Loans provide people with the finances they need to consolidate their debts, pay off the costs of an expensive asset, fund a big life event, or start a business. While you need to be in a position of relative financial security to take out a loan, they offer opportunities and lifelines that can change people’s lives.
Before you get a loan, you need to consider several things. Do you really need a loan? Will you be able to pay it back? What kind of loan should you get? And what can you do to increase the chances of your loan application being successful?
So, how do you get a loan?
We are going to find answers to all these questions and more as we explore the ins and outs of getting a loan and how to ensure you are in the best position to secure one.
How do you get a loan?
To get a loan, you need to figure out exactly how much you want to borrow, ensure you have the financial stability to take out a loan, fill out a loan application form, and, finally, approach lenders that are suitable for the type of loan you want and that fit your current situation. You will also have to complete a credit check once you have submitted your loan application form.
Getting a loan from the bank or another lender can be a crucial step for people who are paying off large sums for an asset or businesses that need a financial injection to kickstart their operations. However, it is important that you only take a loan out if you need it and are certain you will be able to pay it off.
Do you need a credit check to get a loan?
For business and personal loans in the UK, you need to get a full credit check.
A credit check is when a money lender inspects your credit report to see how well you have managed your money or repaid loans in the past.
Money lenders need to see how you have handled borrowing in the past to ensure you are a reliable borrower who is likely to pay your loan back on time and in full. A credit check also safeguards you and your finances because you don’t want to be in a position whereby you have taken on more debt than you can manage.
Once a credit check is complete, lenders use the information gleaned from the check to decide your ‘creditworthiness.’ This determines whether or not they will give you a loan and, if they do, how high the interest rate should be. If you have a strong credit history, you will likely be given a lower interest rate.
So although credit checks can make it harder for you to get a loan if you have a poor credit history, they are also in place to make sure you can afford to borrow.
There are two main types of credit checks:
- Soft credit check.
- Hard credit check.
A soft credit check is when a lender checks your credit report to see what loans or interest rates you are eligible for. A soft credit check is not visible to any other company. So, regardless of the outcome, a soft credit check won’t further affect your credit score or influence your future credit applications.
A hard credit check is a far more rigorous search of your credit history. A hard credit check is a full inspection of your credit report, and any company or lender will be able to see that it has been completed. Therefore, if you have too many hard credit checks carried out over a short period of time, your credit score can be negatively impacted as it suggests that you have frequently applied for credit in a small amount of time.
Top tips for a successful loan application
If you have decided that getting a loan is the right decision for your current situation, you then need to ensure that you are well set up for your application to be successful.
So let’s look at some top tips for a successful loan application.
Make sure you need a loan
You should only get a loan if you need one and if it will help your current financial situation. Loans can be good in the following circumstances:
- Consolidating debt. If you have several sources of debt, you can pay them all off with one loan and then make repay the loan in more manageable chunks. This is especially good if your debt sources have high rates of interest.
- Financing big payments. You may want a loan to buy a new car or build an extension in your house. Loans can be a good way to make one-off big purchases that you can pay back incrementally over a period of time.
- Paying for a big life event. Many people get loans to fund big events that they want to go all out on. For example, people often get a loan to pay for their wedding.
Check your finances
Before you apply for a loan, check your finances to make sure you need it and that you can make the necessary repayments for your loan agreement on time.
If you would be able to afford to not take out a loan but would have to budget in other areas, this may be a more preferable option as you will end up spending less on interest in the long run.
If your finances are squeezed and you have future payments already coming up, you may want to explore other options instead of getting a loan, as the repayments may only add to your financial troubles. You might consider borrowing money from a friend or relative, selling a valuable asset (such as your car), or remortgaging your property.
So, before you apply for a loan, it can be a good idea to create a budget spreadsheet to assess your finances.
Check your credit score
As we have seen, your credit report plays a significant role in determining whether or not your loan application is successful. A poor credit history means your options for getting a loan are limited and may also mean that you get some of your loan applications rejected.
