When you get turned down for credit it can come as a major shock. If you’re already struggling with your repayments because of combined high interest rates and were banking on getting a new loan to reduce your monthly outgoings and stabilize things, it can feel like a disaster to be rejected.
But if you have got a bad credit history or a list of financial mistakes registered against you, getting credit from one of the traditional lenders is always going to be a struggle. The major banks and other financial institutions all have fairly strict criteria when it comes to lending money. And that means that most people with poor or simply impaired credit records are not going to be successful when applying to these institutions.
Thankfully, there are other options provided by a growing number of alternative lenders who specifically cater for people in this situation. While there are no guarantees that you’ll be successful when applying for one of these loans, there is a much higher likelihood of obtaining credit this way:
- Guarantor loans
Before the 1980’s and the rapid growth of credit scoring, it was fairly typical for a potential borrower to make an appointment to see their bank manager at the local branch. If they were new to borrowing or if they had not held an account at the bank for very long, the manager would often ask for some form of security before agreeing to issue a loan. That security would often be a third party – a guarantor – who would agree to making the loan repayments should the borrower get into difficulty or otherwise fail to keep up with the schedule.
Guarantor loans are a newer version of this age-old form of lending. They work because the lender uses the credit rating of a third party when making a decision on whether to issue a loan to an applicant. That third party becomes legally bound to the credit agreement and responsible for making repayments in the event that the borrower gets behind. The guarantor can be a friend, a family member or even somebody at work.
- Homeowner loans
If you own your own house either outright or with a mortgage, then you may be able to successfully apply for a homeowner loan. These come with lower rates of interest than unsecured loans and, very often, have much higher capital sums on offer. It all depends on how much equity you have in your property (the difference between a home’s value and the outstanding balance of the mortgage). When you successfully apply for a homeowner loan, the credit balance is secured against your house meaning that if you fall behind with repayments or default, the lender will be able to apply to a court to take possession of the home and sell it to cover the outstanding loan amount and any interest.
Homeowner loans are similar to mortgages with sums of up to £250,000 (sometimes more) available and very long repayment schedules which can stretch to 25 or even 30 years.
- Payday loans
While payday loans have had a bad press in recent years, new rules imposed by the Financial Conduct Authority mean that all lenders now have to adhere to strict limits on the amount of interest they can charge and the number of times they can allow a borrower to ‘roll over’ repayment of the loan to a subsequent month. The APRs advertised on payday loans can still appear to be very high but it’s worth remembering that these are short term loans and APRs are a representative annual rate. Most payday loans are just for a month or two meaning that you will only ever have to be a small fraction of the total amount that you borrowed. Payday loans are available for sums ranging from £100 up to £1,000 and are a safe option for those confident that they will be able to make the repayment comfortably on time. For example, somebody who borrows £200 at an APR of around 1,400%, will then will only repay £250 – meaning that the total interest will be 25%, not the APR advertised in the headline figure.
- Sub prime personal loans
While the banks may not want to offer somebody with a poor credit rating an unsecured loan, there are plenty of other lenders who do exactly that. Unsecured personal loans are usually shorter term loans than secured ones and will come with shorter repayment schedules and smaller capital amounts. They also come with higher interest charges because the lender is taking a bigger risk when lending to people who have a record of financial mismanagement. The sums involved are smaller than with homeowner loans and are usually amounts between £1,000 and £10,000. A small group of lenders are able to offer large amounts – up to £25,000 – although people with seriously impaired credit may be unsuccessful when applying for one of these. Repayment schedules are usually anything between one and seven years although some lenders do have plans which stretch out to 10 years.
- Credit unions
Credit unions represent a small but growing part of the lending market in the UK. They are mutual organisations – meaning that they are owned by their members – similar to the ownership structure of the old building societies. Credit unions serve the communities that they are based in and offer savings accounts and loans to people who live or work in the area. The major downside to borrowing from a credit union is that most will ask new members to become savers before considering them for credit. This is because the money that they lend is based on the capital that they hold on deposit. While the amounts that credit unions used to offer was small, loans are now growing in value with many now offering larger sums – sometimes up to £10,000. The interest rates on offer are often lower than for sub prime loans.
Article provided by Mike James, an independent content writer working together with technology-led finance broker Solution Loans – a company with many years’ experience in advising clients of their most suitable type of credit.