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Does a payday loan affect your chances of getting a mortgage?

No, a payday loan on file will not impact your ability to get a mortgage. It is a common concern that is raised amongst borrowers who fear that a payday loan on their credit record could be looked upon negatively when they want to apply for a mortgage at a later date. But it is not the case.

Why are there concerns that payday loans could impact getting a mortgage?

Those applying for payday loans online are often considered to be financially stretched and in need of desperate funds. Whilst this may be the case for a percentage of customers, this does not consider the large proportion who use payday loans for emergencies or to cover temporary shortfalls of cash.

However, mortgage lenders and brokers treat these loans in the same way they would for any other kind of loan such as a personal loan.

What mortgage lenders and brokers care about

The mortgage sector looks at finance in the same way as other types of unsecured debt, such as credit cards or personal loans.

What matters most to mortgage lenders and brokers when deciding to approve or decline an application is how you previously managed your debt.

For example, as with any other type of unsecured debt, what will be assessed is your repayment history such as:

  • Did you always pay on time?
  • Did you miss payments?
  • Did you default on the loan entirely?

All these factors have a much bigger impact on whether your mortgage application is approved or not. Lenders want to see you can repay loans on time.

young couple and child moving home

What impacts your chances of being approved for a mortgage?

It is worth noting that your loan repayment history is not the only determinate of whether or not you are approved for a mortgage. Other important variables include:

  • Affordability checks: lenders carry these out to ensure you can afford to take out the loan. If after taking into account your income,  credit history, and future expenses it suggests you would be put into financial difficulty, then a loan is unlikely to be granted
  • Linked to someone with a poor credit history: if you have a good credit score but your partner doesn’t (and you have linked accounts) this could be problematic. See how do credit checks work for more information.
  • Age: a person’s credit score is key to being approved for a mortgage, and when you turn 18 you start with zero credit history. Lenders need to be confident you have experience of paying a loan back.
  • Missed loan or credit card payments: this will affect your credit rating as well as your chances of getting a mortgage. If you appear as high-risk to lend to, then your chances drop.

How to improve your chances of being approved for a mortgage

There are a number of ways you can increase your mortgage approval chances:

  • Employment status: working for the same company for a number of years can work to your advantage. Lenders will be looking for successful applicants to prove they have a stable, regular income and this would be evidence of that
  • Good credit rating: lenders like low-risk applicants. A good credit rating will increase your chances of being approved.
  • Improving your credit score: you can improve your credit score by making sure you are on the electoral roll and paying off any outstanding debts you have
  • Prompt repayments: making sure that you pay back any existing loans or credit cards on time will be considered by a mortgage lender.
  • A guarantor: in some cases, you may be able to have a guarantor on your loan and can be particularly useful for younger people trying to get on the property ladder.
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What loans are available for the self-employed?

Applying for a loan is made trickier when you are self-employed. This is because one of the main things lenders will ask for from you is evidence of income in the form of payslips. As you are not employed by someone, you will not be able to provide these.

In addition, the fluctuation of income on a month by month basis is another reason why lenders are less likely to approve you for a loan if you are self-employed. If the amount you receive in income varies monthly, this makes it far harder for a lender to carry out affordability checks. These are important, as it determines whether or not you are in a financial position to be able to afford a loan. It also indicates to the lender the level of risk in providing you with a loan.

Is it possible to get a loan if I am self-employed?

Yes, but with limited options available. Typically, with these lenders, you will need to have a good credit score (there are ways to improve your credit score if it is not currently up to scratch). You will also need to make sure you meet the specialist lenders’ affordability checks and provide supporting documents.

Loans available for the self-employed

If you are self-employed, the main options available to you are as follows:

  • Payday loans
  • Secured loans
  • Guarantor loans
  • Personal loans
  • Business loans
  • Credit unions
  • Bank loans

Payday loans

If you want to apply for payday loans, you need to demonstrate a regular income and salary. So if you are self-employed and have been for several years, this will strengthen your case over someone who has only recently started working for themselves and does not have a history of stable income.