You can check your credit score through credit reference agencies or credit unions for free. When you do so, you can find out the areas in which you can improve and then take the necessary steps to improve them and increase your chances of getting a loan.
Build up a good credit history
Following on from our previous tip, one of the best ways to ensure your loan application is successful is to build up a good credit history. This takes time, so you should aim to build a strong credit history before you need to take out a loan.
To build a good credit score, you should:
- pay all your bills on time
- pay your rent on time
- check your credit report for any mistakes
- end your financial association with other people. For example, if you have a joint account with someone with a poor credit rating, this can also negatively impact your rating
- consider getting a credit card. Having a credit card and paying the monthly repayments on time is a good way to build a strong credit score.
Leave time between credit applications
If you have a loan application rejected, you should leave a good amount of time (at least a year) before making another one. When a hard credit check is performed, the lender will see your credit applications, and if they see you have made multiple applications in a short period, they are likely to be wary of offering you a loan.
Pay off your outstanding credit
If you already have other loans with outstanding credit, it could affect your chances of getting another loan. If lenders see that you have other loans to pay off, they may be at a higher risk of you being unable to repay their loan.
However, this can also be a balancing act. As we have seen, having a credit card can be a good way of boosting your credit score, and if a lender sees you have a credit card and you keep up with repayments, they may also take that as a sign that you will be reliable in paying back your loan.
So, while you shouldn’t take out multiple loans at once, having one or two forms of outstanding credit could work in your favour, as long as you maintain the repayments.
Perfect your application
Your loan application needs to be perfect. A minor mistake can be the difference between a successful application and an unsuccessful one.
You should also make sure you fit all the requirements for a personal loan from a lender so that none of your applications are wasted.
Shop around
Make sure you keep your options open and compare loan deals from various lenders. That way, you will not only find the best deal, but you will also increase your chances of a successful application by matching yourself with a lender with prerequisites that suit your situation.
For example, some lenders may have a minimum income requirement, others may have special packages for people with poor credit ratings.
Can you apply for a loan with bad credit?
You can still apply for a loan with a poor credit rating, but your options may be limited, and you will likely be charged a higher rate of interest and restricted to how much you can borrow.
There are money lenders that specialise in offering loans for people with poor credit ratings who may struggle to find loans elsewhere.
You can also get special types of loans with a bad credit rating that work differently from regular loans. These include:
- Guarantor loans. These require you to have a guarantor attached to your loan. A guarantor is a family member or friend who signs a contract agreeing to be responsible for paying your loan if you can’t pay for it yourself.
- Secured loans. These attach a valuable asset, such as a car or a house, to your loan which is then used as security should you not be able to repay your loan.
Both options come with risks, and you should only take them out if you are certain you will be able to repay them in full and on time.
What to do if you’ve been turned down for a loan?
If you apply for a loan and have your application rejected, don’t panic, you still have a few options to explore.
Your first option is to try and find another lender who is more likely to offer you a loan. Check all the prerequisites of lenders before you put in your application and see if they offer any of the alternative loans we explored in the section above. However, be careful not to send off too many applications in a short period, as this can then reflect badly in a hard credit check.
Your next option is to strengthen your credit score and reapply at a later date. To strengthen your credit score, you need to pay your bills on time, keep up with your rent, cut your financial ties with other people, and possibly get a credit card.
Your final option is to avoid getting a loan altogether. If your application has been rejected, the lender may have judged that you are not in a stable enough financial position to get a loan. While they might be being harsh, they could also be right, and you should think carefully about whether getting a loan at this point is definitely your best option.
Summary
Getting a loan can change your life. But you need to ensure you are in a stable financial position before you decide to take one out. Lenders will run credit checks on you before offering you the loan, but you also need to think carefully and sensibly about your situation and how you will keep up with the repayments.
If you feel confident about your financial situation, but you need some extra cash to fund an important moment in your life, then a loan could be the answer you’ve been looking for.