Securing a loan with a very poor credit score is extremely hard because few specialist lenders accept applications from borrowers with an abysmal credit history. Arranging a guarantor and reducing negative marks on your credit report might be constructive steps in the direction of securing a loan.
What are extremely poor credit loans?
Extremely poor credit loans are aimed at borrowers with severe credit problems such as CCJs, bankruptcy, and several defaults. Lenders find such borrowers risky and hence charge high interest rates. A loan for really bad credit in the UK might be more expensive than a bad credit loan.
How to secure a loan with really bad credit in the UK
Here are the ways to secure a loan with really bad credit in the UK:
Check your credit file
First off, you need to check the current situation of your credit file. There are three credit reference agencies that keep your credit record. Get a copy of your credit file from all three agencies and check what score you actually have.
You cannot make a strategy unless you know how bad your credit score is. Maybe your credit score is abysmal because of inaccuracies. If that is the case, you will have to dispute them. Corrections take four weeks to update.
Pause from borrowing
Experts generally advise that you stop borrowing money if your credit score has plummeted due to recent defaults and missed payments. Lenders emphasise recent inquiries, defaults and missed payments, and if they are a lot, they charge exorbitant interest rates.
Taking out a new loan will strain your pocket and damage your existing credit score. The best way to deal with this situation is to stop borrowing money for a while. You may have to stay away from borrowing for a couple of years.
Do not close credit card accounts
Borrowers often feel tempted to close their credit card accounts when they do not want to pay maintenance fees. A golden rule of thumb says that you should let them be. Closing your credit cards will increase your credit utilisation ratio. An ideal ratio is recommended to be 30%. Exceeding the limit will call your credibility into question, and most lenders will believe that you often become desperate for loans.
Compare loan deals
If you tend to borrow money, you should compare deals. Interest rates vary by lender. Some lenders charge higher interest rates than others. Chances of approval are slightly higher if inquiries and defaults are too old.
Lenders generally focus on recent inquiries to make a lending decision. However, it does not insinuate that you will end up with lower interest rates.
Borrow less money
In order to increase your approval chances, you should borrow less money. Most lenders will hesitate to sign off on your application if you try to borrow a large amount of money. Loans with very bad credit ratings have been designed to help tide you over during financial emergencies.
Normally, these loans are discharged in one fell swoop, meaning the repayment term of these loans cannot be beyond a month. You will be able to borrow up to £500 provided you demonstrate your repayment capacity. Since high interest rates are charged, the total cost of the loan will be quite high. This is why lenders prefer to approve an exiguous sum of money.
Arrange a guarantor
In case of an extremely poor credit history, you might struggle to get approval for a small loan as well. If you need money for emergency reasons, you can arrange a guarantor. The guarantor could be anyone, either a family member or a friend. They must have a good credit rating, though.
Applying with a guarantor mitigates the risk for a lender, as they can call in the guarantor to discharge the debt in case you fail to repay. Bear in mind that the guarantor will also encounter a drop in credit points even if they settle the whole debt. This will also ruin your relationship with the guarantor. You should be careful about your repayment capacity if you arrange a guarantor.
Consider credit union loans
You can borrow money from either direct lenders or credit unions. It can be challenging to borrow money from direct lenders when your credit rating is abysmal. Fortunately, credit unions also provide small emergency loans. Even if your credit file is not perfect, there is a possibility of getting short-term loans from credit unions.
You will end up with high interest rates. Yet, credit union loans are cheaper than loans from direct lenders. You will have to be a member of a credit union in order to borrow money.
Additional tips to keep in mind
The following are the additional tips you must bear in mind:
Build an emergency cushion
You should try to create an emergency cushion so you do not have to rely on loans. No loan is cheaper than savings.
Pay off your existing outstanding debts
If you have some outstanding debts and credit card bills to pay off, clear them all. An outstanding balance will have a pernicious effect on your credit rating. If a CCJ has been issued against you, clear your debt within a month to avoid it getting recorded on your credit file.
Consider safer alternatives
You can consider borrowing from friends and family. They will not charge interest. Budgeting loans are also a useful option if you are on low wages or benefits. You do not have to pay interest on budgeting loans. Payments are deducted from benefits. However, not all types of benefits are eligible for these loans. You will need to check your eligibility.
The final word
To secure a loan with really bad credit in the UK, you will have to look for specialist lenders. Borrow less money to reduce your chances of being rejected. If you have any outstanding debt, pay it off as soon as possible.
Though some lenders might accept you with a very poor credit rating, it is recommended that you ameliorate your credit score.
