There are numerous ways in which you can secure cheap short-term loans, even with a chequered credit history. You will still need to provide evidence of income and pass the affordability test, but there are a number of options for those with access to collateral or a guarantor.
Short-term finance can be useful for an array of different reasons and is a very popular financial service in the UK.
Positioning your application in such a way as to reduce the headline interest rate is relatively simple in theory but a little more difficult in practice.
What Are the Cheap Short-Term Loan Options?
There are numerous options when it comes to cheap short-term loans which include:-
- Personal loan
- Payday loan
- Logbook loan
In reality, not all of the above options will be open to those with a chequered credit history so the better your credit history, the more chance of securing cheap short-term finance.
However, there are ways and means of adding a degree of security to your loan application which would reduce the risk to the lender and hopefully improve the headline interest rate.
Proof of Income
Before any loan application can be approved, you will need to provide proof of income which in turn allows an affordability calculation to be carried out.
Income streams could include:-
- Employment income
- Investment income
At first glance, many people may automatically assume that income from benefits is less secure than employment income or investment income. But is this really the case?
If you receive benefits from the authorities, then this is effectively guaranteed by the state unless your situation changes. On the flip side, if your situation does change, and for example, you find employment, then you are likely to have seen an increase in your income.
So, it is wrong to automatically assume that income streams such as benefits are a disadvantage when it comes to pursuing loan finance. In reality, much will depend upon the size of the loan and the duration.
Can I Use Collateral to Secure Finance?
The basic formula used by lenders relates to the risk/reward ratio when considering a loan application. The higher the risk, the more chance of default and therefore, the higher the interest rate to account for this. On the flip side, the lower the risk, the lower the chance of default and the lower the headline interest rate.
The use of collateral will effectively bring an asset into the formula which can be liquidated to cover outstanding loan repayments – assuming the borrower is unable to maintain repayments.
What Types of Collateral Can Be Used?
There is really no hard and fast rule when it comes to collateral used to secure finance, but the more common tend to be:-
- Equity in your home
This list is by no means exhaustive, but it does give you an idea of the types of collateral which are often used and accepted by loan companies.
Can I Use a Guarantor?
In a similar scenario to the use of collateral to secure finance, the use of a guarantor will also help to increase the chances of approval and reduce headline interest rates.
Again, the idea behind a guarantor is very simple; in the event that the borrower was to default on repayments, then the onus would switch to the guarantor. In this scenario, the guarantor would also need to pass an affordability test to ensure that they were in a position to cover any loan repayment shortfalls.
The role of the guarantor is not something that should be taken lightly as there are potential financial consequences. Unfortunately, this has caused numerous arguments between friends and family where the original borrower has defaulted.
Do not take on the role of a guarantor unless you’re willing to live with the consequences!
What Happens if I Default on My Repayments?
If you default on an unsecured cheap short-term loan, you would likely have an opportunity to discuss a revision of the terms with the lender. It is in the best interests of the lender to accommodate a changing environment for the borrower within reason.
In the event that the borrower’s financial situation has deteriorated to the point where repayments are out of the question, this opens an array of other scenarios. At this point, it would probably be better to take professional financial advice.
If a loan is secured then upon default by the borrower the asset used as security would be liquidated, the outstanding loan repaid and any surplus capital returned to the borrower.
In the event that a loan is guaranteed by a third party then the onus would switch to the guarantor to take over repayments.
There is a general misconception that upon default by the original borrower, the lender would look to liquidate assets held by the guarantor to cover the outstanding amount.
In reality, they would look to the guarantor to take on short-term repayments until the borrower was in a position to cover future repayments – or for the full duration if the borrower’s finances were not to improve.
The UK short-term loan market is extremely liquid and growing year-on-year as new participants continue to emerge. Therefore, it will be no surprise to learn that many looking for short-term loans (involving an array of different credit histories) are looking towards credit brokers to find the best deals and negotiate the best terms.
There are two different types of brokers available known as independent brokers and tied brokers. If you find a broker with expertise in short-term funding, for those with bad credit histories would be even better, they will often be able to negotiate improved terms.
While the interest on a short-term loan will depend upon the borrower’s financial status and inclusion of assets/guarantors, funding sources such as payday loans tend to charge much higher interest rates than average.
When you consider you could be talking about interest rates between 50% and 1500%, there is often scope for negotiation.
The terms of any loan finance, including the headline interest rate, will reflect the risk/reward ratio calculated for each borrower. This risk could be reduced by secure income streams, collateral or even a guarantor.
For those struggling with a bad credit history, seeing their financial status continue to deteriorate, it may be advisable to take independent financial advice regarding their situation and options.
How Can Flexy Loans Help?
Here at Flexy Loans, we have partnered with some of the UK’s leading Lenders.
They have already helped thousands of people get loans already, and they can do the same for you.
Choosing a loan broker like us (we don’t charge any fees) means our application process matches you with the best loan available to you. All lenders we recommend are regulated by the FCA, which gives you an additional layer of protection.
To apply and see what loan is available to you, click on the below and answer the questions.