For people looking for payday loans up to £1,000, the lender wants to ensure that you can repay your loan without falling into financial difficulty. You may be required to show proof of income through a payslip or bank statement and if you are self-employed, they may require up to 3 months worth of information.

young woman on the phone

Secured loans

A secured loan may be for you if you are having difficulty providing the needed documented income to a specialist lender, or simply do not have adequate employment history to apply for an unsecured personal loan.  With a secured loan (a type of personal loan), the total amount of equity in a property that you own is used as security against the loan amount.

Typically, because of the level of collateral involved, a secured loan can offer you lower interest rates than you would need to pay on a regular personal loan.  However, keep in mind that if you are unable to keep up with a repayment plan on your loan, you risk losing your home altogether.

Guarantor loans

Another loan alternative if you are self-employed is a guarantor loan. These types of loans work by asking a third party (typically a close friend or family member) to be the nominated guarantor for your loan. The person you choose will need to have a strong credit score, and also usually a homeowner as well, in order to be approved.

The risk of lending to you is mitigated through the guarantor, who enters a legally abiding contract to pay the loan back if you are unable to.

It is extremely important that the nominated guarantor is aware of this before signing the contract, as after the initial 14-day cooling-off period, it is no longer possible for a guarantor to remove themselves from the contract.

Another thing to remember is the guarantor loans typically have higher rates of interest than the typical standard personal loan.

Personal loans

With this kind of personal loan (unsecured), it is possible to apply without having to provide some kind of security for it in the form of your home, vehicle or other high-value possession. Personal loans of usually favoured for those with good credit scores and you can receive some of the lowest rates around, from 3%. If you have a fair or poor credit rating, these types of loans may be more difficulty to obtain or come with higher rates of interest.

self-employed businesswoman helping a customer

Business loans

It is also possible for you to apply for a business loan if you are self-employed, providing that these funds are being used in order to support your company. The lender will first check your business accounts to make sure that it makes sense to lend to you.

The amount you can borrow is typically based on your annual revenue and other factors such as credit status, affordability and any other outstanding debt that you may have.

A business loan can be secured, so you can use stock, your premises or unpaid invoices as collateral – or you can apply purely on an unsecured basis, primarily based on your income and affordability.

Credit unions

Credit unions are located all around the country and act as non-profit organisations. If you are looking to borrow small amounts under £1,000, this can provide extremely low rates at around 26% and there are no default fees. Whilst you can be self-employed as part of the eligibility criteria, you may need to be a member of an organisation (like a local church) or have something in common with the credit union such as working for a charity or the public sector. If you are looking for quick loans online, this is not the loan for you. Being a non-profit, the processing of an application can take a few days or weeks and transferring funds can take a little longer than with a traditional loan.

Bank loans

One of the most traditional types of loan for self-employed people would come from your high street bank. You would typically go to your bank manager and ask for a credit line or money for your business. This is less common today with some many commercial lenders operating. However, if you bank with someone, they will usually try offer you loans and you can apply pretty fast through the banking app or going to a business manager at your local branch. Since they will have an insight into your payments and history, you may have more success than with other types of finance. However, banks have been known to restrict their lending criteria for sometime and you may need to wait for a good time to borrow money.

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What loans are available if you are unemployed?

If you do not currently have a job, you will find it difficult to get access to many loans available on the market. This is because lenders will be looking for evidence to ensure that you would be able to afford to not only take out the loan, but have enough to make loan repayments too. However, in a small number of cases, it could be possible to get access to a secured loan (using a high-value item as security) a guarantor loan, or potentially get a loan through the appropriate credit union.

Why is it difficult to get a loan if I am unemployed?

It comes down to creditworthiness and affordability checks. Lenders will usually need successful applicants to show evidence of a regular, stable income and a salary before deciding to approve a loan. Not having a job suggests to the lender you may have trouble paying back a loan granted to you. When you take into account the interest that will also be needed to be paid for the loan, this could lead an unemployed applicant into a cycle of debt they could struggle to get out of.

