So you cant get a loan?
It still can be incredibly tough to get a loan from banks and established loans companies.
Cheap loans are especially hard to find – which is ironic given how low the Bank of England base rate is at the moment.
So what do you do if you’re refused a loan? Don’t despair – we have some alternatives for you to explore.
- Zopa gives good rates for borrowers and lenders
- Credit Unions are straightforward and offer small loans
- If your credit’s good enough, try 0% credit cards
- Alternatives to loans
Remember, when getting a loan you should explore all the options.
If your credit is good…
What is Zopa?
Zopa is the first online financial ‘exchange’. It works by recruiting people who have money saved and want to earn interest on it – by lending money to others who need a loan with reasonable rates.
Essentially it’s people lending money to other people – whilst cutting out the banks!
How does it work?
Zopa isn’t weighed down by huge running costs like a bank, and so doesn’t need to make vast profits on its transactions. It can therefore pass these reductions onto its customers – so both borrowers and lenders get a better deal.
Zopa stands for Zone of Possible Agreement. This is the area between the lowest amount one person is prepared to get for something and the most someone else is prepared to give for that thing. What this means when it comes to lending money is:
- Zopa helps people get a good deal as it negotiates a figure that is between the least the lender is willing to earn and the maximum the borrower is willing to pay.
- So if a borrower wants to pay no more than 6% interest, and a lender will only lend for a minimum of 5%, Zopa is able to broker a rate between the two (say 5.5%) that leaves both parties happy.
The company itself makes money by charging lenders and borrowers a fee. Borrowers pay a variable transaction fee of up to £420 per loan, while lenders pay a small annual service fee.
Lenders may lend anything from £10 across any number of borrowers. Borrowers may take out a loan ranging from £1,000 -£25,000 in value. The loan term is typically set as being between one to five years – but the borrower can repay early if they choose, without incurring any extra cost.
It’s easy to apply, you just log on, put in your details and start lending or borrowing. Of course, it is a properly regulated financial institution so everyone has to have their credit checked and you have to have been on the electoral role for at least six years.
However, despite their credit-checking system, they have a more sensible approach than some banks (who judge you not just in terms of your credit reliability, but also your potential in making them money). Zopa is only interested in your reliability, and takes into account a variety of factors (including your credit history, existing loans, current cost of living, affordability of the loan, and so on).
If you pass Zopa’s credit-check as a borrower, you are placed into a category (A*, A, B, C or Young). A*’s have extremely reliable credit history. C’s, while having a reasonable record, are deemed more of a risk.
Young borrowers are those who haven’t been able to build a credit history yet and therefore are penalised by banks. Anyone who applies to Zopa and is under 26 years old goes automatically into this category regardless of their credit rating.
Lenders can choose which class to lend to. Generally, the lower your category, the more interest you’re likely to have to pay (to cover the increased risk). However, you still can get a very decent rate (as there are fewer overheads to pay).
To reduce any risk to the lender, if you lend £500 or more, your money is spread in lots of £10 amounts across at least fifty borrowers. So if someone defaults, it only affects £10 of the lender’s money. In any case Zopa has, as mentioned, a very low default rate and if any repayments are missed, a collections agency uses the same recovery process that banks use.
What are they?
Credit unions are set up and run by a group of individuals who have something in common – for example, they live on the same estate or in the same town, or they do the same job (hence a nurses’ or cab drivers’ credit union, for example).
There aren’t many credit unions in Britain but they are big in America, Ireland and many developing countries. They’re getting stronger here after some recent legislation, but they are still seen as ‘fringe’ lenders. However, if you have one locally you should certainly consider joining.
How do they work?
They are somewhere between a bank and a co-operative. They offer low-interest, easy-to-use saving and borrowing for their members. Members of the union invest any money they have in savings in return for a good and reliable savings rate. This money is then lent out to other members who need to borrow money at an affordable rate. So everyone benefits – lenders get a good rate of interest on their money and borrowers don’t have to pay through the roof.
As well as savings and loans, many credit unions also offer current accounts (allowing members to manage their money through services such as ATM machines and Direct Debit). You need to be an established member of a credit union before you can get a loan from them.
The three main aims of a credit union are: to encourage its members to save regularly, to provide loans to members at very low rates of interest, and to provide assistance to members in need of financial help and advice.
They are usually thought of as organisations for people on low incomes but, if you’re a saver, a recent Which? magazine report showed that the rates of return are often higher than those offered by the main banks.
The union is completely controlled by members so any profits are ploughed back into the organisation. It is pleasant to know that profits on your transactions aren’t being pocketed by City fat cats.
To find out if there’s a credit union near you, or one that you could join, take a look at FindYourCreditUnion.co.uk
Many credit unions charge you 1% a month on the reducing balance of the loan (an APR of 12.7%). Some charge less, others more (though by law they can’t charge more than 2% a month – an APR of 26.8%). The size of the maximum loan also varies from union to union.
Find out what sort of loans and interest rates are available from your local credit union by contacting them via the credit union search tool. Most credit unions tend to be flexible over the frequency of your repayments, offering you the opportunity to pay back your loan on a weekly, fortnightly or monthly basis.
You can work out a rough estimate of how much a typical 1% credit union loan will cost you by using a loan calculator.
