Getting refused for credit is a frustrating experience and can be a worrying one if you need money to get by one month – but there are still a number of options available to you, such as payday loans, logbook loans and guarantor loans.
However, interest rates on these loans are a lot higher than those offered by mainstream lenders – particularly now loan rates are at an all-time low – partly to reflect the added ‘risk’ involved in lending to those with poor credit scores and partly to reflect the nature of the loan. So what are each of these loans about? Let’s take a look…
Payday loans have come in for a lot of stick in the media, mainly because they often charge a representative annual percentage rate (APR) upwards of 2,000% – however, these loans are not designed to be taken out over a year and so this is a slightly misleading figure.
For instance, Wonga loans have a representative APR of 4,214% but when you break it down, although still high, it’s not as ridiculous as it sounds as the interest on a £250 loan taken out over 14 days is just £40.78 – which can work out cheaper than letting yourself go overdrawn.
The key to payday loans is to take one out over as short a period as possible and make sure you do not roll it over to another month.
These loans work slightly differently as they are generally a more long term option and you secure the loan against the equity in your vehicle.
This means that the representative APR is a lot less than payday loans but still a lot higher than high street loans. For instance, you can pick up a logbook loan for between £200 and £25,000 (depending upon the value of your car) at a representative APR of around 450%.
If you proceed with a loan then the lender will transfer the money to your account upon receipt of your V5 logbook and the car is still yours to drive – however, if you default on the loan you risk losing your vehicle.
Guarantor loans offer another option and, like with logbook loans, work like a secured loan, the difference being that instead of securing the loan against your car, someone must act as a guarantor and the responsibility of paying the loan will fall to them should you default.
Again, these are more long term solutions than payday loans and the representative APR is lower still, working out at about 50% representative (APR).
So, as you can see, if you have a poor credit rating and have been refused elsewhere, there are still loan options available to you – however, as with any loan, you must always make sure that you can meet repayments and, when budgeting, remember to always factor in the higher than normal representative annual percentage rates.
Rob’s cunning in the ways of personal finance, visit www.money-fox.com for the best budgeting and money saving tips.