However, as we have previously mentioned, it may be possible to get a loan with some specialist lenders without having a job.

What types of loans are available for the unemployed?

  • Benefits
  • Secured loans
  • Guarantor loans
  • Credit unions

Benefits

One of the most common things to do for someone that is long-term unemployed is to get benefits. This will be a weekly income that is used for the most basic necessities. The amount you get from Job Seeker’s Allowance (see below) is not a huge sum, in which case you may be better off finding work than relying on benefits.

Secured loan

A secured loan typically allows you to gain access to more favourable interest rates than you would usually get if you were applying for a loan whilst unemployed. You will also usually be able to borrow more than you would with an unsecured loan.

The main reason for this, is that something of high value that you own (such as a vehicle, piece of jewellery or property) is used as collateral against the loan. For the lender, this helps to mitigate some of the risks in lending to you, as this item secures the loan. It does mean that should you fail to keep up with repayments there is a high level of risk to you: the lender has the right to repossess your home (if put up as security) or other high-value items if you can’t pay the loan back.

Guarantor loans

Another possibility if you are unemployed is getting a guarantor loan. Guarantor loans work through the main applicant having a nominated individual (with a strong credit score, a stable income, and usually homeowner status as well) ‘guaranteeing’’ the loan amount. In the majority of cases, the guarantor is a close friend or family member.

You and your chosen guarantor must be fully aware of the possible implications of this type of loan before signing the contract. What we mean by this, is that the guarantor is legally obliged to pay the loan back in the event the main applicant does not, or cannot, pay the loan themselves.

Once the contract has been agreed, it isn’t possible for the guarantor to reverse it and no longer be the guarantor.

Credit unions

Depending on your individual circumstances, it could be possible to get a loan from a credit union. This is usually a lower-cost alternative to other loan products available, and they are specifically open to members who have a common bond amongst them. This could be the same church, trade union, occupation or community.

There are more than 500 unions in the UK and approximately one million credit union members in total. You can research online if there is a credit union you meet the loan criteria for.

Should I use payday loans if I am unemployed?

No, you should avoid using payday loans if you are unemployed. This type of loan is usually only for a few weeks and offers high rates of interest than other typical loans (usually for the convenience of speedy funding). Since repayments are usually at the end of each month and not spread over several years, the interest rates can add up and put financial strain on people who are without employment.

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Can you borrow money with no credit check?

There are a handful of lenders who can provide loans without a credit check, but they will usually have a specific criteria such as having a guarantor or needing collateral such as a car or property, otherwise known as secured loans.

At The One Stop Money Shop, we will carry out a series of credit checks to determine the eligibility of our customers. We want to ensure that customers can afford to repay and will not struggle to keep up with repayments, since this can have a much bigger and worse impact on an individual’s finances.

Why is a credit check carried out by lenders?

Carrying out a credit check is a very important step amongst most lenders, as it ensures that you meet affordability criteria. This means that the lender knows that you can afford to take out the loan that you are applying for, repay the loan on time and without falling into financial difficulty.

A lender is a business and they want to lend out money and get their repayments on time. When a loan is unsecured and there is no collateral, they are essentially giving a few hundred or thousand pounds upfront with quite high risk. With a credit check, they have an indication of how well the person pays and this can be used to determine whether they lend to the person, how much, how long for and what rates.

A credit check takes into account how well you have paid other forms of loans and credit in the past including personal loans, payday loans, mobile phone bills, credit cards and any other financial obligations.

Credit reports are updated in real-time through the 3 main credit reference agencies in the UK of Experian, Equifax and CallCredit.

If you have recently defaulted on a loan or credit card payment, this information is made available instantly on your credit report, so if you apply for new loans, the lender will be able to see this information and make a decision accordingly.

What is involved in a credit check?

