Why Do Lenders Use Credit Checks?
Your credit report is a snapshot of your financial habits, which helps lenders decide whether or not to loan you money.
It contains some basic personal information as well as details of all the debt you currently owe: including how much you owe, whether you pay your debts on time and what kind of debts you hold.
When a lender runs a credit check, they compare your credit file with their own criteria for what makes a good borrower.
If your credit file matches the lender’s criteria, you could be offered a loan.
Keep reading to get the full details of credit checks and the pros and cons and what lenders look for.
Credit Checks Help Lenders Make Business Decisions
When a lender agrees to loan someone money, they do so because they believe it is a good investment.
The lender expects to get all of their money back at the end of the loan and to make a profit from the interest they charge.
If a person has paid their debts back in the past, they are a low-risk investment. The lender can be fairly sure that they will get back their money, plus all of the interest they want to charge if they lend to that person.
On the other hand, for someone is consistently late paying back their debts or has a history of defaulting; the lender can assume they are struggling financially. This makes them a high-risk investment because there is a good chance that they will not manage to pay back the debt on time- or at all.
However, that doesn’t mean that everyone with a less-than-perfect credit history is barred from getting credit…after all, lenders are businesspeople who want to maximise their opportunities for making money.
Instead of rejecting someone with a patchy record, a lender might agree to give them a loan but charge a higher interest rate. This helps the lender recover their money as quickly as possible, so even if the person defaults on their loan before the end though, the lender won’t have lost everything they invested.
When a lender runs a credit check, they use the information on your file to make a risk assessment.
Responsible lenders may refuse you credit if they think there is a high chance you won’t be able to repay, because of the effects it could have on your financial life as well as their profit margins.
However, unless someone has very bad credit, many lenders are willing to take a chance in exchange for higher returns.
Do I Need A Credit Check To Get A Short Term Loan?
You don’t need to undergo a full credit check if you’re looking for a short term loan.
When you apply for a personal loan with the bank, you are subject to what’s known as a ‘hard credit check’. Hard credit checks give the lender a full copy of your credit file, allowing them to see the details of exactly how much you owe, to whom, on what kind of contract and how reliable you’ve been at paying your debts back.
Whenever someone runs a hard credit check against you, it gets recorded on your report. This means that other lenders can see if you’ve applied for credit recently and whether or not you were accepted.
Lots of credit applications over a short period of time can be off-putting to lenders, who may assume that you are desperate for money.
However, many short term lenders approve loans without running hard credit checks. If you have a bad credit score or no credit history, this can be useful in helping you access a loan.
What Are ‘No Credit Check’ Loans?
You may have seen companies advertising ‘no credit check’ loans before. In truth, most lenders selling this type of loan still run some kind of credit check, but it’s less intrusive than the kind you would have to face if you applied for a loan with the bank.
‘No credit check’ loans run a soft credit check against your name. This type of check just confirms your basic details (such as name and address) and returns a copy of your credit score- but not the full report.
Soft credit checks don’t appear on your credit report, so other lenders won’t be able to see that you made an application if you are refused the loan.
Based on your credit score, the lender offers you a loan and interest rate. If you agree to their terms, you’re ‘pre-approved’ for the loan. At this stage, the lender runs a full credit check, as required by regulatory authorities, but in effect, the loan has already been approved.
Because lenders take on extra risk by not running full credit checks before they approve applications, these loans tend to have very high-interest rates.
Regulated V. Unregulated Lenders
There are a small number of lenders offer loans without running any kind of credit check at all. While this is perfectly legal, any lender who does this is unregulated. In the UK, most financial institutions are regulated by the Financial Conduct Authority (FCA), which sets out minimum standards and behaviours for the industry.
If you have a disagreement with an FCA- regulated lender, you can report it to the Financial Ombudsman Service, which has the power to force companies to take certain actions, without having to resort to costly legal proceedings. If your lender is unregulated, you must resolve any disputes yourself or via the courts, which can quickly become expensive.
How Do No Credit Check Lenders Work?
‘No credit check’ lenders often tout extremely high acceptance rates, even for ‘risky’ customers with bad credit ratings or low incomes. If you fall into either of these categories, this may sound like music to your ears…but unfortunately, there’s a catch.
The way ‘no credit check’ providers compensate for taking on risky investments is by charging high-interest rates and limiting the length of time that customers can borrow money.
For this reason, it is almost always more expensive to borrow from a ‘no credit check’ provider than from a lender who runs full credit checks before approving loans. It is also important to think carefully about how you will fund repayments- due to the short loan term; you won’t have long to find the money to repay your loan.
No Credit Check Loan
However, in the right circumstances, a ‘no credit check’ loan could be the right solution. If you decide that a short term loan is the best option for you, it is important to read the terms and conditions of the loan carefully before completing your application.
One of the benefits of no credit check loans is that it’s possible to get multiple quotes from different suppliers without it affecting your credit report, so you can make sure that you’re getting the best deal.
Look for lenders with flexible terms and low penalty fees if possible- it could save you pennies further down the line.
Once you’ve settled on a loan and your application is approved, the cash will usually be deposited to your account the same day.
Most short term loans companies require you to set up a recurring payment so that payments are deducted directly from your account on a regular basis. You may cancel this at any time, but you’re likely to face penalties if you are late making repayments.
We have written extensively about credit checks and how your credit score can impact your loan, you can read all the details here, ‘Our Guide To Short Term Loans With No Credit Check‘.
Are No Credit Check Loans Safe?
Most lenders in the UK are FCA-regulated and will always carry out some form of a credit check on your application, even if it’s just a ‘soft’ check. If a lender doesn’t carry out any kind of credit check at all, they are either unregulated or breaching the FCA’s rules.
In either case, this means they aren’t playing by the minimum standards set by the rest of the industry, and you should probably give them a wide berth.
Since 2014, all regulated short-term lenders have had to abide by strict rules about how much they can charge for interest and penalty fees, as well as how many times they renew a loan.
These measures have made short-term lending much safer for UK consumers, but as with all forms of credit, no loan is safe if you can’t afford to make repayments.
If you’re planning to borrow from a company with relaxed eligibility criteria, you’ll need to make your own honest assessment of whether or not you can manage to repay the debt.
Although it can be frustrating to be turned down because of your credit score, the system works to protect consumers too. If you’re not very good at managing your debts or have a habit of borrowing more than you need, your credit score can act as a buffer to stop you from borrowing so much that you risk landing in a debt crisis.
|Provides access to credit if you have no credit history or a bad credit rating||Most short term loans have very high interest rates|
|You can shop around for quotes without leaving a trace on your credit file||True ‘no credit check’ loans are unregulated, which means you’re not protected if things go wrong|
|You won’t have long to pay back your loan|
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.
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