The lowdown on loan eligibility

16th July 2018

By Kurt Wood

Looking to take out a loan but not sure if you’re eligible? If you’re new to borrowing, it can be hard knowing where to turn for financial support. On top of that, there’s also the question of whether you will be accepted if you decide to apply. For first-time borrowers, the fear of rejection can be daunting, but understanding more about loan eligibility can help you through the whole process.

Your loan eligibility is determined by a number of factors. Knowing how these factors are assessed (and how they can be improved) will give you a much better chance of approval.

Am I eligible for a loan?

Whether or not you can get a loan depends on a number of factors, including your age, credit history, employment status, annual income, monthly outgoings and any current borrowing you already have. Your lender will also assess your credit score to see if you are low-risk or high-risk before making the final decision.

The amount of money you will be entitled to borrow will also be affected by the factors listed above.

What type of loan do I need?

There are many reasons to apply for a loan. Whether you need extra funds to make a big purchase or you’re looking for ways to consolidate other debts, a loan can be very useful.

Before applying for any loan, you need to consider whether you’ll be able to keep up with the expected repayments. While loans can give you the financial freedom to make a large purchase, they’re also a long-term commitment that you need to stay on top off. There are several types of loan available, so make sure you’re looking for the right one.

Here’s a look at the different loans available:

Personal loans

Most lenders can offer personal loans of up to £25,000 unsecured. Anything above this amount is usually secured against your house (and is known as a homeowner loan). A personal loan is usually available on short payment terms, ranging from 12 months to 7 years.

Secured loans

A secured loan is only available to homeowners and is taken out as a charge loan in addition to your mortgage. This type of loan is typically for borrowing over £25,000 and up to £100,000. As this loan is secured against your house, you could end up losing your home if you don’t keep up with the repayments.

Car loans

There are a number of different car financing options available, including hire purchase and leasing agreements that don’t give you full ownership of the vehicle. Low-rate personal loans are often the most affordable way of funding a new car.

Short-term loans

Short-term loans are repaid over a period anywhere between a few months to a year. They are for small amounts (£100 to £5,000) and some of these loans carry high interest rates.

Guarantor loans

Young people who have no credit history or people with poor credit ratings may choose to get a guarantor loan. This means that a parent, family member or friend will be co-signing the loan agreement with you. If you fail to make the repayments, your guarantor will be responsible for covering your repayments. While this opens the door for anyone who otherwise couldn’t get approved for a loan, it can be risky.

Consolidation loans

For anyone who is in debt or has multiple credit cards that they haven’t paid off, a consolidation loan can be a good way to put all of your debt in one place. This helps to reduce your monthly payments and will organise your finances with one outstanding total.

What affects my chances of getting a loan?

Loan eligibility is mostly affected by your credit profile, which is recorded by the three credit reference agencies in the UK (Equifax, Experian and CallCredit). Lenders will pay a small fee to access your file whenever you apply for credit to check whether you are going to be a low-risk or high-risk customer. Learn how to improve your credit score to ensure you have the best chance of being approved for the loan you need.

However, having a high score does not guarantee you’ll be accepted. Many banks will have their own lending requirements in place, too.

Here are some of the other things that will affect your chances of approval:

Recent credit activity – while your score provides a view of what you’re like as a credit customer, the activity on your profile is just as important. If you get declined for a loan or credit card, this will show on your profile for three months. Any County Court Judgements (CCJs) or bankruptcies will appear on your record for up to six years.

Employment status – for some loans, full-time employment will give you a much better chance of getting approved. If you are self-employed or working part-time, you may need to shop around a bit more.

Annual income – one key element that affects your loan decision is your income. Lenders are unlikely to accept loan applications that are beyond someone’s income capabilities.

Existing loans – if you already have existing debts such as loans or credit cards, it could be harder to get approved.

Monthly outgoings – lenders will ask you to break down your monthly outgoings (including rent, bills, groceries etc.) so they can get a better picture of your disposable income.

What happens if I'm declined by a lender?

Multiple rejections can look bad on your credit file and will be visible to other lenders every time you make an application. These will stay on your file for three months. Rather than making application after application, wait a while, and think about what you can do to make your application stronger next time.

It's a good idea to speak to the lender and ask them why you didn’t qualify. They may be able to shed some light on the situation and may even offer alternative solutions.

Using a loan eligibility calculator

The best way of checking if you are eligible is by using a loan eligibility checker before applying. Not only can this save time when searching for a suitable loan, but it can give you a better idea of what loans are available, based on the information you provide.

Our loan eligibility calculator is free and easy to use, and it won’t leave any footprints on your credit file. Through a soft search, it shows you the likelihood of getting accepted by different loan providers. This can help you avoid having multiple rejections listed on your account.

Compare loans online

If you’re ready to start shopping for loans, we recommend using our online loan comparison tool to find the best loan for you. You can compare different loans and interest rates side by side –  just be sure to use our loan eligibility calculator before you apply to ensure a better chance of approval.

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