A credit check is carried out by a lender when you apply for certain types of credit. This is done through one of the three main credit reference agencies in the UK who hold information on your financial credit file. 

This information is used to see whether to approve or decline your loan application. The information on your credit file includes:

  • Full name
  • Date of birth
  • Address
  • Any bankruptcies
  • All loan, credit cards, and mortgage accounts currently open
  • Previous applications searches
  • Current overdrafts
  • Any missed payments
  • Outstanding debt
  • Any joint accounts you have with other people
  • Existing forms of credit you have available to you
  • Defaults on loan repayments

Will a credit check leave a search footprint?

Yes, whenever a lender carries out a credit check, this leaves a footprint on your file that is visible to other companies that they have made a search on your profile.

This is known as a hard search footprint, which stays on your credit file for approximately 12 months. This is different from a soft search footprint, that does not leave a mark on your file and is often used for eligibility calculators and if someone you have a joint account with is applying for a product.

What loans are available without a credit check?

Guarantor loans

Guarantor loans are usually aimed at those with bad credit who may have difficulty otherwise getting access to a loan. The main applicant nominates a ‘guarantor’ to back their loan. This is typically a spouse or family member, who has a good credit rating, is a homeowner and most importantly, willing and aware that they will need to pay back the loan if you can’t.

Guarantor loans usually have lower rates of interest than typical for those with a poor credit rating, as the loan is being backed by someone with a good credit score.

Secured loans (car or home loans)

A secured loan requires you to provide collateral in the form of a high-value asset such as a piece of jewellery, a vehicle or your property against the loan. This is to mitigate the lender’s risk in lending to you. In return, you can expect to receive a lower rate of interest and better overall terms for the loan.

Secured loans tend to also have lower rates of interest than you would have with a payday or unsecured loan, but are also associated with higher levels of risk.

However, it is extremely important that you are aware that if you end up defaulting on repayments, the lender has the legal right to repossess the items you put as collateral for the loan to recuperate the debt. This could mean losing your home if you are not careful.

Can I get a loan without a job?

No, it is usually not possible to obtain a loan without some form of employment with the vast majority of UK lenders. This also includes people who are currently recipients of benefits or receiving a pension.

There are a small number of providers who do provide loans for those who are unemployed, but remember that they are likely to have sky high-interest fees to compensate for the perceived risk in lending to you or they may require some form of security such as a car, home or jewellery.

Why can’t I get a loan without a job?

This is mostly down to affordability checks. Lenders have a legal responsibility to ensure that any borrower who takes out a loan is in a financially stable position to do so.

Remember that loans are granted on the basis of the strong probability that you can pay back the loan. If you are in a position that does not suggest you can do this – such as by not having a job, then a lender is unlikely to approve your loan application.

Lenders will need evidence that borrowers can afford a loan, and one of the most common ways of checking is by asking for proof of income. Typically, borrowers may be asked to provide a recent bank statement or payslip as evidence that they can afford to repay their loan.

Failing to keep up with loan repayments can incur additional fees and negatively impact your credit rating which can affect your chances of getting future finance such as credit cards, loans and mortgages.

What type of job do I need to have?

In terms of the job that you need to have to apply for a loan, it can be either full time or part-time. The most important thing is that this job needs to be stable, providing you with a regular monthly salary that you can live on.

The lower the income you receive from your job, the lower the amount you can typically borrow.

Ideally, when applying for something like a quick loan, personal loan or mortgage, the lender wants to see something legitimate with a payslip from a business.

It is OK if you are self-employed, because you can still have a limited company. But in terms of ticking boxes from the lender, they cannot rely on ‘gig economy’ jobs, getting paid in cash or earning 100% on commission.

Can I get a loan if I am self-employed?

Yes, it is possible to take out a loan with us if you are working for yourself and there are over 5 million people in the UK who are self-employed.

You will need to be over the age of 18, a full-time UK resident and your employment must provide a stable and regular monthly income. For some lenders, particularly in mortgages, they like to see limited companies that are profitable and have been running for a minimum of 2 years, although this can vary depending on the product.

