Four loan options for those with a poor credit rating

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Date: 14 October 2020

Close-up of a hand stamping a loan application with the word approved

In the United Kingdom, credit reference agencies (CRAs), like Experian, Equifax and TransUnion, determine credit scores through the use of different credit score scales.

Their credit scores determine whether you have a good or bad credit rating. For example, Experian's credit ratings range from 0-999 while Equifax's rating goes from 0-700. However, for TransUnion, the range is 0-710. Regardless of the credit reference agency, the rule is the same: the higher your credit score, the better your credit rating will be.

If you have a low credit score, you are considered to have a poor credit standing. For your credit standing to be considered poor, your Experian score would be below 720, below 379 for Equifax and below 565 with TransUnion. In practice, this means that if you apply for loans, you may automatically get rejected if your credit rating is low. Alternatively, financial institutions may require you to comply with additional requirements such as paying a higher interest rate or providing a guarantor.

Fortunately, having a low credit score doesn't mean you can't take out a loan. Some lenders understand that having a bad credit score is sometimes inevitable, so provide a means by which these borrowers can still access financial products. Consequently, there are loans available that you can still access if your credit score is less than perfect.

Cash advance loans

Cash advance loans allow you to take out a loan by issuing a cheque made out to the credit institution (lender) for the amount of your next pay cheque. The agreed amount includes the value of the loan plus any interest and fees. The cheque you make out to the lender should cover the entire loan.

Upon issuing the cheque, the lender then gives you the agreed amount. After that, when the debt falls due, the lender deposits the cheque to recover the amount loaned by the borrower.

This type of loan is convenient, especially since it does not require an extensive verification process. The cheque becomes the security for lenders that you will pay off the loan when it falls due.

It is perfect for unplanned expenses. Aside from being convenient, it is cost-effective as you will not have to go through a long, draw-out process to obtain the loan.

Payday loans

Just like cash advance loans, payday loans are very common and share many of the same features and benefits of cash advance loans. Often, payday loans are issued together with cash advance loans.

Payday loans are short-term loans where the debtor is extended a high-interest loan based on their income and credit profile. This type of loan is unsecured loan and often carries interest rates far above the Bank of England base rate and that of other finance facilities available to borrowers with better credit ratings.

Typically, payday loans must be paid back after a short period of time. These loans also carry expensive fees and penalties if the money is paid back late or the borrower defaults on their payments.

Secured loans

A secured loan is a type of loan where a borrower is required to offer personal assets,  such as a house or a car, as collateral. These assets are then considered as security for the loan in case the borrower defaults or fails to pay the amount when it falls due.

Because of the nature of these loans, the lender has the right to seize the asset should the borrower default. As such, lenders of secured loans have stricter rules. A default does not necessarily result in a cycle of debt but will result in forfeiture of the asset, which is a long and challenging situation to get out of.

Instalment loans

Instalment loans are repaid through a regular payment schedule or instalments. The amount to be paid on each due date in the payment schedule includes a portion of the principal amount loaned plus any interest due on the debt.

Instalment loans are more flexible in terms of loan amount and repayment periods. You can take out an instalment loan that you repay over a number of years or that you repay over a much shorter period of time.

The advantage of a shorter instalment period is that the interest payable on the loan is lower than for a long-term instalment period. However, the monthly amortization could be a bit burdensome. On the other hand, opting for a long-term loan period will make monthly repayments more budget-friendly. You should bear in mind that long-term debts are likely to be costly overall as the interest repayable tend to be higher when taken as a whole.

Takeaway

Sometimes having bad credit is unavoidable. Many factors can come into play resulting in some people having a lower credit score. Although there are lots of disadvantages from having a low credit scores, it doesn't mean that you will be unable to take out a loan when you need one. As mentioned above, there are loan options available for people with a low credit score.

Copyright 2020. Article was made possible by site supporter Tiffany Wagner

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