no one was sneakily opened up any credit accounts in your name.
As well as cleaning up loose ends, there are some tips that you can apply to future applications. Firstly, list a landline number on your application as well as or instead of a mobile number.
Listing a home telephone shows stability in the form of a fixed address and that you can manage the line rental and bill payments billed to you from your telephone provider. Also, ensure that in any future applications your information is consistent.
Accuracy is invaluable when it comes to filling in sections to do with time spent at addresses and employment dates. I’m sure it goes without saying, but fabricating information on credit application is not only a big no no, but its also a criminal offence. Lastly, being able to list a guarantor that you share a mutual trust with can really strengthen your applications, particularly to bad credit score loans.
When shopping around for loans, price comparison sites will have a handy column in their comparisons comparing interest rates across lenders. What you will find, particularly with no credit check loans, is that interest is pretty high, at around 50%APR for a good provider, as high as 400%APR in the easiest to obtain loans.
High interest is basically the price you pay to build your credit score. It’s important to know how much you are going to repay on your loan. For example, if you take a £5000 loan at 24.9% APR repaying £198.53 a month, you’ll end up paying a total of £7147.08. That's a £2147 cost for quick access to money.
Make sure that your choice is worth it, they can help build your credit score, but are not the only way to do so.
Unsecured loans are loans issued by the vendor that are not backed up against any property that you own. A great example of a secured loan is a mortgage. With an unsecured loan, there is no risk of repossession if payments are missed. Unsecured loans are available for amounts up to £25000, and can be a really cheap and easy way to get your hands on money quickly. Where they are flexible, the problem is that when unsecured, interest rates tend to be much higher than that of credit cards and secured loans.
This can make them dangerous if you are particularly lapse with making repayments, and do not repay the loan in the arranged time period. If not paid on the agreed time scale then interest rates will skyrocket, making them a very expensive option. In terms of having the bailiffs giving you a surprise visit, you have nothing to worry about. With these loans being unsecured, any possessions owned previously to taking out the loan, and any owned afterwards for that matter, can not be reclaimed as payment.
If it’s getting to that point, you may want to consider optionally selling some of these possessions to foot your bill, but no one will be round trying to pilfer your family heirlooms. These debts also have the potential to be written off, if things are really in dire straights, via a debt relief order, information for which can be found over at insolvency.gov.uk, as you need to meet set criteria for this to be a valid option.
To answer this question in a word, then it would be yes. The main cause of credit rejection is that the bank or building society do not think that you can make the repayments, and therefore will cost them more money than you earn them. By proving that you can stick to an outlined repayment plan with a bad credit loan, even at higher interests, your credit rating will improve many times over.
With banks, the decision is a calculation between profit and risk, if risk of losing money outweighs the potential for them to make a profit then that’s where you can find yourself rejected. Provided you stick to the repayment plan, short term loans can be essential tools when it comes to building credit, but bare in mind they are not the only way.
If the repayment plan isn’t met, the consequences in terms of your credit score are reduced, but the costs of higher interest and a very angry guarantor are significantly increased. Before taking out a short term loan you need to be 100% sure that you can make the repayments on time, or it can be a very expensive process of not getting anywhere in terms of improving your credit.
In short, any amount of credit achieved has the potential to give your credit score that much needed most in the right direction. However, the key to this boost is sensible management, i.e. borrowing the right amount for you repaying over the right time scale for you, even if that means incurring a little more interest. If at any point you think that you wont be able to make the repayments, then this loan is not for you, don’t open yourself up to that level of risk.
As mentioned earlier, high interest is to be expected on bad credit loans. It is unfortunately the cost of building your credit score, that gives you access to better rates in the future. In terms of variability, there’s a massive gulf between reasonable and extortionately high interest rates. For example, take the four companies we highlighted earlier in the article, they are all fairly easy to obtain credit with, with a good level of interest at around 50%APR.
This value is to be expected. However, if you do not shop around, some loan companies will try and charge as much as nearly 400% APR. Make sure that the loan is right for you, as interest payments will stack up quickly, particularly if you are prone to missing repayments.