If you want to borrow money through a personal loan, you could face a catch-22 situation.
As with many types of financial products, it makes sense to shop around to find the best loan rate: but, in fact, doing so can harm your chances of getting a good deal.
Loan applications and your credit record
When someone applies for a loan, credit card, mortgage or even a mobile-phone contract, the company involved checks the applicant’s credit record.
This shows what outstanding borrowing they have at the moment as well as whether they have missed any repayments over the last few years.
But the credit record also displays any type of credit you have applied for, even if you were turned down or decided not to go with that particular deal.
How to clear your debts
The problem is, if you want to know what rate a lender will offer you on a personal loan, you may think the only way to find out is by making an application: after all, there is no guarantee that you will qualify for whatever “headline” rate the lender uses on its marketing materials or in best-buy tables.
But if you make a number of applications for loans in an attempt to identify the best one, this could have a negative impact on your credit record.
To any lender which checks your file in future, it may look like you have applied for a number of loans but been turned down each time – which could suggest you are too much of a risk for other banks to take on.
How to check your credit report
Getting around this problem
The good news is that this issue has been addressed by a number of lenders: many of them will now let you make an informal check of the rate you are likely to qualify for.
By providing some details such as your income and age, the lender can carry out what is known as a “soft search” of your credit file in order to provide you with a good idea of the interest rate you can expect to pay on your loan.
This soft search, as the name suggests, does not leave a permanent mark on your credit file and other lenders won’t be able to see it. In theory, you can make as many of these informal applications as you like without them jeopardising your chances of borrowing in the future.
These checks – which could be called “quick quotes” or similar – simply involve filling out a few details on the lender’s website and you should be able to get an answer very quickly. If you’re not sure whether the lender in question offers this service, give them a call to check – don’t risk making a formal application until you are ready to do so.
Five things to do before a loan application
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