- The crackdown on irresponsible lending has made it harder for borrowers with poor credit to access loans
- Payday lenders still exist but charge very high interest rates
- Installment loans from credit unions could be a better option for many borrowers
Prior to the COVID-19 pandemic, half of all British people had no savings at all1. The COVID lockdowns led to 1 in 10 of those who had savings spending around 50-75% of their emergency funds. Depleted savings and a rising cost of living make for difficult circumstances for many people in England. Should the average family experience a broken-down vehicle or need to conduct repairs after a storm, they may need to turn to credit to fund that expenditure.
Individuals with bad credit may find it difficult to access the loans they need in an emergency. Over the last few years, the Financial Ombudsman Service2 has upheld many complaints about unaffordable lending, making lenders wary of serving people with poorer credit histories. Fortunately, there are still some options for U.K. borrowers with blemishes on their credit files.
Credit Scores Mean Less Than You Think in the U.K.
One common misconception, fueled by the popularity of American personal finance blogs, is that U.K. credit scores matter. The scores published by Experian3, Equifax4 and Transunion5 in the U.K. are not shared with lenders. Those scores are shown to users as a guideline and a way for those credit reference agencies to sell credit score improvement services.
Individual lenders in the U.K. have their own scoring systems and risk assessment algorithms. They can see the prospective borrower’s history (defaults, late payments and so on), the amount of debt they have and some other metrics such as the age of their accounts. Each lender can decide how much weight they give to those metrics.
Defaults and CCJs Are a Red Flag to Lenders
While lenders don’t see the scores created by the credit reference agencies, that doesn’t mean those scores are useless. Lenders do frown upon issues such as County Court Judgements (CCJs) and defaults, and those are things that will make your credit score drop dramatically. So, it’s not worth worrying about small fluctuations in your score caused by your credit card balance being reported as a little higher or lower than normal. However, if your score drops by several hundred points, that could be a sign something more serious has happened, such as a default registered against your name.
Short-Term Payday Loans Are Rarely a Good Move
In the 2000s and 2010s, payday lenders such as Wonga ran aggressive marketing campaigns. These lenders provided high-interest loans to almost anyone who applied for them. Wonga collapsed into administration in 20186 following a huge number of irresponsible lending complaints from borrowers who experienced severe financial hardship as a result of the high interest they were forced to pay on loans they feel they shouldn’t have been offered in the first place.
Payday loans are still not illegal, although there are restrictions on how they can be advertised. These lenders still charge predatory interest rates, and would-be borrowers should view them as a last resort.
Traditional Instalment Loans Have Strict Lending Requirements
Payday loans are short-term loans offered over a period of days or weeks. Traditional instalment loans are usually for much higher amounts and have repayment terms measured in months or years. They charge much lower interest rates than short-term loans, but the lenders have far stricter requirements. Borrowers will be credit-checked, and it’s rare for a lender to consider someone who has a recent CCJ or defaults on their credit file. There are some exceptions to these terms, but any lender with flexible requirements is likely to provide smaller amounts and charge higher rates.
Guarantor Loans for Bad Credit
Guarantor loans are instalment loans that are often available to people with adverse credit. The lenders ask the borrower to have someone act as a guarantor for them. If the borrower fails to pay back the loan, the lender can pursue the guarantor for payment. Guarantor loan companies charge higher interest rates than traditional lenders, but their rates are more favourable than those of payday loans, and the amounts they’ll lend are usually higher too. The person who agrees to act as a guarantor will be credit-checked, and would-be guarantors should think carefully about the possibility of being called upon to make payments.
Try Your Main Bank
Individuals who have a longstanding relationship with a mainstream bank and a stable income may have some success with applying for a loan via that bank. This is particularly true if their adverse credit history is minor and already fairly old. Defaults and CCJs, for example, stay on a person’s credit history for 6 years in England and Scotland. Some lenders won’t work with a person who has any defaults or CCJs, even if those markers are 5 years old and the debts have been cleared. A bank that has an existing relationship with you may be more flexible with its risk assessments.
Consider a Credit Union
One option that many people overlook is credit unions. A credit union7 is a not-for-profit organization where the users are members and part-owners. Some credit unions are set up with the goal of providing banking services to people living in a specific geographic area. Others serve people who have links to certain industries or religions. Credit unions typically offer banking services with lower fees, better interest on savings and more flexible attitudes towards lending. Joining a credit union and keeping a savings account with them could stand you in good stead should you need to borrow in an emergency.
Secured Instalment Loans for Bad Credit
Secured loans often have more relaxed lending criteria than unsecured loans. It’s possible to secure a loan against a house or an asset such as a car. Borrowers should think carefully before pursuing this option because the asset the loan is secured against could be repossessed if they default on the loan. However, there are some circumstances where a secured loan may be appropriate. Taking out a secured loan for debt consolidation is something most debt charities would advise against. However, if there’s a genuine emergency and you’re confident the repayments are manageable, secured borrowing is an option.
Alternative Options for Smaller Loans
Borrowers who need only a small amount of money or are looking for a loan for a specific purpose may want to look at alternative options for credit. For example:
- Buy now, pay later: These services allow users to defer payments for up to 30 days. If your emergency is needing a suit for a job interview or a replacement laptop, borrowing from a service such as Klarna and paying in 30 days could help you get out of a bind.
- Pay-in-3 services: PayPal has a “Pay in 3” option, and many Buy Now, Pay Later services also allow people to spread the cost of a large purchase over 3 months. These services offer instant decisions, and the credit checking process isn’t as strict as with traditional loans.
Peer-to-peer lending services allow normal users to invest in them by contributing to loan pools that are given out to prospective borrowers. Users acting as lenders can pick the level of risk they’re willing to accept. They then earn interest when borrowers pay back their loans. In some cases, a borrower who is considered borderline or slightly high risk may more likely be accepted by a peer-to-peer lender.
Check Your Credit File Before You Apply
If you’ve been struggling to get credit, but you aren’t sure why, check your credit file. There’s no need to pay a subscription fee to do this. You can request your file for free once a year from each of the credit reference agencies. Alternatively, if you’re willing to accept sharing your data with companies that promote credit services, apps such as ClearScore and Credit Karma offer free, regularly updated information about your credit file. Those apps also have a matching service, giving you an idea of which loans and credit cards you’re likely to be eligible for.
Don’t Trust Comparison Site Eligibility Estimates
Comparison sites and apps such as ClearScore and Credit Karma make it easy to search for loans. They’ll even give a report with information such as “80% of people with a score similar to yours were accepted for this loan.” Always remember that those estimates are based on general profiles, and they aren’t a guarantee you’ll be accepted. Before you apply for a loan, go to the lender’s website and complete their eligibility checker. This will give you a much clearer idea of whether you’ll be accepted (and what interest rate you can expect to pay) without triggering the need for a hard credit check that would be recorded on your file.