Qualifying for bad credit loans is not a cinch, although, unlike banks, direct lenders have built a reputation for helping subprime borrowers to tide them over during emergencies. Small in size, these loans are required to be discharged in full on the due date, which is unlikely to be beyond a month. Because direct lenders accept applications from bad credit borrowers, it does not insinuate that you cannot be declined.
At the time of reviewing your application, a lender would run an affordability check, and if they believe that you are highly likely to commit a default, they will repudiate your loan application.
Some lenders are flexible with the acceptance of loan applications from subprime borrowers, but getting such loans from them could be risky. They could be loan sharks or unregistered lenders who charge exorbitant interest rates to make a profit from your vulnerable situation. Be wary of such lenders. It is enjoined to take out loans from reputed and registered direct lenders.
When you need money for emergencies, you generally prefer to get an instant injection of cash. No matter how soon a loan is disbursed, no lender would make a lending decision without a perusal of your credit score. Therefore, it is vital that you improve your chances of getting approval for a bad credit loan.
Ways to increase your chances of a bad credit loan approval
Here is how you can increase your chances of a bad credit loan approval:
Check your credit report for errors
You should check your credit report to see if there are any unidentified accounts. Chances are, you have already become the victim of identity theft. Do not forget that your lender will peruse your credit report, and if your credit score is poor because of unpaid balances, they will most likely turn you down.
You can obtain a free copy of your credit file from all credit bureaus once a year. Go through it and file a dispute. Credit reference agencies take about a month to rectify errors.
Meet the eligibility criteria
You all know that you need to meet the basic eligibility criteria to get loans for bad credit from direct lenders – you must have come of age, be the resident of the UK, and have a stable source of income – but what additionally you need is the bare minimum credit score that they have set for approval.
If a lender has set the minimum score for acceptance of applications 500, you cannot put in an application with a credit score less than that. Otherwise, your application will be rejected without further ado.
Avoid multiple credit applications
When you apply for a loan, a lender will run hard inquiries that show up on your credit report. These inquiries make up 10% of your credit score. Multiple credit inquiries can brutally affect your credit rating.
Therefore, it is suggested that you avoid putting in applications to multiple lenders within a short span. Apply to only one lender at a time. If your application has been refused, then you should contact a new lender.
Demonstrate affordability
In case of a poor credit rating, a lender would always charge high interest rates as there is a high probability that you will likely make a default. You should try to offset this impact by showing your repayment capacity. Your chances of getting approved for bad credit loans are slightly higher when you have a stable and regular income source.
Consider a guarantor
You should arrange a guarantor with a good credit history. Arranging a guarantor increases your chances of getting these loans approved because your lender can call on them when you fail or refuse to meet your repayment obligation.
However, at the same time, it is suggested that you be careful about arranging a guarantor. They must know the consequences they will have to bear if they abdicate their responsibility. Falling behind on payments will not only ruin their relationship with the guarantor but it will also affect their credit score.
Keep debt-to-income ratio low
A debt-to-income ratio represents how much debt you owe against your income. This ratio does not affect your credit rating, but lenders take stock of how much debt you owe. The more debt you owe, the higher the chances of defaulting. You should always try to keep this ratio as low as 30%. Here is how you can reduce your debt-to-income ratio:
- You should pay off all your debts on time. The outstanding balance keeps accruing the loan amount, and hence the size of the debt keeps accumulating.
- Avoid having short-term high-cost debts such as payday loans. If you have not been on these loans for at least years before applying for bad credit loans, you can quickly get approval.
- Focus on your credit card bills too. Make sure that you do not utilise more than 30% of the balance at a time. Pay off all credit card bills on time in full. Bear in mind that your debt-to-income ratio includes credit card balances, too.
If you already owe too much debt and do not understand what you should do, try to consult a debt advisor. They will likely provide you with the assistance you need.
Borrow only what you need
Your income sources will be evaluated to decide whether or not you can afford to pay back the debt. Since you are to pay interest on top of what you borrow, it is crucial to know how much it would cost you in total. Online loan calculators can help you know the estimated cost. As the actual cost will be higher than the estimated one because of fees, you should try to reduce the borrowing amount, so the payment can fit in your budget.
The final statement
In order to increase your chances of approval for bad credit loans, you should try to borrow what you can afford, reduce your debt-to-income ratio, consider a guarantor, and demonstrate affordability. However, it is recommended that you ameliorate your credit score.