What else do I need to apply for a loan?

  • A UK resident
  • Have a permanent UK address
  • A valid mobile number so that we can contact you about your loan status application
  • Valid email address
  • UK bank account
  • Able to afford monthly repayments
  • No recent IVAs or bankruptcy

What is a CCJ?

A CCJ, otherwise known as a County Court Judgement, is a court order that can be ordered against you if you fail to make repayments on credit. This type of credit could be a loan, credit card or mortgage.

CCJs are granted when failing to pay loans and other bills, including mortgages, phone bills, lawsuits, compensation claims, payday loans and more.

Whilst most lenders will send you follow ups or reminders if you have not made a repayment, if you do not respond or refuse to pay, the lender can issue a court order to collect the funds.

This means by order of the court that you must pay for the loan or that you have debt outstanding. Having a CCJ is usually a negative thing and is something that will stay on your credit file for 6 years and significantly impact your chances of getting approved for other types of loan and credit in the future.

Key points about CCJs

  • Court order for not paying a loan
  • Will be on your credit record for 6 years
  • Is satisfied if paid, unsatisfied if not
  • Usually associated with bad credit
  • Is considered serious and not ignored

You will receive a warning letter

Prior to receiving a County Court Judgement, you will be sent a warning letter from the people who you owe money to.

This could be either a default notice or a letter before action is taken. Before any CCJ is ordered against you, you must receive this letter at least two weeks beforehand.

The warning letter will typically outline steps you need to take to resolve the situation before a CCJ is ordered and also outline what will happen if no action is taken by you.

If issued a warning letter, you are usually given two weeks to respond.

What do I do if I get a CCJ?

If you get a CCJ, it should also include a copy of the Financial Conduct Authority (FCA’s) default information sheet, detailing what you need to know.

It is also highly recommended that you obtain free debt advice if you are given a CCJ from the likes of Citizens Advice Bureau or other non-profits. This can be helpful in terms of deciding what your next step will be. It also ensures you are dealing with the claim correctly so that your circumstances are taken into consideration regarding how you repay the debt.

Should I ignore a CCJ?

No, ignoring a CCJ does not make the situation go away. All it means, is that your circumstances will not be taken into account, and the court will still issue the CCJ regardless. As a result, ignoring the situation will only work against you.

Is there a deadline to reply to a CCJ?

Yes. If you receive a CCJ by post, you will have only 14 days in total to reply to it. To reply, you are required to fill in the reply form, providing detailed information regarding your income and outgoings.

What are my options with a CCJ?

When filling in a reply form for a CCJ, your options are as follows:

  • To admit the claim if you are in agreement about the amount you owe to creditors
  • If you disagree, you can file a defence about the amount owed
  • Alternatively, submit an acknowledgment of service, but state that you need more time to defend the claim (more than 14 days). This would be to organise your defence

What can the court do?

The court may decide to:

  • Make a judgement requiring you to pay the debt off in instalments
  • Make a judgement requiring you to pay the total amount upfront

What happens if I don’t keep to the terms of a CCJ?

If you fail to keep to the terms of a CCJ issued against you, the implications can be serious. At this stage, the creditor will most likely ask the court to enforce the debt. This can be done in a number of ways:

  • By taking bailiff action
  • Through a charging order
  • Through an Attachment of Earnings Order

Will a CCJ affect my credit record?

Yes, unless you pay the CCJ in full within 30 days after receiving the judgement, it will go on file. A CCJ will remain on your credit record for six years and has the potential to damage your credit score.

A bad credit score makes it harder for you to obtain access to credit in the future, or to receive competitive interest rates. However, there are ways you can improve your credit score.

Can you get loans with a CCJ on your credit file?

There are some lenders who are willing to offer what is known as CCJ loans. Most lenders see a CCJ on a credit file as an instant rejection, but some others are willing to take a view.

