Whenever you apply for finance, the lender or bank you’re applying with is going to assess your credit profile and this will inform them if you are eligible for the finance that you’ve applied for. Knowing what makes up this assessment can be helpful, particularly if the finance you need is for an expensive asset like a motor vehicle or home loan.
Assessment criteria will include checking more obvious things, but there’s more to it than that. Here are some of the bigger things that will be used in your application assessment:
- Your employment history and your current employer.
- Your income and income sources via a payslip or bank statements.
- Your income security and how long you’ve been earning your current salary or have been with your current employer.
- Your existing debt portfolio and how well you service it by making the required payments.
- Your debt-to-income ratio, which is a check of how much of your income you use to service existing debt. Lenders want this to be 43% or lower for big asset purchases.
- Your credit score. This is a score from 300 to 850 given to your credit profile based on a number of factors including how much you rely on credit each month. This should be above about 650 to make it a good score.
Once all of this has been assessed and depending on the type of finance you’re applying for, you’ll be offered a finance deal which will include costs and interest rates that can be based on your credit profile. Keeping your credit profile in good shape will mean your credit will likely cost you less over the lifespan of the agreement.
Next up, we have 5 ways to borrow money when you need it.
Secured vs Unsecured Loans
It’s important to be able to comfortably service the monthly payments of any new and existing debt when you apply for finance. When you do take out a loan, some providers may require some form of collateral to secure them. This collateral can be an existing asset or investment and it will be tied to you paying the instalments and servicing your debt. If you default on a loan, this attached collateral can be seized by the lender or bank to recover your outstanding credit balance.
If a loan doesn’t require collateral, it’s an unsecured loan, and while it might not have an asset attached, lenders may hand over your account to a collection agency or institute legal proceedings to recover outstanding amounts if you default.
Personal Loans
Personal loans are a versatile and accessible unsecured loan which can be a finance option when smaller amounts of money are required for any number of different reasons. They offer a functional way to consolidate debt, cover any emergency expenses that may arise that you can’t afford without one, or to pay for large appliances and recreational vehicles. A personal loan is a non-revolving credit that pays out a pre-determined lump sum to you which you are then required to pay back over an agreed number of instalments, usually short term.
Personal loans can vary greatly in the interest rate and fees, so doing due diligence and comparing personal loan offers on sites like Smarter Loans might save you a considerable amount of money. If you’re juggling many smaller loans, then consolidating them with a personal loan can also save you money in the long run and might reduce the total monthly cost of servicing them.
Payday Loans
A payday loan is a microloan that is designed to help you bridge the gap between paydays should you just not make it and you have expenses that still need to be covered, like groceries or transport costs, or you find yourself without the cash for a small medical or other kind of emergency.
Payday loans are accessible and often don’t require strict credit checks to be available thanks to their lower requirements than other loans. They are generally slightly more expensive than other forms of finance, however. If you’re looking for a quick and easy way to compare direct payday loans, then making use of the services offered by Payday UK can be useful. They can compare the offers of several payday loan lenders at once, making it easy to compare offers and find the best one for you. Find more information here about their services.
Asset Finance
Asset finance is one of the simpler types of loans because while it’s a secured loan, the asset itself is generally the collateral. Asset finance is used for loans of a higher value and represents a longer loan period than other finance methods.
They’re usually offered with a fixed APR and all loan costs and administrative fees are built into the monthly instalment. If you’re buying a car or other vehicle, you’ll almost certainly be making use of asset finance. A home loan is another type of asset finance.
Overdrafts
An overdraft is one of the two types of revolving credit we cover in this list. Revolving credit differs to the fixed style of credit offered in a personal loan because you’re given a credit limit and as you repay this type of credit, the balance under the credit limit that you repay becomes available for use again, thus it is revolving. An overdraft is an extension of your current account by letting you over-draw your account. They’re a flexible option for when you need to borrow money because often banks won’t charge for the facility unless you use it.
Interest on overdrafts is charged at a single annual interest rate (APR). While they might not be suitable for use to make purchases, they can be useful because you can avoid costly bounce fees and suspension of service from debit orders that you might not have enough available money to cover in your account. If you use your overdraft often, then a credit card might be a cheaper revolving credit option for you.
Credit Cards
The classic credit card is another type of revolving credit option that, structurally, works much the same as an overdraft in the way that paying it off gives you access to the credit again provided you have available funds below the credit limit. Credit cards are usually cheaper for continued use than an overdraft as they are designed to have a credit balance.
Many credit card providers offer incentives for early settlement like a period of 0% interest and they can often be added to a banking portfolio as a bundle with a current account to reduce the monthly fees. They can be useful for smaller purchases of appliances and unexpected expenses and many allow you to charge purchases to the card with either flexible or fixed repayment options. Interest rates vary and will be based on your personal credit profile.
These are a few of the ways you can access credit if you need it, but they are not the only ways. Store credit cards that are offered by big retailers and other credit options exist, but the ones we’ve listed are the most flexible. Remember when borrowing money to be responsible and make sure you can afford the repayments of any credit you use before you take it. Don’t forget to shop around to compare credit details before you commit!