It is not a cinch to get on top of your finances, but if you have been struggling to keep tabs on your expenses, it might affect your ability to qualify for a loan. No matter how great your income is, you would need to borrow money for a mortgage or a car.
How responsibly you have been paying off your debts and credit card bills, but overly relying on them will reduce your chances of being accepted. Your poor credit rating is not always the result of non-payments. Occasionally, it is the effect of too much debt. If you owe a lot more debt, your credibility will be put into question. Bear in mind that your lender employs their own method to calculate your affordability.
When your credit score is less than perfect, lenders might not approve your application for large loans. Most probably, you will be offered small loans, but you will end up with high interest rates. When your credit report is not stellar, it does not preclude you from submitting a loan application. It depends on the fact that how much risky borrower they think you are and their policy when it comes to signing off on your loan application.
Finance options that you can consider with poor credit
Here are the finance options that you can consider with bad credit:
Secured loans
These loans are also called homeowner loans. When your credit rating is not up to scratch, your lender expects you to secure your loan against a valuable asset such as a house. This reduces the risk of a lender because they have the right to repossess and liquidate your house to cover their money back in case you fail to discharge your obligation.
If you are already on a mortgage, you can take out money against your equity. However, it is possible only when your house has built some equity. Its market value must be higher than the current outstanding amount of a mortgage. It will be a second-charge mortgage.
Here are the benefits of secured loans:
- When you have built equity, your lender could lend you money against it despite a less-than-perfect credit rating.
- You can choose a longer repayment term if you want to opt for smaller monthly payments. You can easily budget around payments.
- With the help of the equity you have built, you would be able to borrow a larger amount of money than with personal loans.
Things you should be aware of
These loans are guaranteed against your possessions. If you fail or refuse to pay off your loan, you will ultimately lose your property. Repossession might not be immediate, but it will be eventually. In addition, it is worth bearing in mind that you will have to pay much more interest in total if you choose a longer repayment plan. It is consistently most useful to ensure that you will not fall behind on repayments. Think twice before applying for a loan against your home or equity because your home would be repossessed if you did not settle your debt.
Guarantor loans
It is likely that you do not have a house, or you might not feel inclined to borrow against the equity you have built. Some people avoid securing their loans because they do not have to borrow a large amount of money. Here comes the role of guarantor loans.
Guarantor loans are small loans that require you to position a guarantor with a good credit history. These loans are aimed at subprime borrowers who have a very poor credit rating. Your guarantor can be your significant other or a friend.
Here are the benefits of guarantor loans:
- A guarantor can enable you to access funds despite a very bad credit rating. This is because your lender can call on the guarantor if you fail to discharge your obligation on your own.
- As you start making payments on your own, you will notice an advancement in your credit score.
Things to consider
If you struggle with your finances, your lender will ask your guarantor to repay the debt. This means your relationship with the guarantor will be ruined. In addition, your guarantor will end up spoiling their credit score because of your negligence. You can take out bad credit loans with no guarantor from a direct lender, but the loan amount will be quite small. Such loans are paid off in one fell swoop.
Joint loans
Joint applications could come in handy when your credit rating is subprime and you have been refused elsewhere. If your partner has a good credit rating, you should try to apply for a loan jointly. This will increase your probabilities of being accepted for a loan.
When you take out a joint loan, you both will be accountable for the settlement of the debt wholly or partially; therefore, your lender would take into account the repayment capacity of both of you.
Benefits of joint loans
- This allows you to borrow a considerable amount of funds.
- Having a joint application will make it much easier for you to have your loan processed smoothly.
Things you should bear in mind while submitting joint applications
Just because one of you has a good credit rating, it does not mean that your chances of getting approved for a loan are always high. It relies on the lender to decide whether to approve your application.
There is no assurance that you will be competent to qualify for better interest rates. If one of you forgets to create the payment, the other will be responsible for settling it. Remember that you both will lose your credit points if it happens.
To wrap up
There are various financial options you can consider when you have a bad credit rating. These options include secured loans, guarantor loans, and joint loans. They are all subject to some drawbacks. Make sure that you weigh up all pros and cons carefully before considering them.