Getting your first loan or credit card is a real challenge for many young people. Bear in mind that those applying for a short term loan or a small loan who have less than perfect credit histories worry about making an application for finance just to be rejected later on. And it’s just the same for a lot of young people who have little or no credit history.
In this article, Loan Broker looks at:
• what it’s like for young people today and why they need loans
• if you apply to a bank, what’s expected of you
• how to build your credit score up
• how to find short term loan and small loan companies which work with young people with little or no credit history
What’s it like for young people today?
According to The Conversation website, “(t)he UK has a consumer debt crisis and it is young people, aged 18 to 34, who are most vulnerable”. 55% of 18- to 24-year olds owe an average of £8,000 in debt and that’s before you factor in any student loans or tuition loans.
Too many commentators blame the young by characterising their indebtedness as a “product of ‘binge’ culture” when, in fact, it should be viewed as “a problem of affordability”.
What exactly is making life unaffordable for the young?
• Higher education finance
• Inflation outstripping wages (real wages are down by £13 per person per week after inflation over the last 10 years, according to BBC News)
• High rents and higher fees associated with renting
• Increased competition for jobs
• Zero-hour employment contracts
For many young people, debt is something they accumulate now with the intention of paying it off when they have more stable, better-paying jobs. Until that time comes, with Britain being such an expensive country in comparison to most other developed economies, debt is seen by many as unavoidable.
If you go to a bank, what do they want to see?
Many young people consider going to their bank as their first port of call when they’re looking for a loan. But what exactly is it a bank wants to see in a potential borrower before they’ll lend you any money?
Your background and how you present yourself
If your Mum and Dad opened an account for you when you were in your early teens, it’s only natural for you to think that, because you’ve kept your account in the black for all the time you’ve been with them, they will be open-minded to lending you money.
Unfortunately, that’s not the case. Unlike in France where it is against the law for a machine to make a decision about a human, here in Britain, machines generally decide whether or not a person fits a bank’s “borrower profile”. There are some occasions where a bank manager can overrule the decision of the bank’s computer but those occasions are few and far between so it’s probably wise not to expect that your application will be treated in this way.
If you have little or no credit history, there’s not much for the bank to go on to assess your creditworthiness. If you are called in for a meeting, it’s best to look smart and professional. Before you set off for the bank, look at yourself in the mirror and be honest with yourself about whether your appearance would persuade a risk-averse bank manager to overrule the bank’s computer. Banks have been very risk-averse since the 2008 financial crisis.
What you want to do with the money
Your bank will want to know what you want to do with the money once you’ve got it. They will generally view it more favourably if you buy an asset with it like a car or a computer system to help you with your work – that makes a bank loan potentially very useful for freelancers and contractors.
However, if you want to do something they might class as trivial (like funding a holiday) or risky (starting a business, investing in stocks and shares, and so on), they may be strongly inclined to say “no” because they’ll think that what you’re spending money on can’t generate a personal return for you or there’s a chance that you could lose some or all of the money.
How are you going to pay it back?
Without a credit history, your bank is going to be particularly interested in your plan to pay the loan back. Remember that you’re not just paying the amount you want back – you’re paying the interest on top of that as well.
They’ll want to know your income and how stable your employment is. They’ll need an understanding of how you spend the money you do earn and how much you have after all your expenses have been paid because it’s that money you’ll be using the pay the loan back to them.
Because you’re young, you will probably not have an asset the bank might want to take as security. This cuts off another potential plus point in your favour.
Does a bank actually offer a short-term loan or a small loan?
Let’s not forget too that banks are in the business of lending larger amounts of money (£3,000-£50,000) to customers over many years (mainly 3-5 years). You may not need that much and it’s never wise to borrow more than you actually need.
Even if you ticked every box that would indicate to a bank that you’re a good risk, they may not be even able to help you because the amount you want is too small and they want you to borrow it over a longer time.
Why do most people want a short term loan or a small loan? It’s not for the bigger things in life like a new car, home improvements, holidays, car purchase, and more. Most people want short term loans or smallloans because there’s a financial emergency and they just, at that moment, don’t have the cash to cover an unexpected bill like garage repairs, boiler breakdowns, washing machines breaking, or funeral expenses.
You should never use a short term loan or a small loan for something you don’t absolutely need. Because they’re more expensive than other types of loan, you shouldn’t use them to buy gifts, on nights out, and so on.
So, if you’re a young person wanting to build up their credit history, what’s the best way to go about it?
