Why is it so hard to get a small loan?

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There are a number of reasons why finding a lender for a small loan is hard but not impossible.

Essentially, it boils down to the applicant having a bad credit rating which will restrict the number of opportunities for borrowing money because a lender may not want the potential risk.

For many of us, we may have been declined for credit by a lender even though we may consider ourselves to be credit-worthy.

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Why is credit rating so important?

It's for this reason why a credit rating is so important because it's a way for a lender to measure how credit worthy a potential applicant is; someone who always repays their loans and bills on time is seen as a good credit risk.

That makes sense and for those who struggle to repay bills and loans on time, is as being more of a risk.

This means there is a system to score people on their creditworthiness and understanding how this system works means you can boost your credit rating for when you need to apply for a major loan or credit in future.

However, even for someone with a low credit score, there are still opportunities for borrowing money and to avoid expensive lenders it will pay dividends to spend some time preparing and understanding the lending market.

As mentioned previously, various lenders use different criteria so while you may have a good credit score with one lender does not necessarily mean that another lender will view you in the same light.

This also works for those with poor credit score; there will be lenders who will judge your credit rating in a favourable light whereas others will not.

How to improve credit rating

So, what are the tips on how to improve credit rating?

Essentially, because lenders use different methods to workout your credit score they will be using your credit history for estimating what that score will be.

So, repaying your mortgage and loans, particularly unsecured loans, as well as paying credit cards and car finance on time, for example,will all be added to your credit history to show a potential lender how reliable you are.

Along with your credit file history, your credit rating is also worked out by using the information that you give in the application form for credit or a loan.

This checklist will give you an idea of how to go about improving your credit rating:

· Credit file

The first step should be to check your credit report as the main reasons to apply for a small loan or credit. Some websites offer free access to your credit history so you must ensure the report is accurate and that any mistakes are removed.

· Get voting

In the UK it's important to be listed on the electoral roll because this will prove to potential lenders that you live where you are and are who you claim to be.

· Pay-off debts

If you have a credit card or a mobile phone contract you no longer use, then close it down. That's because your credit score will also determine how much credit you currently have access to and balance that on the amount of money you need. Don't just cut up credit cards,you need to speak with the credit card provider to close the account.

· Who do you live with?

Another issue for someone wondering why they are being refused credit may be down to who is listed at your address. For example, if you have a mortgage with a partner then you'll be linked financially to that person. However, if they have a bad credit rating then this could reflect on you and if they no longer live at the address, it's important to tell the credit agencies they are no longer linked with you.

· Maintain payments

One issue about late and missed loan and credit payments is that they may remain on your credit history for up to six years.Not paying gas and electricity bills promptly may also reflect badly.

· Build your credit history

One issue we have overlooked so far is that credit histories obviously need you to be active with borrowing. For those people who've never had a credit card or had credit then they will have no credit history so potential lenders have nothing to gauge your financial behaviour with. There are credit cards available that will help build your credit profile but you will need to repay in full the balance every month to create a good credit history.

There are other issues as well, and one that is often overlooked is the number of credit applications you make – this is important if you are looking to free up money using small loans. Do not make lots of applications between several lenders because they will request information from credit reference agencies and these requests are logged - too many will be seen as creating a risk.

Small loans for bad credit

As we have seen, it is possible to get small loans for bad credit from a potential lender but you'll need to do research.

Also, there are lenders who will check whether you are eligible under the criteria for a small loan and they will not be asking for a credit reference so there's no credit footprint to count against you.

It's also important to understand that a small loan for someone with bad credit could range from £100 and, with some lenders, up to £5,000with a repayment period between three months and three years.

Small loans vs credit cards

However, which would be best for you; small loans versus credit cards?

There's good reason to recommend either and for credit cards the plus points include lenders offering 0% deals as an introductory offer.

This means that should you pay off what you owe then there's no interest charged on the borrowing.

The downside for someone with a poor credit history is that you may get a credit card but one with a low credit limit and you will need to pay the minimum monthly repayment - or more to clear the debt.

The plus side for accessing a loan is that the interest rates tend to be better and tend to be for larger amounts. There's also a wider range of purposes to use the money, for example buying a car.

The downsides for a loan is that the interest rate could be higher for smaller amounts borrowed and some lenders may have administration charges to process your application.

So, while it is hard to get a small loan, it's not impossible and by researching carefully you will find a lender who will, regardless of your credit risk, offer you a small loan to help you out financially.

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