With loans getting harder to obtain, Neil Faulkner brings back his 'tactical applications' idea. Sounds clever, but never mind that he can't count to seven...
The best unsecured personal loans are offered to those with excellent credit records only. So anyone with a tarnished history must consider making 'tactical applications'.
I mentioned this idea once before, in an article with seven tips in it. Unaccountably, I called it Six Great Tips For Getting A Personal Loan. As I'm a personal finance writer who appears to be unable to count, I guess it's lucky that this idea is quite simple.
It's been just four months since I first suggested this, yet in that short time it has become even more relevant. It's got significantly harder to take out a loan. Being realistic, most borrowers won't get the best interest rates, which are currently around 6.5% APR to 7% APR. So people who have missed payments, had a CCJ, or have borrowed too much or too little*, will have to set their sights a bit lower to increase their chances of a successful application.
What you shouldn't do in this situation is simply try your luck on the cheapest loan first. The odds of you getting it are very low to non-existent, and it'll cause problems. Firstly, you'll feel disheartened. Secondly, you'll be miffed. Thirdly, you'll have delayed getting a loan. Fourthly, and most importantly, it'll add a mark to your credit record; the more applications you make for loans and credit cards, the worse your record looks.
To that end, I've made a table that will hopefully help you choose a loan you're more likely to get:
| Missed payments | Suggested interest rate you go for |
|---|---|
| 1 in the past year and none in the past 3 months | Around 8% APR |
| 2 in the past year and none in the past 3 months | Around 9% APR |
| 2 in the past year and 1 in the past 3 months, or 2 each year for the past 2 years | Around 10% APR |
I can't cover every single scenario, but hopefully you can see roughly where you fit in and make a judgement call.
If you've missed two payments in the past three months or three or more in the past year, or if you have a CCJ on your record or some other mark that's worse than a missed payment, I don't think you should try to get a loan without first getting someone else to take a proper look at your finances. I also don't think that anyone should be applying for loans over, say, 10% APR (at today's interest rates, anyway) without first checking if there are better options, because there's a good chance that there is.
My recommendations are educated, rough estimates of what you might be able to get. You're not guaranteed to get them. Each lender has different criteria, which they keep to themselves. This means that one lender offering 8% APR might accept your application whilst another doesn't. Even if you have what you think is a perfect record, a lender might not find that you fit the profile it's looking for.
More tips
To help you get the right loan, here are some extra tips:
Check the TAR as well as the APR
Remember that the Annual Percentage Rate (APR) is just a rough guide to how cheap a loan is, because it can be manipulated. A loan offering 8.5% APR could actually be more expensive than another loan offering 9% APR. Therefore, you can't just use the APR. You should also find out what the 'total amount repayable' (TAR) is. This is the total cost, including interest and charges, that you'll pay by the time the loan is cleared.
To compare loans using the TAR with The Fool's search engine, click 'View Unsecured Loans' and then sort by 'Lowest total repayable', rather than by APR. This way, you know the cheapest loan will be listed first.
Look for additional benefits
Taking a loan with a higher interest rate may play into your hands in the long run, because they can offer you additional benefits. Look for loans that have no early-repayment charges and that allow you to make overpayments. When you have extra cash, you can use it to pay off the loan earlier, which reduces the interest you pay.
Find those hidden tickboxes
If a lender rejects your application you might, shortly after, receive a call, letter or email from another company, offering you a secured loan. Do NOT take out this loan. You can avoid this 'offer' altogether by ticking (or unticking) the appropriate box in the application form, which forbids the lender from passing your details to other companies. These boxes can be very well hidden, so be thorough. (As you always should be when reading small print.) It'll be there somewhere!
Consider alternatives to loans
Finally, I said earlier that people with poor credit records should seek guidance before taking out a loan. However, if you have any debts it's always worth asking for more opinions, because there could easily be a better option for you. It's amazing how many options we have, actually.
You can read our guidance, How To Get Out Of Debt, and you can get tailored advice anonymously from the debtors, former debtors and debt experts in our friendly Dealing with Debt community.
*If you've hardly borrowed anything, you'll find it harder to get the cheapest credit, because the lender has no history to see how reliable you are at repaying. Lots of things can affect your rating; read Why You Can't Get Credit for more.
> Compare unsecured personal loans through The Fool. Seek guidance from our Dealing with Debt community before considering a secured loan, because they're not suitable for the majority of people who want to consolidate debt.