There are no hidden charges with credit union loans and no penalties for repaying the loan early. Life insurance is also built in at no extra cost – so if you were to die before repaying the loan, insurance would cover the cost for you.
Most credit unions can lend for up to five years (unsecured) and up to 10 years (secured). However some lend for up to 10 years (unsecured) and up to 25 years (secured).
How do I get one?
Not everyone is approved for these cards, of course, as the rate is so low. So if you think your credit rating might not be up to scratch then be sure to check your credit rating first before wasting an application.
Remember that each time you apply for credit and get rejected, you get minus points on your credit rating ‘scorecard’. So get a 30 day free subscription to CreditExpert and check your score before applying (just remember to cancel it at the end of the free period if you don’t want to continue with a monthly subscription).
If your rating is bad, there are ways you can improve it, enabling you to get access to better interest rates and deals.
If you don’t have time to improve your rating, you could try a card that has a low regular balance. Check here for the lowest standard rates.
1. Get the best card for 0% interest on purchases
The longest deal on the market at the moment is the Tesco Clubcard Credit Card for purchases which offers 21 months 0% APR on purchases. However after the 19 months are up, the rate goes up to 18.9% APR – so make sure that you’ve either paid off the balance by then, or…
2. Switch any remaining debt to a good 0% balance transfer card
If you don’t manage to pay off the whole balance on your 0% purchases card before the 0% interest period expires, transfer your debt to a decent 0% balance transfer card. (This allows you to continue to pay off the balance without paying interest on it).
You can currently get a fantastic 37 months’ interest-free balance transfers with Barclaycard .
You can keep moving the money from card to card until you pay it off. However its important to note that you have to pay a fee every time you transfer a balance. It’s usually not more than 3%, but if your are borrowing big amounts, then this can be a bit of a shock to the bank balance.
Problem: I have a bad credit rating.
Firstly, work on improving it. There is no substitute if you are looking for a favourable interest rate. Find out how to improve your credit rating here. Most high street banks and building societies offer better interest rates over private loan companies and almost all will carry out a detailed credit check.
What about Pawnbrokers?
Pawnbrokers offer short term loans guaranteed by personal possessions and are one of the very few ways of securing a loan without enduring a credit check. You can pawn many items such as jewellery, antiques, watches or even cars.
How do they work?
Pawnbroking is a relatively old fashioned way of borrowing money, the slogan ‘Lend yourself money’ is often used. This means you hand over a watch or a gold ring to the pawnbrokers and they lend you usually half the agreed value of the goods. The item can then be purchased back from the pawnbrokers for the amount of the loan plus an agreed amount of interest. The value of the goods is determined by the pawnbroker, so take care in choosing an item to pawn, sentimental value doesn’t count and it is possible that you’ll lose it!
Take time to understand the full terms of the loan before accepting an offer. Many include a maximum six month repayment period, whereby items not collected are deemed to belong to the pawnbroker. The amount of time and interest the loan carries is governed by the pawnbroker. If the loan is not repaid or extended the pawned item will then be offered for sale.
When approaching a pawnbroker firstly be sure that the pawnbroker is fully accredited and registered. The Consumer Credit Public Register lists everyone with an Office of Fair Trading licence.
Borro.com offers a fully insured online mail order pawn service that provides discreet and easy loans from the comfort of your own home. With no shop premises to manage Borro.com can charge lower interest rates than the high street pawnbrokers and lend up to much more. The process is relatively simple and they promise to have the funds in your account the same day you accept the valuation offer. There are also no early redemption fees, so if you want to repay the loan all in one go it won’t cost you anything.
They will provide short and quick loans on all items of value with the exception of electricals including, jewellery, watches, diamonds, gold, art and antiques and luxury cars (with a value of around £50,000).
Pawnbrokers make the majority of their profit through charging higher interest rates, for example, Borro.com charge a monthly interest rate that varies between 2.99% and 6.99% depending on the asset and the value of the loan (you would normally expect to pay that for a whole year with normal loans), the equivalent of a sizeable 68.8% APR. Pay the loan back quickly however and pawnbroking can be a very effective way of generating immediate cash.
Payday loan companies provide smaller, (under £1,000) very short-term funding guaranteed by your next paycheck. They usually charge huge amounts of interest, typically £25 for every £100 loaned, which equates to 25% a month or a faintly ridiculous 1737% APR. You generally have to provide your debit card information as the full amount plus interest is recovered the moment your paycheck lands in your account.
The problem with payday loans is that the full amount is repaid all in one go, placing you in a similar position the following month. This type of loan is more likely put you further into debt and should be used only as a last resort or emergency.
It’s worth considering whether you actually need a loan at all. For example, if you need an extra £1,000 to get that new car or build that housing extension (and don’t need these things as a matter of urgency) why not wait until you can afford it off your own back?
There are lots of ways to raise quick cash on the side. You may be able to rent out something you own, or make a surprising amount for just a few hours a week doing bar work. Plus there’s always boring old saving – and you can even save when you don’t have any money. Break the amount you’re trying to raise down into manageable targets that suit your circumstances. You could aim to save that £1,000 over a three month period, for instance, putting aside £333.33 each month.
Ideally, if you can avoid taking out a loan, do. After all, why pay interest if you can avoid it?
Have you taken a loan without using a bank? Share your experiences in the comments section below.