Each time you apply for a loan, the lender will run a credit check on your credit file to assess their risk for lending money to you. If your file shows that you have made regular payments to loans before, they may assess you as a risk worth taking and be prepared to offer you a loan. If however you have previously defaulted on payments or your file shows irregularity, they may reject the application as they consider that you have a bad credit history. In cases like that there are still options available, one option which I would not recommend would be to access funds from some of the companies who specialise in offering loans to those with poor credit. The interest rates (quoted as an APR) attached to loans like that tend to be much, much higher as the lenders perceive that they are taking a greater risk. Often very strict penalties are imposed and those with bad credit sometimes make their situation worse by doing this.
The only way to reassure lenders is to build a healthy credit history again and one way would be to use guarantor loans. You would apply for the loan and as part of the process you would have another person, with a good credit history, sign to guarantee the loan. Your guarantor can be a family member or friend and usually a homeowner is a good choice, they cannot be financially connected to you.This would mean that in the event of you defaulting on the loan, your guarantor would be asked to make the payments for you. It is important that your guarantor is made aware of the commitment that they are making and that they are happy to assume that risk for you. The risk is being taken by your guarantor and not the lender and your application should then be met with a more favourable outcome. The interest rates on a guarantor loan are usually higher than they would be if you applied for a loan in your own name with good credit. This rate however can be variable according to factors such as the amount of loan, the duration of the loan and the borrower’s own circumstances, so in some cases, it may be worth applying for a small loan over a short period of time and going from there. Using a guarantor loan will allow you to build your credit score again as long as regular payments are made to clear the debt on the loan.
Remember to shop around as interest rates and terms and conditions vary from lender to lender. Do not assume that the rate quoted in the advertisement is the rate that you will be offered so check with the lender. Look beyond the companies with the biggest adverts and ask questions of the lender. Watch out for hidden costs such as arrangement fees and heavy penalties for late payment. Go with a reputable lender and don’t forget to check their reviews on your search engine and as with any financial commitment, it is important that you consider what would be affordable for you each month on a regular basis.
