Many individuals with lower credit scores may find it harder to access some forms of borrowing. If you are struggling to get a loan because of a bad credit score, you are not alone.
Although getting rejections can feel isolating, there are still avenues for finding much-needed financing. Even for those struggling with a less desirable credit rating, options exist for securing loans when emergencies or unexpected expenses hit, although eligibility depends on each lender’s criteria.
When you apply for a loan, the first thing that most banks and lenders will do is check your credit score. Your credit score tells lenders whether you are a high-risk or low-risk borrower, which potentially impacts the interest rate, borrowing terms, and approval rate.
No matter your income level or credit score, one good practice is having an emergency fund. An emergency fund is designed to cover your basic living expenses for a period of three months, or if you are a family with dependants, a period of six months. These funds are liquid, meaning that they can be used straight away when needed. Emergency funds are designed to come to the rescue for unexpected and essential expenses like sudden car repairs, rent advances, or end-of-month grocery hauls when things are tougher.
Emergency funds aren’t designed to last forever. So, if the time comes that a fund has been depleted or more than the emergency fund is needed, looking at different borrowing options is the next step.
However, when exploring different avenues for borrowing, it is always essential to read all the fine print to make sure you completely understand what is required of you in the agreement. Properly reading and understanding all agreements reduces the risk of falling prey to fraudsters or loan sharks.
Here are some legitimate borrowing methods to consider.
1. Payday Loans
Payday loans generally have a faster and less stringent approval process, albeit coming with high interest rates, making them one of the simpler options for securing a loan with bad credit. However, as long as you repay these on time, you can comfortably avoid falling into the debt trap.
Look for genuine and regulated lenders online or offline. Payday loans are less likely to impact credit scores further if they are repaid on time and there isn’t a pattern of frequent applications.
2. Guarantor Loans
These loans are beneficial for people struggling to get a loan because of bad credit. As a high-risk borrower, a lender might ask an applicant to provide a guarantor. This person will vouch for the applicant and agree to repay the loan if the borrower is unable to.
To select a guarantor, it is important to choose an adult individual with a good credit score, a regular income, and a UK residency. Guarantor loans are beneficial for people with bad or no credit scores, but also for those looking to improve their credit rating.
3. Secured Loan
When you put up security or collateral for the money you borrow, it is known as a secured loan. Even with poor credit, an asset, like a home or car, can go a long way in obtaining a secured loan. The borrower uses the asset as collateral; if they fail to repay the amount, the lender can sell the asset to recoup their funds.
Secured loans should be taken only when a significant sum is urgently needed, not to cover smaller bills and expenses.
4. Borrowing from Friends and Family
When cash is needed, but there is no option for more institutionalised financial help, some people may be able to turn to family and friends. However, not everyone may have this option, and it is important to approach borrowing from loved ones in a delicate manner.
Just like you would make proactive efforts to return the money when borrowed from banks, it is important to have a similar stance for friends and family. This arrangement relies heavily on trust, and it is important that all parties have a mutual understanding and stick to any agreements that are made.
5. Peer-to-peer Lending
Peer-to-Peer lending is when you borrow from an individual rather than an institution like a bank. The interest on peer-to-peer lending is much higher than traditional loans; however, a greater risk comes from the possibility of being targeted by loan sharks. Loan sharks are lenders who will loan money, often to those in desperate situations. However, if you become unable to repay your loan or its high interest, then loan sharks have been known to begin a pattern of abuse against borrowers. In many instances, transactions are undocumented, making it difficult to seek legal remedy.
Final Words
Even for those struggling with bad credit, there are options to acquire a loan when needed and loan approvals are not solely dependent on your credit score. However, a good credit score does go a long way in areas as far-reaching as securing a loan, finding good rental accommodation, and even landing a job.
Maintaining long-standing bank accounts, being a registered voter, not needlessly applying for loans, and ensuring credit cards aren’t defaulted on can all be ways to build good credit.
When a crisis hits, preparation is a key part of riding out the storm. Additionally, financial planning, building a strong credit history and creating sound budgets can all help to build a healthy financial future.