Lack of credit history often holds young people back
It is true that the reason behind many rejections young people face when applying for a loan is a lack of credit history. It’s a vicious circle – you need credit history to get the best loan offers but how do you get any loan offers in the first place if credit history is so important?
But first, what is credit history? There are three companies in the UK who provide credit reports on you and every other citizen to finance and other companies once you’ve made an application – they’re called Equifax, Experian, and CallCredit (soon to be called TransUnion).
They’re used by lenders to help them decide whether they should lend to you in the first place, how much they should lend to you, and how much interest they should charge you. Credit reports hold up to six years’ worth of information about you.
What do credit reports contain? They contain the details of any finance companies and large non-finance companies (like Sky, utility companies, mobile phone providers, and so on) that you have a relationship with. For each of these companies, the credit report records whether you make a payment or miss a payment. They also show how much debt you have in total, how close to your credit limits you are, and whether you have any county court judgements against you.
As strange as it may sound, many finance companies would prefer to lend money to someone with a £200,000 mortgage, a £20,000 loan, and 5 credit cards with a combined balance of £10,000 because the lender can see that they are meeting all their repayments and that they are a responsible borrower. If they see a credit report with very little information on it, to them, it’s like taking someone on for a job without having a CV or interviewing them to see if they’re suitable for the role.
Build up your credit history
Think of building up your credit history as an ongoing exercise – something that will take a couple of years but will be worth it in the end. Here’s Loan Broker’s five-point plan:
• Register to vote – if you’re not on the electoral register, many lenders will say “no” even if you have a great credit history
• Make sure the bills you pay are paid on time and in full – most mobile phone networks report on payment history to credit reference agencies, for example, and this is a great way to prove that you’re good with money
• Try to stay put for as long as possible – the fewer addresses on your file in recent times, the more comfort that gives a lender
• Check your credit report – there are millions of credit reports with errors on them so you should get in touch with the credit reference agencies to check to see if there is any wrong information on yours. While you’re doing that, look to see which companies have done searches on you lately – if you don’t recognise a company’s name, someone might be fraudulently applying for credit in your name. Last, you may be “linked” to someone else on your credit report – particularly if you share initials and your surname with a family member. You can file for a “notice of disassociation” from a person and this is recorded on your credit report for lenders to see.
• Consider taking out a credit builder credit card – these cards are designed for people with poor credit scores or little or no credit history. You can’t borrow that much on them and the interest rates on the card are generally higher than the interest rates you’d get on a standard High Street bank card. Make sure you make the repayment in full and on time every month – it’s even better if you can clear the balance all in one go each month.
One last thing – more and more lenders are checking for gambling habits on credit reports. Your credit score may go down if there is a lot of activity recorded on your credit report particularly with gambling apps.
Growing popularity among young people for small loans
40% of people taking out short term loans or small loans are aged between 21 and 27 years old. It’s becoming a more and more popular way for young people to access the finance they need in an emergency and for them to build up their own credit history.
LoanTube works with many of the lenders happy to work with young people and we offer a free service (more on that below) matching you together with those lenders.
LoanTube’s golden rules for young people applying for short term loans or small loans are:
• Only borrow as much as you actually need
• Only borrow for emergencies
• Make sure you can make the repayment(s) on time and in full
• Only apply for loans through Financial Conduct Authority-approved lenders or brokers.
• If someone asks you for money upfront to arrange a short-term loan or a small loan, don’t take them up on the offer.
The short term loans and small loans we can offer you:
• Borrow between £50 and £2,000
• Borrow for between 1 month and 12 months
• We are a Financial Conduct Authority-approved broker and all our lenders are Financial Conduct Authority-approved also
• You’ll never pay more in interest than 80p per day for every £100 borrowed
• You’ll never pay more than a £15 default fee if you miss a repayment
• When added together, the interest and any default fees you pay will never come to more than the value of the loan you took out.
So, how do you apply?
Get the cheapest debt consolidation loan from licensed lenders with Loan Broker
We’rea team of highly experienced loan brokers, not lenders. So, what does this mean for you? We know our lenders really well so, when you submit your details to us on your application for aloan, we use that knowledge to introduce you to your ideal finance company – particularly those who are happy to work with younger borrowers with limited credit histories.
We enjoy really good and open relationships with all of the companies on our lending panel and, as soon as we get your details, we’ll know exactly which ones will be the happiest to provide you with the loan you need right now.
With us, you can avoid wasting your time by filling out multipleloan applications with different lenders and that reduces the risk to you of getting a “no” answer to your application.
Start your loan application with Loan Broker today.