For instance, because a CCJ can last 6 years, it can become ‘satisfied’ is paid off in full and since 6 years can be a long time, a lot can change for an individual’s circumstances. So even though they have a CCJ, their credit score could be constantly improving and their recent repayment record could be good.

If the borrower has a CCJ and generally has poor credit, there may be lenders who are willing to offer finance on the basis of having a guarantor or valuable security such as a car or property.

What is a Credit Limit?

A credit limit refers to the total amount you can spend on your credit card each month and this can go up or down depending on your spending patterns and the provider’s criteria. If you spend over your credit limit, you will usually be charged fees.

Credit limit example: if you have a credit limit of £1,000 and you have already spent £500, then you will only be allowed to spend another £500 as this is your total credit limit.

You should aim to pay off the balance in full each month so that you do not accrue high levels of interest. In addition, when this amount is paid off, it means your original credit limit is reinstated and you can spend up to the original credit limit amount once again.

How do you find out your credit limit?

Finding out your credit limit is easy, and credit card providers are required to be transparent about it by the FCA. When applying for a new card, you are informed of the maximum limit you can have prior to going through a credit check (leaving a hard search footprint on your file).

Otherwise, if you need a reminder, you can check your credit limit in a variety of ways:

  • Looking at your most recent credit card statement
  • Contacting your card provider by phone, email or post
  • Signing into your credit card account online or via the app

How is a credit limit calculated?

The underwriting process used by credit card providers determines your credit limit, as well as the level of interest you will be charged on your card.

Generally speaking, the underwriting process involves using proprietary methods and other formulas to calculate your credit limit. Keep in mind that different underwriting methods are used by credit card companies.

Things taken into account during the underwriting process may include:

  • Your credit history
  • Your repayment history
  • Your debt-to-income ratio, if you have one
  • Your income
  • Your employment

Can your credit score affect your credit limit?

Yes, typically the better your credit score, the higher your credit limit. If you start to miss payments or your credit score falls, you may be offered lower credit limits. However, it will vary from provider-to-providers.

With most cards, a hard credit search will be carried out to see if you:

  • Have missed payments in the past, and if so, how recently and how many
  • Have outstanding debts (this includes other credit cards as well as short term loans, overdrafts or a mortgage)
  • Existing credit that you have (for example another card or an overdraft you currently aren’t using)

Can a credit limit be changed?

Yes, it is possible for a credit limit to increase or decrease.

You could request for your credit limit to be raised and likely be approved if you have used it regularly and made prompt repayments each month.

In some cases, the credit limit is automatically raised by your provider or you may be notified by them that you can raise the limit if you so wish.

Your credit limit could also be decreased. Reasons for this can include the following:

  • You have missed minimum card repayments
  • Exceeding the credit limit
  • Not using the credit card regularly
  • Your credit score has got worse since taking out the credit card, through using other products

What happens if I go over my credit limit?

You should avoid going over your credit limit as there can be implications for doing so. For example:

  • You might not be able to use the card until some of the balance has been paid
  • You will usually be charged a fee by the credit card provider
  • It could lead to a black mark on your credit file, making it harder to access credit in the future
  • A credit limit reduction could be implemented
  • You may be charged a higher APR

Things to Remember When Applying For a Loan

If it is the very first time you have decided to apply for a loan or have very little experience in the world of loan products, then you may potentially feel a little overwhelmed. It can be hard to know which loan product to choose, and what may be a better type of loan product to you if you know little about the differences between products.

Making sure that you are completely clued up about the different kinds of loans and the potential advantages and disadvantages of the main categories of lending, is vital before you decide to apply for a loan.

In this guide, we talk about some of the most important points you should take into consideration when you are making an application for a loan.

Consider how you are going to repay your loan

If you are unable to keep up with your repayments for a short term loan, there may be added fees or you will be continued to be charged daily interest if your loan is still outstanding. Therefore, it is always important to think about how you are going to repay your loan, whether it is through savings, income or an upcoming bonus. You should avoid taking on other debts, budget efficiently and manage any other upcoming expenses.

