Once you turn 18, you are automatically given a credit score which becomes an indicator of whether or not you are a good person to lend to. There are several factors that contribute to your credit rating but typically the better your track record when it comes to repaying credit cards and loans, the higher your credit score will be.
Unfortunately, if you fall behind on repayments, it also means that credit score can fall and this is not ideal because you are then considered a riskier person to lend to for credit and loan providers. Some lenders may decline your application or offer you terms that make the product more expensive, to account for the risk.
For some with bad credit, it can feel like there is no way of getting any credit at all, but fortunately there are some options available.
Secured Loans
With a secured loan, you are putting down a valuable asset you own as security to help you get the funds you need. This is typically a car or property and you are releasing the value from this asset, but you risk the lender repossessing it if you cannot make repayment. This is so the lender can recover their costs by selling your car or property on the open market – so how much you can borrow depends heavily on cost of your collateral.
Secured loans against a property include a mortgage. However, you typically need a good credit score for a mortgage but if you have bad credit, there are options such as second mortgages on your home but you borrow a smaller amount that you can afford. Other options include equity release, common for over 55’s, where you release equity on your home and the lender or bank owns a percentage of it so you can get money immediately.
For securing something against your vehicle, there is the option to apply for a logbook loan for up to £50,000, again depending on the value of your car, bike or van. Once again, you risk the vehicle being repossessed if you are unable to keep up with repayments.
When your asset is being used to raise funds, there are several lenders that do not even look at your credit score, instead preferring to look at the value of the security. Where credit scores are important, you simply may be restricted to how much you can borrow or charged a higher rate.
Peer to Peer Loans
Peer to peer loans are types of personal loans that allow you to borrow money from other people in the public, except they receive an interest rate on your loan, like an investment. There is peer to peer lenders that act as middlemen to pair up investors with other borrowers and over £7 billion was lent out in the UK last year.
It caters for those with bad credit because investors can get higher rewards when they invest in those with poor credit. The interest rate is around 3% per year for good credit borrowers or around 10% for bad credit borrowers – so there are several people who are willing to lend to earn a higher return.
Guarantor Loans
This is a very popular way to help bad credit borrowers get the finance they need. It requires the individual to find an extra person to co-sign their loan agreement and agree to repay if they cannot. Essentially the borrower is able to piggy back off the guarantor’s good credit history, homeowner status and employment status – with the better the profile, the more likely of acceptance.
Guarantor loans typically last for 1 to 5 years with rates of 39.9% to 49.9% and the guarantor is rarely needed. But provided that the borrower continues to repay every month, on time, the data will be passed onto the credit reference agencies and this will cause their credit score to improve, giving them future financial freedom.
For mortgages, some of the best rates at 90% or 100% LTV are only available once you have a good guarantor – hence it has strong validity with lenders.