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How to get a loan

Applying for a loan can be a daunting process, and often one that is filled with jargon about varying APR rates and questions about your financial position.

This guide will walk you through the questions to ask yourself before submitting an application for a loan, providing you with all the information you need to ensure the best outcome for you, without impacting your credit file.

How do I qualify for a loan?

In short, to qualify for a loan, your personal information needs to meet a lender’s criteria.

You generally need to be able to demonstrate some level of credit history in order to get a loan, as lenders often use your credit score to determine what loan terms to offer.

If you have poor or no credit history, you may still be able to get a loan, however you may be offered a lower sum of money, or a loan with a higher interest rate.

Keep in mind that the higher the interest rate, the higher the overall cost of the loan.

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Can I check if I can get a loan?

To understand whether you may be able to get a loan, it is useful to know what your credit history and credit file looks like.

You can see your credit report by searching Credit Reference Agencies online. These agencies are also known as CRAs, and you can contact them directly to request a copy of your report.

The most well known CRAs in the UK are Experian, Equifax and TransUnion. A basic credit report is usually free, but they may charge you for other subscription options and services.

In addition to your credit score, common eligibility criteria in the UK include:

  • Being a UK resident
  • 18 years or older
  • Having an annual income of £10,000 or more

Soft search credit checks

Checking your eligibility through a soft search credit check can also provide you with a good indicator of how likely you are to be accepted for a loan.

A soft search credit check is an initial look at certain information on your credit report. Lenders and brokers can perform soft searches to give you an idea of how successful your application would be without conducting a full examination of your credit report.

Unlike full credit checks, soft search credit checks are not visible to other lenders, allowing you to shop around and compare loans without negatively affecting your credit file.

Keep in mind that soft search credit checks are only indicative. If you decide to go ahead with your loan application, the lender will usually carry out a full credit check. This will leave a mark on your credit report, even if your application is unsuccessful.

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Can I get a loan with a poor credit score?

Yes, it is possible to get a loan even with a poor credit score. Some lenders do consider applications from those with little credit history or a poor credit score, although you may not get as good a deal.

There are also a number of ways to improve your credit score, and consequently your chances of being accepted for a loan.

  • Ensure that you register on the electoral roll and that your details are up to date.
  • Keep new credit applications to a minimum, particularly if you have recently been refused credit.
  • If you can afford to, avoid taking a payment break on any existing debt you may have.
  • Keep track of your credit history to ensure the information is correct and up to date.
  • Always pay any bills that you have on time.

Keep in mind that significantly improving your credit score takes time. A minimum of a few months is likely, as credit reference agencies may not receive updates of your records straight away.

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Can I have more than one loan?

Yes, it is possible to have multiple loans with different lenders as long as you pass their affordability and eligibility checks. It is important however to consider whether you will be able to keep up with the repayments across all your credit.

You may also have multiple loans with the same lender, providing they allow it. In many cases, your existing lender will either:

  • Allow you to apply for a new loan to run alongside your existing one
  • Allow you to apply for a new, larger amount and close your existing loan

Keep in mind that submitting multiple applications for loans and other types of credit over a short amount of time can have a negative impact on your credit score.

Additionally, paying off existing debt with a new loan may extend the overall terms of the debt and increase the total amount you have to pay back.

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Can I pay a loan off early?

Yes, although you may have to pay an early repayment charge. This is often between one to two months’ worth of interest depending on your lender. Your loan agreement will contain information about any early repayment fees they may charge.

There are however benefits of paying back your loan early, such as saving money on the overall interest you would have paid.

You can use a loan repayment calculator to work out how much you could save by increasing your monthly payments.

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What types of loans are there?

Broadly speaking, there are two common types of loans: secured and unsecured loans.

When you take out a secured loan, you usually need to provide some kind of collateral, such as a property or something of monetary value.

An unsecured loan however does not require any collateral, meaning they offer a higher risk to lenders and therefore often come with a higher rate of interest.

Secured loans

When you take out a secured loan, you agree to use an asset, such as a property, against the loan. The collateral acts as security for the lender, protecting them from loss if you fail to repay the loan.

There are different types of secured loans, where mortgages and home equity loans are two examples. As long as you pay the loan repayments on time and as agreed with your lender, you will keep ownership of your collateral and build up your credit score in the process.

However, if you do not keep up with your loan repayments, your lender has the legal right to take possession of the collateral. Not paying your debt will also have a negative effect on your credit score and may make it difficult to be accepted for any other credit in the future.

It is important that you let you lender know as soon as possible if you are struggling with your repayments. For more information on what to do and where to turn for free impartial advice, see our financial support page.

Unsecured loans

An unsecured loan is often referred to as a personal loan. This type of loan does not require any collateral or asset secured against it. This means that lenders will mainly base their decision to lend to you on your credit history.

If managed well and budgeted for, unsecured personal loans can provide you with extra cash up front, for example to pay for home improvements, a wedding or settle any existing and costly debt you may have.

Remember, if you are paying off existing debt with a new loan, you may extend the terms of the debt and increase the total amount you pay back.

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Is a loan right for me?

This depends of a range of factors, such as the amount you are looking to borrow and your personal and financial circumstances.

By comparing your options, you may find that other forms of borrowing, such as using an overdraft or a credit card may be better suited for your needs.

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Important things to remember

Before you apply for a loan, keep in mind that:

  • Submitting multiple applications over a short time can have a negative impact on your credit score
  • There may be other, more affordable borrowing options available to you
  • Always let your lender know as soon as possible if you are experiencing financial difficulties
  • For mortgages, your home may be repossessed if you do not keep up with your repayments

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