If you're having tough time managing your finances and you're struggling to get back on your feet, you may feel like you've exhausted all options and unsure of what to do next. However, there's another solution you may not have considered that, over time, could help you to transform your finances. Small loans can be used strategically to help you free up funds and improve your financial situation.
For those battling existing debts, getting another loan may be the last thing on your mind, but with the right tools and advice, you can use these loans to transform your finances. To learn how, read the full guide below.
What is a small loan?
Small loans are a type of personal loan given by banks or lenders. On average, you can borrow between £50 and £500, however, some lenders provide loans of up to £2000. Interest rates are normally very high for small loans, therefore they are mostly used for short-term borrowing.
In most cases, you apply for your loan online and the money is transferred to your account within a few hours of your application being accepted. This is useful for emergencies such as car repairs and unexpected bills, as you can get the extra funds you need quickly and easily.
Unlike larger loans like a mortgage, personal loans are unsecured, therefore you don't have to worry about losing your home or your assets if you can't keep up with repayments.
Why is it so hard to get a small loan?
If you've asked yourself 'why is it so hard to get a small loan', it's likely that you've also tried to apply for loans from multiple lenders. This could be hindering rather than helping your chances of your applications being accepted.
When you apply for credit from a lender, they will perform a 'hard credit search' and take a look at your credit file before deciding to lend money to you. These searches appear on your credit record and other lenders and banks can see this information when you apply for additional funds or credit.
If you make too many applications within a short period of time, it can appear as if you're desperate for funds and lenders may see you as an 'untrustworthy' borrower.
To avoid this, it's always best to perform a soft credit check before making any applications. You can use tools such as the Experian Eligibility Checker to check whether you're likely to get accepted for a loan. This tool performs a soft credit check, and therefore, your search won't leave any traces on your credit file.
If you're finding it difficult to get a loan, there are a few checks that you can carry out in order to find out why your application has been declined, this includes:
- Checking your credit record - You can use tools such as Clearscore and Noddle to check your credit score free of charge. Be sure to check your score and see if there are any mistakes in your report as this could be the reason why your application was rejected. If you find that there is a mistake in your report, alert your credit reference agency and they will investigate it for you.
- Asking your lender why they refused you - You can contact your lender directly to ask them why your loan application was declined. However, they're not required to give you a detailed answer so you may not get a useful response.
Once you've identified the reasons, you can work towards improving your chances of being accepted for a loan.
How to increase your chances of getting a loan
Having your loan or credit application rejected can be a disheartening experience, and you may feel like you're out of options. However, there are several things that you can do in order to improve your chances of getting a loan. Read on to discover the main tricks.
Spread out your applications
As mentioned earlier, the number of applications you make can have a significant impact on your credit file. It's difficult to say what is classed as 'too many' applications, however to be on the safe side, it's best to wait at least a month or two before applying for another loan if your previous request was rejected.
Get on the electoral roll
Being on the electoral roll for a long period of time counts as a positive on your credit file and is also an easy way to improve your credit rating. Simply register to vote and get on the electoral register for your current address to improve your chances of getting a loan.
After introducing these simple tactics, you'll be well on your way to improving your financial situation. Below, we'll go through how you can use loans to restructure and reorganise your finances.
Using loans to budget
If you have multiple debts spread over a range of credit cards and accounts, a loan will allow you to move all of your debts and outgoings to one place. This is known as 'debt consolidation', and the process involves taking out a loan to pay off all of your existing debts so that you only have to worry about one monthly repayment on a fixed rate.
Some of the advantages of this include:
- You to only need to make one repayment per month - You won't have to deal with the difficulty of keeping up with payments for different lenders.
- You can improve your budgeting skills - Only having to worry about one payment per month can make it easier to stay on top of your finances, and plan your spending around your monthly repayments.
- Shows lenders that you are a responsible borrower - If you keep up with your monthly repayments until the consolidation loan is paid off in full, this can show lenders that you're responsible and improve your chances of getting credit in the future.
Debt consolidation may seem like the perfect option from the outset, however, you must consider the disadvantages before making any significant decisions.
If you're planning on taking out a small loan to pay off other debts, be mindful that personal loans have high interest rates, therefore if you can't afford your repayments, you could end up in a worse situation that you when started.
As well as this, remember to only apply for a loan if you've exhausted all other options. Always pay debt off before saving or use your existing savings to clear your high-interest debt. This will help you to avoid incurring further interest charges and can help to you reduce the amount owed to a more manageable level.