Have a bad credit rating? If so, you will likely have difficulty getting the nod for your application. Though several other factors contribute to strengthening your application, a credit score plays an imperative role in increasing your chances of approval.
Obtaining a loan at an affordable interest rate is not a cinch, and it becomes more complicated when you have a poor credit score. Many people think that you are eligible for an affordable interest rate if your score is up to the mark, but to your dismay, it is not the reality.
For instance, if you are looking to take out a £1000 loan, a lender will look at your credit rating and other factors like your current income. Your past payment record may put you in a good light, but your current income makes your affordability question.
How does a poor credit score influence your borrowing ability?
According to Experian, an appropriate credit score is 761, and a score less than a poor credit score. If you have a lower credit rating, it shows that you miss the due dates.
Although you may have some genuine issues for the past due date, like falling sick in hospital, a lender will assume that you can make a default this time as well. It increases the risk of the lender, and in order to mitigate it, they will charge a higher interest rate.
In addition to the interest rate, lenders charge higher APR and higher loan origination fees. For instance, if you are looking to take out a £10,000 loan for bad credit with no guarantor, the loan origination fees may be at least 5% and the interest rate between 29 and 34%.
However, if you have a good credit rating, the loan origination fees will be 1%, and the interest rate will be between 10 and 11%.
Directly you can notice the disparity in how much money your bad credit rating can cost you. You often do not realise it, but the basic calculation can let you have an idea of it.
When you have a low credit score, you are a risky borrower.. A lender may not be in the condition to lend you money. Some reputable online lenders can turn you down without further ado, but others may use it as a business opportunity to make money by trapping subprime borrowers.
You get tempted to borrow money, and the lender will charge interest penalties and late payment fees when you fail to pay off the debt. And this cycle will continue, and eventually, you will fall into a debt trap.
Do not think that you can throw in your towel and escape it, as your account will go to the collection agency, and if you still fail to pay off the debt, the matter will go to court, and then your assets will be utilised for debt settlement.
Tips for getting a loan at affordable interest rates
Here are some tips to get a loan at affordable interest rates despite a bad credit rating:
Improve your credit score
Suggesting improving a credit score counteracts the way of getting a loan at affordable interest rates despite a bad credit score. Note that a poor credit score ranges between 561 and 760.
The application of a borrower with a 561 credit score will be looked at differently from that of an application with a 630 credit score. Of course, the latter is more favourable than the former. Consequently, it is recommended to improve a bad credit score. It must be nearer to the fair credit score range so you can avoid imposing a higher interest rate.
Complete your bill amount on time
It is vital to make payments to all of your accounts on time. If you have any debt to clear, ensure you clear it on time. If anyhow you make a default on a payment, contact your lender immediately and tell them if you had a genuine issue for being behind the due date.
This may stop them from reporting credit reference agencies of your default. However, note that you will have to clear the outstanding dues within the stipulated time given by the lender, but you cannot dodge late payment fees.
Manage credit cards smartly
Credit cards are primarily responsible for the mismanagement of your finances, affecting your credit score. Although experts suggest making payments with cash, you do not stop using credit cards.
When you swipe your credit card, you do not realise if you will be able to pay off the bill on time, and when the bill is generated, you end up running out of cash. When you use cash, you know how much is in your pocket now that you can spend, and there is no chance of having any doubt about your buying power, but this is not the scenario with credit cards.
If you are utilising credit cards, keep remembering to pay the entire bill when it is generated. If you have multiple credit cards, be careful while closing unused cards. Because if you do so, you will likely end up increasing your credit utilisation ratio, and that may ding your credit score.
Consult a financial advisor if you are confused about improving your situation. Low credit may impact the interest rate you accumulate. Still, at the same time, there are other factors that play an intrinsic role in deciding your approval, for instance, debt-to-income ratio, your current income, future financial condition, a co-applicant or a guarantor with a good credit score, if any.
The bottom line
Although the aforementioned tips can help you get a loan at an affordable interest rate despite a bad credit rating, you must be careful when choosing an online lender.
You can get a list of direct lenders in the UK online, but you will have to research to know which one is actually genuine. Interest rates and APRs vary by lender. Of course, you would like to choose the one that leads you money at the most competitive interest rates you can find only with research.
Lisa Ann has developed a well-experienced professional career. From managing the staff of more than 50+ loan experts at Fastmoneyfinance to boosting the delivery of various loan offers, she has acquired many challenging roles to come out with the best results for the company. Lisa Ann is a Senior Content Author and the Chief Financial Advisor at Fastmoneyfinance. To back her massive experience in the UK’s financial industry, she has the postgraduate degree and diploma in Business and Finance.