Tim Leonard
Sam Bromley
A no credit check loan is what you might want to look for if you have been rejected for a loan or have bad credit. You’re probably thinking that if your credit score is holding you back, then why not get a loan with no credit check, where the lender won’t want to review your credit score.
But if you’re searching for loans with no credit check because of bad credit, there are other borrowing options you could explore, as well as opportunities for building your credit history.
What are no credit check loans?
While you may come across the phrase ‘no credit check loans’ when searching for credit, regulated lenders in the UK are required by the FCA to assess your creditworthiness before offering you a loan.
A credit check is likely to form part of that assessment because a good credit history helps show that you can afford the loan and pay it back.
The FCA has told lenders that they shouldn’t use phrases such as ‘no credit check loans’, ‘no credit checks’, ‘loan guaranteed’, and ‘pre-approved’ when advertising their loans. Using these terms makes it seem easy to get a loan, and doesn’t give people adequate warning about the risks of borrowing.
If you find a lender willing to offer you a loan with no credit check or any other affordability assessment, it’s likely that it is not regulated by the FCA. You won’t be protected if anything goes wrong.
An unregulated lender could be a loan shark. These illegal lenders typically charge high interest rates and often use intimidation and violence to get money from people who have borrowed from them.
Why do lenders perform a credit check?
The FCA requires that firms use enough information to assess someone’s creditworthiness – and a credit check gives lenders in-depth details about your finances and how you’ve managed credit in the past. It helps them determine whether you would be able to repay the credit, and how risky it may be to lend to you.
The FCA says that most firms will use data from credit referencing agencies as part of their checks.
A credit check should only form part of their assessment though, and you should expect responsible lenders to ask questions about your income and expenditure too, for example.
Credit checks can also protect you from identity fraud, helping lenders work out whether you are who you say you are.
There are two types of credit checks. A hard credit check is a full examination of your credit history, which will usually be conducted before you’re finally approved for credit. Hard credit checks are recorded on your credit report, which means that other lenders or companies can see you’ve made a credit application.
Multiple hard credit checks in a short space of time could affect your credit score.
A soft credit check, on the other hand, is a quicker assessment that only looks at certain parts of your credit report. A soft check gives both you and the lender an idea of whether any credit application you formally make might be successful. You might get a pre-approved loan based on this initial soft check.
Importantly, a soft search can’t be seen by other lenders or companies that might want to assess your credit situation and it will not affect your credit history.
Where can I get a loan with no credit check?
While most regulated lenders will perform a credit check, you may still be able to borrow money without a credit check from certain institutions.
Pawnbroker
Pawnbrokers, or pawn shops, allow you to borrow money based on the value of an item, such as jewellery, precious metals and electrical goods.
The pawnbroker values the item and offers a loan based on what it thinks it is worth. The pawnbroker may quote you a daily or monthly interest rate, but it must also show you the annual percentage rate (APR). You then leave the item with the pawnbroker and, if you repay the loan plus interest by an agreed date, you can get it back.
Even though they may not run a credit check, pawnbrokers are still regulated by the FCA. However, pawnbrokers can be an expensive way to borrow and you risk losing your item if you can’t afford to repay the loan. Borrowing from a pawnbroker also won’t help you build up your credit history, as repaying your loan won’t be reported to the credit reference agencies.
» MORE: What is a pawnbroker?
Friends and family
Depending on your situation, you may be able to borrow money from friends or family. This can be a way for you to borrow money without needing to go to a lender and undergo a credit check, especially if you’re struggling to get credit elsewhere. It can also help you to avoid high interest rates.
However, you need to be aware of the potential impact that borrowing from a family member or friend could have on your relationship, particularly if you find it difficult to repay the loan.
You can minimise the chances of problems occurring if you follow certain guidelines around borrowing or lending money to friends and family.
For example, to help protect both the lender and borrower from any future disagreements, you can put the agreement and the repayment plan in writing and make sure both parties are happy with the arrangement.
Keep in mind that borrowing from friends and family won’t help you build your credit history.
Credit unions
Some credit unions may offer certain loans without a credit check, such as a family loan. These are usually available to members who receive child benefit, which is used to make repayments. You would need to give the credit union proof that you receive child benefit.
