How to apply for a loan and get approved
Whether you have excellent credit, fair credit, or limited credit history, applying for a loan can be nerve-wracking. Fortunately, you can learn how lenders determine loan eligibility, giving you insight into which loans you might qualify for before applying.
Shopping for a loan is not like shopping for a laptop or a new pair of jeans. When you scroll through comparison tables it might appear that loans come with a set price tag, most will only show you a representative interest rate and an example of how much a loan will cost you over a fixed period of time. How much it actually costs to borrow money varies widely between customers, and is based in no small part on your credit score.
What credit score do I need for a loan?
Loans are advertised with an Representative Annual Percentage Rate which is the amount a loan will cost you each year, taking into account interest as well as any fees or charges.
However, this is representative, and only 51% of those who apply for a loan must receive the advertised APR - usually the borrowers with good to excellent credit scores. Many more will receive a higher APR, and end up paying more. Some will not be accepted at all because their credit score is not good enough.
» MORE: How to improve your credit score
Loans come in different shapes and sizes, from those that help you with home improvements or a wedding, studying or buying a car, to those you take out to buy a new house. But they can all be broadly categorised as either secured, or unsecured.
Secured loans, which include mortgages, are borrowed against an asset, such as a property. It means that if you fail to repay as agreed, the asset can be reclaimed by the lender and sold to cover the outstanding sum. Generally this means the lender is taking on less risk, as they have a back up if you turn out to be an unreliable borrower, and so will often lend to a broader range of customers including those with poorer credit scores.
Unsecured loans, often called personal loans, do not require you to put up an asset as collateral. Instead, the lender will want to make a confident assessment that you are going to honour the terms of the loan so they don’t lose out. It tends to follow that the more reliable a borrower you are, the less expensive it is for you to take out the loan. This means those with poor credit scores are likely to pay higher rates or struggle to take out an unsecured loan from mainstream lenders altogether.
What is a good, fair, bad credit score?
- There are three credit reference agencies in the UK, Experian, Equifax and TransUnion. Each keeps a record of your financial relationships, and will give you a credit score. Experian's range from 0 to 999.
- Equifax’s range from 0 to 1,000.
- TransUnion's range from 0 to 710.
Each agency also has a scale for what score it considers to be good, fair or poor. A good score from Experian, for example, is between 881 and 960, for Equifax it’s 531-670 and TransUnion, 604-627.
» MORE: How to check your credit score
Each lender will have their own way of scoring you, too, based on information they take from the reference agencies, but the agencies provide a helpful guide to the types of loans you’re likely to be able to apply for.
Loans for good credit scores
If you have a good or excellent score, you are in the best position to borrow affordably and are most likely to be accepted by any lender you choose for personal loans and secured loans and mortgages.
» COMPARE: Personal loans
You should, therefore, be guided by cost. Generally, the longer you borrow, the more you borrow, the more the loan will cost you.
Watch out for fees and charges for repaying a loan more quickly than agreed, too.
» MORE: How to choose a personal loan
If you have a good or excellent credit score and want to borrow a smaller amount of money, a few hundred or a few thousand pounds, then an interest-free credit card could be a better bet. The most competitive cards are available to those with the best credit scores, and unlike a personal loan, if you clear your card in full each month, or take out a card with a 0% offer, you won’t pay any interest at all. Be sure to keep to the repayments offered though, as credit cards are an expensive form of borrowing if you fall outside of the deal you have taken out.
Loans for fair credit scores
A fair credit score with Experian is considered to be between 721 and 880, for Equifax it’s 439 to 530, and TransUnion it’s 566 to 603.
You should still be able to borrow from mainstream lenders with a fair credit score, but you may not be accepted for their full range of loans or cards, and you should expect to be charged a higher interest rate on money you borrow than if you had a good or excellent score.
You are unlikely to receive the advertised APR from all lenders and will probably end up paying significantly more, or have your application rejected if you go straight to a lender that is open to all of the market. You may get a better deal going to a lender who advertises directly to those with fair or poor credit scores.
Applications for loans will show up on your credit file and too many applications will be off-putting to lenders, and will damage your credit score further.
If you have a fair credit score you should always use a soft credit application first to see if you are likely to be accepted and how much you might be charged interest wise.
Loans for poor credit scores
If you have a poor credit score you will find it harder to borrow from mainstream lenders or be accepted for the most competitive loans, mortgages or credit cards.
There are specialist lenders that provide loans for those with poor credit scores, including subprime lenders or lenders that offer loans secured against a property. You will however, end up paying extremely high interest rates on smaller loans.
You may also consider a guarantor loan where a friend or relative agrees to step into pay a loan if you are unable to do so, giving the lender confidence to accept your application, but know these will tie your finances to another person and if you fail to pay on time their credit file could be damaged too.
Another option would be to hold off from applying for a regular loan until your credit score is better. In the meantime you could use a credit building loan or credit card that will help you improve your score by showing you are able to repay money owed on time.
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Laura is a journalist and author, writing about money since 2008. Including writing for The Times for 9 years. She believes finance doesn't need to be complicated. Author of Money: a user's guide. Read more