For many people, credit scores are an enigma which are as intangible as they are misunderstood.
Yet since the financial crisis of 2008, they’ve become paramount in all of our abilities to access credit. After all, given that personal loans are not secured against another asset, a credit rating is the primary means by which a lender can determine the risks of lending money to you. So if a loan is what you’re after – and an affordable one at that – it’s imperative that you get your house in order.
What’s included in my credit score?
In short, your credit rating encompasses all details relevant to your borrowing habits. All of the following will feature in the key information a lender analyses when considering whether to grant you a loan:
- Personal details
- The number of bank accounts and credit cards you have
- Records of late payments, defaults or bankruptcies (over the last six years)
- Details of the person you share your accounts with (if applicable)
- Whether you are registered on the voters’ roll
- Any information relating to fraud or identity theft – either with you as the victim or perpetrator
- Errors or county court judgements
- Your ability to meet other obligations; be that rent/mortgage payments, or things like mobile phone contracts
All of the above are crucial in demonstrating your suitability as a candidate for a personal loan, and you can quite easily improve your credit score with a few simple tricks. For example, paying off any late bills, reducing overdrafts or signing up and registering yourself on the electoral roll can make a significant difference.
Additionally, taking out new lines of credit, or making purchases with a repayment scheme (eg: a mobile phone contract) are quick and easy ways to show that you’re someone who pays off their debts. Remember, someone who has no record of debt, somewhat paradoxically, might score poorly in their credit rating, as by never having had any debt to service, the lender has no indication that they would have the discipline to pay off a loan if they did acquire one.
Getting your personal loan
Once your credit file is in shape, you should be on track to get a loan that works for you, at an APR you can afford. Personal loan providers come in all shapes and sizes, be that mainstream banks and building societies, or online platforms within the realm of alternative finance. With such a myriad of options, it makes sense to do your research, and find the loan that works best for you.
Bear in mind, there are other things to factor in besides the APR. So ask yourself, and ultimately the provider, the following questions:
- What’s in the fine print, and what penalty charges are there?
- Is the interest rate fixed?
- What are the repayment terms?
- Can I repay the loan early, and if so, at what cost?
- How easy is it to apply?
One of the reasons online platforms such as peer-to-peer (P2P) lenders have emerged so strongly in recent years is in light of the points above. Firstly, they are able to offer highly competitive APRs due to the efficiency of their business model; one which matches people who are willing to lend their extra funds directly with those seeking a personal loan. With no intermediaries and minimal red tape, this streamlined process allows consumers to reap the benefits.
In addition, the online application process typically takes just a couple of minutes, while incoming FCA regulation means there is no fine print designed to catch you out. Some P2P platforms such as Lending Works even offer you the chance to make over-payments and early repayments with no charge, making it a particularly attractive option to source a loan.
Nevertheless, the final choice is up to you. The important thing to realise is that a good-value, affordable personal loan need not be out of your reach, nor is it something to fear. In many cases, it can be a constructive solution to improving your short and long-term finances. They key is to ensure that you select the right one for you, and that all starts with making sure that your credit file is as sound as a pound.
Main image and P2P photo by Simon Cunningham @ Flickr. UK credit score image by DumbFunded.