How to build a good credit history
You may find it more difficult to access the credit you want if you don’t have a credit history, or have a poor one. This might not seem important if you don’t want to take out any credit right now. But starting to build up – or improve – your credit history should help when you apply for a form of credit in the future, whether it’s a loan, a credit card or a mortgage.
If you can build up your credit history before applying for credit, you may increase your chances of getting accepted and paying a lower rate of interest.
Some of the ways you can start to improve your credit score include:
- Registering to vote.
- Using a bank account responsibly.
- Setting up and paying direct debits.
- Checking your credit report and correcting any mistakes, such as typos or outdated information. You can check your credit history for free, without affecting your score.
- Joining a service, such as Experian Boost or Credit Ladder, which uses information about your rent payments, bills, and other spending to build your credit score.
» MORE: How to improve your credit score
Why is my credit history important?
Your credit history records information about your finances and how you have managed credit in the past, including loans, mortgages, credit cards, car finance and more.
A poor or non-existent credit history doesn’t necessarily mean that you can’t, or won’t, repay a loan. However it means lenders won’t have information about how you have previously handled credit, which may not give them confidence that you will repay the loan in full.
What are my options if I don’t have a good credit history?
It’s not impossible to get a loan without a history of making repayments on time, but it may be more difficult.
That being said, lenders will also consider your income, employment status, and other factors to determine whether to offer you a loan, so having a limited credit history may not rule you out.
Some firms are also using open banking. If you have online or mobile banking, this could let you share information from your bank directly with the lender, such as your balance, transactions and income. Some firms may place more importance on this information than your credit history and score when deciding on eligibility and rates.
There is a range of lenders that specialise in providing loans to people with a poor, little or no credit history, but these are likely to come with much higher interest rates to compensate for the perceived increased risk.
Many lenders will allow you to get a quote or check your eligibility for a loan by conducting a soft credit check, which doesn’t leave a mark on your credit file. You may have your loan pre-approved following a soft credit check, pending final approval.
If you decide to proceed, lenders will usually conduct a hard credit check, which will appear on your credit file. Beyond specialist unsecured loans, some other options may be suitable for people with limited credit histories.
Credit builder card or loan
Credit builder credit cards and loans are designed for people with limited or poor credit histories. If you take out one of these and make all your repayments on time, you can start to build up your credit history and improve your score. This may help you to access more types of credit at more competitive interest rates if you need to borrow in the future.
Credit builder cards will usually come with a low credit limit and high interest rates, so it’s important to clear your outstanding balance in full each month if you can.
You can also typically only borrow small amounts with a credit builder loan. They are only available from certain lenders, such as credit unions, and only if you meet certain criteria, such as having a low credit score or low income.
These loans may not work in the same way as a standard personal loan, so make sure you read the terms of each provider before applying.
Bad credit loans
Designed specifically for those with a poor or limited credit history, bad credit loans will usually have a higher interest rate than other types of loans.
Guarantor loan
When you don’t have a credit history and want a loan, applying with a guarantor could help. The guarantor acts as a form of security as they agree to repay the loan if you can’t make the repayments. This minimises the risk of lending to someone with no credit history, so it can help you get accepted for a loan and receive a lower rate of interest than you otherwise could.
The guarantor would typically need to be over 21 years old with a good credit score and a stable income, and they may also need to be a homeowner. Often, lenders also require your guarantor to be a close family member – a parent, for example.
Lenders will conduct credit checks on both the borrower and the guarantor.
Secured loan
When you take out a secured loan, you put an asset forward as security. This is typically a house, but it can also be another high-value item like a car. The security minimises the risk for lenders as they are entitled to repossess your property to get back the money they are owed if you fail to repay the loan.
So if you have no credit history, you may stand a better chance of getting approved for a loan if you choose a secured rather than unsecured option. However, you need to consider the risk that you could lose your property if you default on the loan, so you need to think carefully if a secured loan is right for you.
Where to get debt help
If you’re looking for no credit check loans because you’re struggling with your finances, it’s important to note that there are charities available that can give free debt help, such as:
- Citizens Advice
- StepChange
- National Debtline
Charities like these can help with things like budgeting and coming up with a plan to deal with your debt. They could also help you apply for debt respite schemes such as the ‘Breathing Space’ scheme in England and Wales and the Debt Arrangement scheme in Scotland. There isn’t currently an equivalent scheme in Northern Ireland.
Image source: Getty Images
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