If you are struggling with a poor credit history and finding it hard to get approved for a loan there are ways to improve your credit rating and get a better deal.
However, it is best to avoid lenders that offer loans with no credit checks, as they may be operating illegally. Instead, you could consider other ways to borrow money, such as boosting your credit score or getting help with budgeting or benefits.
You should be very wary of taking on a loan that is issued with no credit check. Lenders need to be authorised to offer you credit, and they are required to conduct some sort of credit check before they lend you money. This is to establish that you will be able to pay back the loan, and that you are not taking on more debt than you can manage.
Firms that lend to customers must be regulated and authorised by the money watchdog, the Financial Conduct Authority (FCA). If a firm offers you a loan without being authorised, and does not carry out a credit check, then you should find other ways to borrow money, as they are likely to be a loan shark and may be operating illegally.
Lenders must carry out a credit check if you want to borrow from them. Some lenders and brokers will allow you to do what is called a “quotation search” or “soft credit check”. This means a lender will check your credit file but the search will not show up if other lenders view it and so your credit rating will not be affected as a result.
The law stipulates that all direct lenders carry out a credit check on all loan applications. Therefore, if a direct lender claims to offer short term loans with no credit check, they may not be telling you the truth, or they may be operating illegally.
If you are worried about your credit score stopping you from getting a loan, there are still some ways around it, but it is worth doing your research to avoid taking on high-risk debt.
A loan with less strict credit checks will likely come with a greater risk in the form of high interest, penalties and extortionate fees, so it might be better to consider improving your credit score first.
One of the most dangerous forms of credit is a payday loan. These loans start off with high interest and the fees and charges can rack up very quickly, meaning that you can get into serious debt as a result of a small instant loan.
Payday loans are best avoided. If you are desperate for short term cash because of a financial emergency, it is a good idea to talk instead to a free advice service such as the Citizens Advice Bureau or National Debtline, who can help you get your finances in order.
Generally, your credit rating will be checked before you are given any form of credit or loan.
It may be possible to take out a loan without a 'full' credit check, where a lender will only make a basic check to ensure you are not a fraudulent borrower or currently bankrupt.
But be very careful, as often any lender willing to take the risk of running only a basic check will have very high costs and strict terms that could lead you into a spiral of debt. In essence, a loan without a credit check likely to be a payday loan, and would best be avoided.
Some loan brokers and comparison sites offer a soft credit check to help you work out whether you might be eligible for a loan. This can be useful to see whether it is worth making a proper application, or whether you are likely to be turned down for a loan under your current financial situation and that you need to make some changes to your credit score in order to be approved or get a better loan deal in the future.
It is not as formal as a credit check and will not leave a “footprint” on your credit file or affect your eligibility for a loan in the future.
A credit check is carried out by financial institutions such as banks and loan providers whenever you apply for one of their products.
They look at your credit report, which shows a history of your financial interactions, including debts repaid, debt still owed, as well as missed payments, defaults and other information. Your credit file also shows whether you are borrowing up to the maximum on your credit card, and how often you use credit.
Your credit report also comes with a score, which is based on the history of your repayments, how much debt you currently have outstanding, and how risky your history suggests you might be in the future. Lenders use your credit report as one of the decisive factors when approving or rejecting your application.
Almost every loan you apply for will involve a credit check. In some rare instances, such as with payday loans and some guarantor loans, you will not be subject to a credit check (even if you are, they will likely not consider it important).
Each of the main credit report providers have their own scoring system, but they generally calculate it based on similar risk factors. If you pay your bills on time and have very little outstanding debt, and you have no history of missed payments, then you should have a good score.
If you are young, have a bad credit history of missed payments, or do not have much of a credit history, then your score is likely to be lower, and you will not be offered the best deals on credit products and loans.
Having a history of paying debts, and clearing them regularly shows that you are a responsible borrower.
Many people who have never had a credit card or ever had any kind of loan are likely to have a very poor credit score. Lenders want to see that you know how to handle debt.
You should also ensure you are registered on the electoral roll and put your name on some household utility bills. If you have a contract with your provider then these bill payments will show up on your credit report - the more often you pay them, and on time, then the quicker your credit score will improve.
If you have had missed payments or CCJs (County Court Judgments) or filed for bankruptcy, then it is going to take time to improve your credit score.
It is also a good idea to check your credit report, as sometimes there can be mistakes on there, and those mistakes could be the reason you've been rejected in the past. You can write to the credit reporting agency and get mistakes rectified.
There are a number of different options you could consider instead of taking on a risky high-cost loan.
Many unsecured loans providers are unlikely to lend to you if you have poor credit, but there are many deals on the market, and specialist companies cater to those who don't have the perfect score.
Been refused credit in the past? Compare credit cards to improve your credit rating.
Generally, guarantor loans are safer and cheaper than payday loans, but there is still a high amount of risk, not just for yourself, but ultimately for your friend or family member who is willing to be the guarantor.
Secured loans providers are more willing to lend to those with a poor credit history, but that is because the customer assumes more risk. The interest rates are usually higher than on an unsecured loan and you will have to 'secure' the loan against your property.
If you fail to keep up with repayments, you could have your home repossessed by the loan provider.
Compare a whole range of secured or homeowner loans for borrowing between £3,000 and £80,000.
Credit unions are one of the best ways to borrow if you have a poor credit score. The only downside is that you usually have to be a member in good standing before you can take out a loan.
This usually entails having been a savings account holder for at least a few months and have money coming in regularly.
However, some credit unions can make exceptions for individual circumstances. Plus, the interest rates on loans are usually far better than what you would normally get anywhere else if you have poor credit.
Credit cards are usually quite flexible. You may not need a large lump sum of cash that a loan will give you, and you might not need a few years to pay it all back.
There are many 'bad credit' credit cards available on the market, targeted at people with poor credit.
They have higher interest rates than the leading credit cards, and lower spending limits, but they still give you at least 30 days of interest-free spending, provided you can pay your balance in full and on time.
Plus, you can improve your credit score by paying off the balance regularly and eventually become eligible for a credit card with a lower rate of interest.