When you make an application for a personal loan, the lender will make their decision based on a number of factors. The most important of these is your credit file. Often, you will hear people refer to this aspect of borrowing with the terms ‘good’ or ‘bad’ credit – indicating the overall health of your credit.
Many people who discover they have a poor credit rating look for borrowing options that can be applied for without the need for a credit check. This option is often suggested via online advertising, however it’s very unlikely that you will be able to apply for a loan without your credit history being checked by the lender.
A credit reference agency check is really the only way to assess the creditworthiness of a borrower, most lenders will do so to ensure they are lending responsibly as well as wanting to understand the likelihood of the return of their funds.
Why do I see ‘no credit check loans’ advertised online?
You should be very wary of claims for loans with no credit checks. Companies that advertise ‘no credit check loans’ are often, in fact, brokers or introduction services, who pass your details on to lenders that do introduce credit checks, as part of their vetting process.
How can I check my credit rating?
In the UK, there are three main credit reference agencies; CallCredit, Equifax and Experian. Each of these holds a version of your credit file, containing detailed information about your borrowing history, including everything from details of your mortgage to your levels of credit card debt.
Any late or missed payments from previous or current borrowing will be recorded, along with any previous applications you’ve made for credit cards and personal loans.
When a company makes a credit check it will be one of two types: a hard search or a soft search.
You can check your credit rating online with any of these agencies, at any time and there are many options to do this free of charge
Will applying for a loan negatively affect my credit rating?
When a company makes a credit check against your name, it will be one of two types: a hard credit check (hard search) or a soft credit check (soft search.)
A soft credit check is an initial look at certain information on your credit report, often used by companies to decide how successful your application might be, without conducting a full examination of your credit history.
Soft searches have no impact on your future credit score, as only you can see them on your report.
A hard credit check is a thorough search of your credit report and is permanently recorded, so that any company searching your record in the future will be able to see it. Receiving too many hard credit checks over a short period of time can affect your credit score for six months, which is why making a large number of loan applications quickly is ill-advised.
What causes a bad credit rating?
You may find yourself with a poor credit rating for a number of reasons:
- Missing or incomplete repayments on previous or existing loans.
- Making payments later than agreed.
- Being declared bankrupt in the past.
- Entering into an Individual Voluntary Arrangement.
- Having a County Court Judgement (CCJ) awarded against you.
- Making multiple unsuccessful applications for loans or credit cards in the past.
It’s also possible to have no credit rating at all, if you have never previously taken out any kind of loan or finance deal, and don’t use any credit or store cards. This can also have a big impact on the type of loan available to you, as you have yet to build up a history of reliable borrowing.
When you apply for a personal loan, every lender will access your credit file, but each one has a different method of scoring your application. This means that while you might be rejected for a loan by one bank, another could accept your application for the same amount, based on the same personal criteria. Contrary to popular belief, there is no single credit blacklist that either allows or prevents you from borrowing.
If you’re not sure of your credit score, you can check this online, for free, through the three main credit reference agencies, along with a number of other sites. Borrowing options available to those with a poor credit rating tend to have certain pitfalls, like stricter terms and higher interest rates.
How can I improve my credit rating?
If you do discover that you have a poor credit rating, there are a number of ways that you can improve this over time, making borrowing easier in the future. Ensuring that you’re registered on the electoral roll and trying to avoid frequent applications for loans and credit cards will help, as will meeting the scheduled repayments for any debts you already have.
Some websites make it possible to search for the loans that you’re likely to be refused, should you make an application. Based on hypothetical details, these sites will show you the available options, letting you know which applications are worthwhile and which might damage your credit rating further.
Lenders who consider alternative data
Some banks and lenders will consider other financial indicators to prove your creditworthiness when you apply for a personal loan. These might include your employment history and income along with how well your current account is maintained and whether household bills are paid on time.
It’s becoming increasingly common for lenders to use alternative data to establish the risk posed by a borrower as this allows them to build up a more robust picture of a person’s relationship with money.
Examine the specifics that a lender’s personal loan offers, in order to determine how credit is used in decision making. Experian’s personal loan marketplace also provides details for several lenders who use alternative data.
Poor credit score loans
If you have a poor or non-existent credit rating, and need access to money quickly, there are few alternative ways by which you can apply for a loan.
Some online lenders have loan products designed to cater to people with a poor credit rating. You will find that terms and conditions are stricter and APR’s higher than for standard personal loans, as lenders are exposing themselves to greater risk.
As with most loans, this type of borrowing can be either secured (set against an asset like a house or car) or unsecured. With a secured loan, your asset may not be safe if you fail to make repayments.
Borrowing over as short a timeframe as possible is one way to keep the total cost of your borrowing to a minimum, but make sure your monthly repayments are realistic and will remain affordable, even if your circumstances change.
What other loan options do I have?
Joining a Credit Union
Credit Unions are non-profit making cooperatives whose members can borrow from pooled deposits, at relatively low interest rates. Credit Unions make loan decisions based on alternative criteria (described above) though you do have to be a member to borrow.
Professional groups often form credit unions, so you may be able to join one through your job. You can also search for Credit Unions at www.mycreditunion.gov.
Using a guarantor
A guarantor is usually a family member or close friend, who has good credit themselves and trusts you to meet the repayments for the loan. If you fall behind, this person will be equally responsible for the debt, so it’s important to be confident that this is highly unlikely to happen before asking someone to co-sign your loan.
With a guarantor, the interest rate for the loan will be calculated based on that person’s credit rating, which may make borrowing terms more favourable than applying in your own name.
Though guarantor loans are a great way for those with a low credit rating to access borrowing, it should be noted that a credit check will be carried out by the lender, for both applicant and guarantor.
Is there anything else I should consider?
As with all borrowing, you should never borrow more than you need, and should be confident that you can comfortably afford repayments, while also meeting your own needs and those of any dependents.
Personal loans can actually be a good way for people with low credit scores to improve their ratings for future borrowing. As long as repayments are made on time, the loan will demonstrate that you’re now able to stay in control of your finances.
If you’re struggling with any aspect of money management or debt, charities like StepChange can help.