Pick the most convenient repayment date

With many lenders, including The One Stop Money Shop, you can select your repayment date for your collections to come out of your bank account, whether it is the last working day of the month, the last Friday or a specific date e.g 15th or 25th.

Customers will usually choose the day most convenient and when they will receive their income from work, although you may want to give yourself an extra day or choose the last day of the month so you can wait for your income to clear and to re-organise all your finances.

Avoid applying for too many loans

If you are looking to apply for quick loans, you may be tempted to apply for numerous loans on one day or during one sitting. However, you should be aware that applying for too many loans, especially payday loans, can have a negative impact on your credit score and other lenders may treat this with caution if they believe that you are trying to take on too many loan products in a short space of time. This may suggest an urgency for money or even fraud.

Your credit score can determine the loan rate you receive

Another thing that you should keep in mind is that whether you have a good or bad credit score can impact the interest rate you receive for the loan you have applied for, or it could be the difference between being accepted or declined for a loan in the first place.

Alternatively, if you have a poor credit score, but get approved for a loan, it is likely that you will not receive the most favourable rates available for the loan. For example, you may have to pay a higher APR, and may not be able to borrow as much money as you would have if you had a good credit score.

Understand how the representative APR works

An important thing to be aware of when it comes to loans is that you may not necessarily get the rate advertised. This is down to the way the Representative APR works. It means that the lender is only obliged to give the advertised rate to 51% of all successful applicants. In terms of the other 49% who are approved for a loan, the lender is able to decide what will be the APR. See how APR works for more information.

Why Did I Not Get The Rate Advertised For My Loan?

A common question that is asked about loans is why did I not receive the rate advertised? This can leave borrowers feeling particularly confused, especially if they have seemingly met the eligibility criteria.

We take a look at some of the main factors that can determine the loan rate you end up receiving when applying to borrow money.

To give an overview, the rate you are charged by a lender may be specific to manage your risk and likelihood of paying on time, taking into account:

  • Credit status
  • Income
  • Affordability
  • Other outstanding loans
  • Whether you are a repeat customer

How the representative APR works

In order to understand why you have potentially not ended up receiving the advertised loan rate, it is important to know how the representative APR works.

The representative APR is only available to just over half (51% in total) of successful applicants. This in line with the Consumer Credit EU directive. The directive states that this is a fair approach regarding lending practices, as it means that lenders will need to provide the advertised rate to at least half of all borrowers who have made a successful application for a loan.

However, it does also mean that lenders have the autonomy to charge you a higher APR if you happen to fall into the other 49% of successful applicants, which is one of the reasons why you may not receive the advertised rate.

This considers that every applicant will have different requirements and eligibility in terms of income, affordability, credit scores and more. So whilst a lot of people will be eligible, so many be offered different rates according to the lender to manage risk. For instance, those with poor credit scores are often charged higher rates of interest to manage the risk of potential default.

How the typical APR works

The typical APR means that the rate advertised for the loan needs to be provided to at least 66% of successful loan applicants. However, there are a number of different factors that may determine if you receive this, such as the length of the loan needed and your credit score. 

APRs have often look inflated, because they are based on an annual product, so whilst they may be relevant for 12 month loans, they may seem a lot higher for 6 month and 9 month products.

For more information, read our guide on What is APR?

Are you already a customer with the lender?

You may or may not receive the advertised rate depending on your history with the lender you have applied for a loan from. For example, if you have already taken out a variety of loans in the past, and managed to pay these back promptly without difficulties, it is likely to increase your chance of being able to obtain the advertised rate, or lower, as it demonstrates trust.

Equally, if you have paid on time but now you have more loans open and your affordability is more stretched, you may still be offered another loan, but maybe at a higher rate – again to manage the potential risk of default.

The importance of affordability checks

It is also possible that you did not get the rate advertised for the loan you’ve applied for due to affordability checks that have taken place and the criteria of these checks can vary from lender to lender.

