According to some financial experts, you should have worth of living expenses minimum of three months. So, you can avoid rushing to direct lenders to borrow money. Having a considerable size of savings is extremely crucial to cushion a financial blow. Unfortunately, it is difficult to keep an adequate amount of savings when unforeseen expenses halt your chances of financial progress. It is this situation where think of borrowing money. It can save if you lack sufficient savings to fall back on.
Online lenders have made it convenient to borrow money.
- You simply have to fill in the application form.
- Then, your lender will run an affordability check.
- You will get money directly in your bank account when your lender is sure that you can repay the debt.
There is no lending institution can agree to your loan application without performing a credit score check. With lower credit profile, you have lesser chances of securing a loan.
Does that mean you are not eligible to get cash loans with bad credit?
Personal loans are of two types. These are secured loans and unsecured loans. In secured loans, you will need to have collateral. In contrast, you get approval on unsecured loans based on your repaying capacity only. All small unsecured loans are known as cash loans. No lender will restrict you from applying for small emergency loans when your credit score is poor. They will charge high interest rates to lower their risks involved in lending you money.
- The size of cash loans for low credit score is quite small, so most of the lenders might be willing to lend you without running a credit check.
- Small personal loans are typically aimed at funding small emergencies.
- Therefore, lenders will not require you to undergo a lot of formalities.
Qualifying for cash loans with bad credit is quite easier. You should simply have to prove your lender that you can repay the debt on time. Here is how you can prove your repaying capacity:
- Income and employment
You should be earning a steady source of income to qualify for bad credit cash loans. At the time of filling in the application form, you will have to provide your financial account. A lender expects you disclosing true details of your monthly expenses, so they can get an idea of your budget has room for making additional payment.
You should have a passive income source if you are unemployed. Such sources include rental income and freelance income. Your lender will carefully analyse your financial situation to decide whether to approve your application.
- Repaying capacity
Just because you have an income source, it does not mean that your repaying capacity will also be strong. A strong repaying capacity suggests your monthly budget has the scope to make a debt payment on time. A registered lender is supposed to stress on your repaying capacity more than your income source.
Collateral is needed when the borrowing sum is large
Personal loans on small amount may not need collateral even if your credit score is poor. It is because the maximum loan amount you can avail of is up to £1,000. If want to borrow a higher amount like £10,000 or above, you will need to arrange collateral.
The worth of an asset you secure against your loan should be more than the borrowing sum. Lenders particularly seek higher worth security so they do not have any difficulty covering back their money in case you refuse to pay off the debt.
Your lender will make you familiar with what assets they will want as collateral. You can bring another person as a guarantor if you are unable to secure your loan against an asset. There is a condition. With no guarantor, one must have a suitable credit score. Your lender can question the person who to repay the uncertain debt if you miss any repayment or default in between the loan term.
It is not easy to arrange a guarantor because their credit score will plummet when you make a default. It is too risky for anyone to act like a guarantor.
Tips for improving your credit score
Here are the tips for improving your credit score:
- Focus on a credit mix
Having a variety of debts on your credit report will have a positive impact on your credit score as it demonstrates your ability of tackling different types of debts together. Your credit score will be badly affected if your credit report has only one type of debt. Diversify credit mix to do up your credit score.
- Lower your credit utilization ratio
A high credit utilization ratio can seriously affect your credit score. Financial experts suggest having not more than 30% of your credit card utilization ratio. The ideal ratio is 25%. Pay off your credit card balance as soon as possible to bring it down.
- Make payments on time
A lender wants to see how likely you are able to make payments. Your credit report should not have a record of missed payments and defaults. Otherwise, you will see a significant drop in your credit rating. Make sure you pay off your accounts on time including credit card bills.
- Credit length is important
It is not surprising to see people closing their old credit card accounts to save money on monthly fees. Unfortunately, doing so will badly affect your credit score. Closing of such credit cards will reduce your credit length. In addition, your credit utilization ratio will go up because the total credit card balance will reduce.
The bottom line
A bad credit score should be fixed even though you have a chance to borrow money. It will help you avail yourself of lower interest rates. You must have two things to show to the lender. First is a steady income source and second is a strong repaying capacity to be eligible for a cash loan with a bad credit score.
Suppose you require getting a larger loan amount for startup. For this, you can back your loan application with collateral or a guarantor. This will help you to qualify for long-term personal loans, and there will be lower interest rates.
You should instead try to improve your credit score. Pay off your bills on time. Diversify your credit mix. Lower your credit utilisation ratio and avoid closing older accounts.