Unsecured Loans and Credit Ratings
If you are going to apply for an unsecured loan it is very important that you have an understanding of credit ratings and how they will affect your loan. When you apply for an unsecured loan most banks and building societies will go through a process of checking your credit rating so they can assess how much risk you pose to them. A credit rating is a collection of data that is built up on someone's track record of meeting financial obligations such as rent, tax, bills and other debts. Risk for a bank or building society is the amount of losses they could make from a borrower. So a borrower with high risk is going to one that could potentially default on their loan repayments, leading to the loan provider to potentially lose money if they do not get it back eventually.
High Risk and Low Risk
Someone who has a bad credit rating will be someone who is high risk for a bank or building society whereas someone with a good credit rating will be low risk. If you have meet all of your past repayments, bills, debts and other financial obligations in the past you will have built up a good credit rating. If, on the other hand, you have missed deadlines or defaulted on past financial obligations your credit rating is going to be bad.
Those low risk borrowers with good credit ratings are going to be rewarded by getting lower interest rates on their unsecured loans. Interest charges are applied to almost all loans on every kind and are the way that loan providers make a profit from issuing out loans. So a low interest rate means you are going to be paying less every month back to lender and this is going to save you a lot of money compared to an unsecured loan with a high interest rate.
If you do have a bad credit rating there is a way you can opt to get a loan which requires no credit check. Some high street banks and building societies will offer this service and set the interest rate of a loan based on the market value of the amount of money that is being borrowed. It is more common to find these sorts of loans online however where many online financial institutions offer unsecured loans with no credit check required. The downside of these unsecured loans is that they will usually demand a high interest rate anyway, so they are often only worth it to those who have a very bad credit rating and perhaps have been issued with a county court judgement so are finding it hard to get accepted for any loan.
A county court judgement is what a bank or building society will issue someone if they have consistently defaulted on their repayments. It means that the borrower is taken to court so the lender can legally get their money back. If you have been issued with one of these county court judgements, it will be on your record for years before the record is clean again. This can have a hugely negative affect on people's ability to get a good loan or get any loan at all.
Why It Is Like This?
Unsecured loans and credit ratings work in this way so people are encouraged to be more financially responsible with their debts and money. A financially responsible borrower means a bank and building society is going to be a lot less likely to lose money from issuing out loans. Whereas a borrower who is irresponsible is likely to lose financial institutions society money.