To summarise, an affordability check when it comes to short term loans products refers to the ratio between your income and the level of debt you could possibly afford.

In order for lenders to determine this ratio, they may ask you for monthly expenses for a variety of things such as your mortgage payments, credit card payments or average food and entertainment costs.

Having received this information, the lender will consider if it would be possible for you to pay the advertised rate taking into account these other variables. As a result, this may mean you have to pay a higher APR.

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How Do Unsecured Loans Work?

Interested in applying to borrow money, and potentially get an unsecured loan? It is worth making sure that you are aware of everything you need to know about one, before making an application. In this guide, we explain the main things that you need to know regarding unsecured lending.

What is an unsecured loan?

An unsecured loan enables the borrower to borrow a few hundred pounds, or potentially thousands: either from a bank or building society, or a specialist lender like The One Stop Money Shop.

What is the difference between an unsecured loan and a secured loan?

The main difference between an unsecured loan and a secured loan is that with the former, there is no requirement for you to put down assets as collateral for the loan you are taking out in order to meet the eligibility criteria. Typically, assets that are put down as security include equity in your home, or a vehicle – lowering the level of risk to the lender in lending to you.

In terms of examples of secured loans, typical types include logbook loans, car loans and mortgages. With secured loans, you will tend to be charged lower amounts of interest for taking one out than an unsecured loan and also borrow a higher amount for a longer period of time.

However, unsecured loans can have major benefits: as the borrower is not required to put down assets in order to obtain finance, it tends to present a lower level of risk for the applicant. This is because if you are unable to keep up with repayments for a particular reason, you do not run the risk of potentially losing valuable items, or having your property repossessed by the bank or lender. With a secured loan, the lender legally has the right to do this.

Failing to keep up with repayments for an unsecured loan will have a negative impact to your credit rating and result in late fees added to your total bill.

What are the different types of unsecured loans available?

There is a wide range of unsecured loan products available on the market for you to choose from, depending on your needs and individual circumstances. Some of the main categories can include:

  • Credit cards
  • Peer to peer lending
  • Emergency loans
  • Payday loans
  • Personal loans
  • Home improvement loans

One thing to keep in mind when it comes to unsecured loans, is that they usually charge higher interest rates due to the lack of collateral used against a loan. However, those with the best credit scores and affordability can sometimes receive rates as low as 3% through mainstream banks and lenders.

Can I get an unsecured loan if I have bad credit?

With a number of lenders, it is possible to still get a loan of this kind with bad credit. However, in order to be able to do so and to alleviate the element of risk for them, they may decide to lower the borrowing amount or credit limit, or charge a higher interest rate than usual.

Regarding the total amount you will be able to borrow, this will largely be dependent on your current credit score and your recent history of paying of loans or similar credit. If you have a CCJ loan or recent defaults, this will not help your chances of approval, but if you are in a good cycle of paying off loans on time and your score is improving, this can help the success of your application.

For more information, see loans available for people with bad credit.

What are the eligibility criteria for an unsecured loan?

Interested in applying for an unsecured loan? Before applying, you should always make sure that you meet the eligibility criteria. Whilst the exact requirements may vary from lender to lender, typically things required include:

  • The applicant must be over the age of 18
  • You will need to be a UK resident
  • Have a valid debit account
  • In full or part-time employment

What if I default on payments for an unsecured loan?

If you take out and end up defaulting on repayments, then unlike a secured loan, you will not run the risk of losing assets, such as your home or your vehicle.  Instead, they are likely to contact you by sending a letter, phoning or offering an alternative lending arrangement.

With regards to unsecured loans, the biggest issue with defaulting will be the impact on your credit score. This could make it harder for you to access funding in the future, should you need it.

In addition, you will likely be charged fees for defaulting. This includes a default fee, that can be £15 in total and it is a one-off charge. You could also be charged daily interest for each day that you have not paid on time.