Lenders in the United Kingdom run credit checks or credit searches before lending any money to potential borrowers. They carry them out to check your finances, such as available credit and existing debt, and to assess your financial behaviour and creditworthiness.
Aside from banks or building societies, credit checks are also run by landlords, letting agencies, and utility and mobile phone companies in the UK. Some employers also carry them out to check for financial ‘red flags’ in job seekers, like whether they’re likely to indulge in bribery and employee fraud.
The problem is when you don’t have a credit history it can be difficult to access financing, look for a property and apply for utilities, or even find a job. This situation forces borrowers to look for no-credit-check loan alternatives.
What are no-credit-check loans?
No-credit-check loans are the go-to financing option for borrowers who are ineligible for traditional loan products, mainly due to a less-than-perfect repayment or credit history.
These credit products allow individuals to borrow money without being subjected to credit checks. Instead, borrowers of no-credit-check loans will be assessed through their employment, income, and bank account history.
Do no-credit-check loans exist in the UK?
Unfortunately, lenders in the UK cannot offer a loan without carrying out a credit check first. If they do, they’ll be in breach of the UK's Financial Conduct Authority (FCA) regulations. In recent years, they have become more stringent on short-term financing.
In addition to mandatory credit checks, FCA now has restrictions on the following:
- the interest rate lenders can charge
- how many times a borrower can seek refinancing
- the default fees lenders can charge
The FCA has become stricter on lenders who do not comply with the regulations. Lenders face substantial fines and can be ordered to compensate borrowers whom they treated unfairly. In the worst-case scenario, the FCA can withdraw a company’s licence as a lender.
The FCA aims to provide an appropriate degree of protection for the borrowers. While this strict regulatory environment reassures borrowers, it makes taking out loans harder for consumers who don’t have credit.
What are the alternatives for borrowers with no credit?
Credit unions, a type of cooperative, are one good option for borrowers with no credit. You can also buy a money order for up to £750 from them to pay smaller loans. Their members usually pool funds to offer loans, typically at lower rates. While they’ll still be interested in your credit history, they offer flexible loans to people with poor, limited, or no credit history.
Additionally, you don’t have to worry if a credit union goes bust. All funds saved in it are protected by the Financial Services Compensation Scheme (FSCS). This protection is up to £85,000 per person, similar to that level of protection as savings in a bank or building society.
However, to be able to borrow money, you must be a member of that credit union first. Also, the membership is typically contingent on having similarities with other members. For example, you must be a part of the same organisation or live in a similar local area as the other credit union members.
Taking out a secured loan is another option. This is a credit product where you borrow money against collateral you already own. Your property is at risk if you subsequently can’t repay the loan. You need to seriously consider this risk before taking out this type of loan.
Financial institutions offering secured loans include established banks, high-end asset lenders, high-street pawnbrokers, and regulated online lenders. The asset you use as security could be an item of jewellery, your house, a car, and other prized possessions that hold value.
Another alternative would be using a guarantor (often called a co-signer in other countries). A guarantor is a person who agrees to guarantee the loan you take out if you can’t pay it back. A guarantor can also be used if you’re a student renting a property for the first time.
Although asking a guarantor can be helpful, this type of agreement assumes a lot of risk on the guarantor’s part. If you default, the guarantor will be responsible for repaying your loan, In addition, their credit score will be affected by the missed payments.
If you don’t want to risk damaging a personal relationship, using your savings is another financing alternative. However, this may not always be available or an option for you, especially at short notice.
If you’re not yet saving, start building an emergency fund for your future. It’s recommended that you try to save up at least three to six months’ worth of your living expenses.
Final thoughts
Be a wise borrower and choose a safe loan – regardless of how desperately you need the funds. If you encounter lenders offering a no-credit-check loan, avoid them at all costs. They’re breaking the rules set out by the FCA. If you take the risk, you will not be protected by the FCA once you realise the finance provider is offering loans illegally.
Copyright 2023. Featured post made possible by Sally Trase of Start Grid/Searchtides for CreditNinja .