Many people take out a loan due to their financial constraints. The most common types of loans are available in situations such as when purchasing a new vehicle or home (car loan or home loan), for studying abroad (student loan), to consolidate existing debt, for a family holiday (vacation loans), to cover medical treatments and more.
Loans in the UK are offered in various different types. Before you choose a loan provider, check all the options (interest rates, repayment cycle, etc.) and then decide which one to go with.
What are the Types of Loans Offered in the UK?
The loan provider will require an asset as collateral before granting the loan amount to the applicant. In a secured loan, if the applicant fails to make their monthly loan repayments, the loan provider has the right to sell the asset in order to repay the money you owe.
Loan providers who offer secured loans in the UK are at less risk of the applicant defaulting. This has its own benefits as providers will offer you with better interest rates even in the case of a below average credit score.
When the loan applicant is approved for a personal loan, the provider will grant the loan amount without the need of placing any collateral. However, the risk factor for loan providers is high. Generally, personal loans are of relatively small amounts and are given to applicants with exceptional credit scores.
Guarantor loans in the UK are when the loan is acquired by placing an asset as collateral. However, the collateral will be given by a person on behalf of the applicant, this person is known as the guarantor.
A guarantor is obligated to co-sign the loan agreement in order for the applicant to avail a loan. The agreement also states that in case the applicant fails to repay the amount due, it will become the responsibility of the guarantor to clear the debt.
The Procedure When Applying for Loans in the UK
When applying for loans in the UK, the application process can be carried out online. Most loan providers allow applicants to upload the necessary documents when submitting their application form.
Procuring and Submitting the Loan Application
The loan provider will check the information submitted and run a credit check on the applicant to determine whether or not to approve the loan.
Loan Provider Completes Background Checks
The loan provider will check the information for any discrepancies, based on which they will decide the loan approval status.
Loan Provider will Make a Soft Quote
When availing loans in the UK, the loan provider will show you an estimate of their best offer. This is after the background check is completed.
Loan provider Sets its Final Quote
If the applicant meets the loan providers criteria, a final offer will be made. The applicant can either choose to accept or decline the offer when availing loans in the UK.
Documents Required for Availing Loans in the UK
Loan providers check the applicant’s credit report from the Credit Rating Agencies (CRA). However, loan providers will still require applicants to produce physical forms of documentation which are listed below.
Mainly, loan providers require applicants to provide 2 forms of identification. One for proof of address and the other for proof of identity. CRAs also require certain details of the applicant to calculate their credit score.
CRA Documents Required
- Personal details (date of birth, contact details, marital status, etc.)
- Bank account details (account number, account type and name, etc.)
- Employment details of the applicant (employer’s name, salary slips, years completed, etc.)
- Current address and previous address in case the applicant has moved in the last 36 months.
ID Proof for Loan Providers (any one)
- Valid Driver’s License
- Biometric Residence Permit
Proof of Address Documents (any one)
- The most recent utility bill.
- Recent statement from the bank or building society.
- Driver’s License
- HMRC Tax Notification
Keep in mind that when availing loans in the UK, your credit score should match the criteria of the loan required. If you have a low credit score, you will attract providers who offer loans with high interest rates which can lead to debt.
What are the Main Ways a Credit Score Gets Affected?
There are many situations that can lead to your credit score being negatively impacted in the UK. Some of the most common reasons are listed below.
Regularly Applying for Credit
If you have frequently applied for a loan in a short span of time, it will reflect on your credit score. Loan providers will perceive you to be highly dependent on credit and may avoid offering you loans as you pose a high risk.
Making Late Payments
All loan providers view late payments as a sign of financial troubles. Lenders can gauge that you are struggling to maintain and keep up with expenditures. Late payments also negatively impact your credit score and can lead to a higher interest rate.
Your credit score will be significantly impacted if you file for bankruptcy. It will reflect on your credit records depending on which type of bankruptcy you file.
- For Chapter 13 bankruptcy, it will reflect up to 7 years from the date of filing.
- For Chapter 7 bankruptcy, it will reflect for 10 years from the date of filing.
Bankruptcy should only be considered as the last option because your credit score will be severely impacted and loan providers will not entertain your loan applications.