It’s a fact of life that, inevitably, we all meet with unexpected expenses from time to time. If this happens in-between your benefit payments things can get a little too close for comfort.

One of the most effective ways to fashion yourself some breathing room is by taking out a short term loan. However, there are a number of things to consider first.

Interest Rates

You will find it practically impossible, especially in today’s financial climate, to get a loan from a major bank. If you are considering getting a loan whilst on benefits then, unfortunately, you will have forget about the interest rates you have seen advertised on the high street.

The lenders you are more likely to secure a loan from operate in what is known as the “sub-prime” market. Whilst you may be used to hearing of interest rates between around 10%-20%, the typical APR on a loan form a sub-prime lender will be somewhere from 500%-4,000%. Some are in the tens of thousands.

For this reason it is best to borrow on small amounts for very small periods of time, otherwise the amount owed will rise rapidly and you may risk defaulting your repayments. This will impact on your credit rating.

Loan Amounts and Guarantors

If you are unemployed the absolute largest amount you are likely to secure a loan for is £3,000, however, only very few lenders offer this much to people who are on social security. Their interest rates are very high and their collection policies are inflexible, meaning if you are unable to keep up with repayments, which realistically, considering the APR, is likely, you’ll be facing all sorts of trouble. Event then, these lenders will only lend an amount such as £3,000 if you have a guarantor.

A guarantor is somebody who is willing to make your repayments for you should you fail to do so. It can be anybody but it is normally a close friend or family member. Being a guarantor is a big commitment as they are making themselves legally liable to pay off the loan if you can’t and as such guarantor loans need to be thought about carefully.

Furthermore, they will need to have a job with a decent income and a good credit history, as they will be credit checked by the lender. This means they can’t have received a CCJ or defaulted a payment in the last six years, or be on an IVA or be bankrupt.

If you are lucky enough to have someone willing to stand as a guarantor for you, it’s worth figuring out between you if it would not be wiser for the guarantor to get a loan in their name and then lend to you as a friend. This is also a big commitment but may ultimately be cheaper and there are typically more lenders for people with good credit then there are guarantor loan lenders.

For one thing, with their good credit history and income, they should be able to go to a high street lender and get a loan with a considerably lower APR. Secondly, high street lenders can be easier to negotiate with if you run into any troubles and so will your friend/relative.

If you don’t have a guarantor, which most people don’t, you’ll find it hard to get more than £1,000.

Credit Checks and Credit History

Your credit history is also going to be a factor. If you receive a County Court Judgement (a court order to pay an outstanding bill or debt) or receive a default notice (a letter from a company which comes after a final warning to tell you that you’ve defaulted, or failed, to pay outstanding monies) both of these will stay on your credit history for up to six years, limiting the amount you can borrow and the types of lender you can approach.

There are a number of websites that you can go to in order to find out exactly what your credit score is and what is on your credit history. You normally have to pay for this service, however, it is worth doing. Many people who have received default notices don’t know about it, often losing the actual notice itself amongst other bills and documents.

Some short term lenders may not credit check you at all, but be honest with yourself. Will you actually make repayments on time? If not, don’t get the loan. These same short term loans are generally loaded with lots of extra fees and charges for failed and late payments. This is on top of the interest so be sure you can pay on time.

Secured Loans

A secured loan is where you, the borrower, have to provide collateral to the lender as a kind of deposit for the loan. One particularly common form of secured loan offered to people on benefits or with poor credit are loans secured against cars. This is good news if you have a car or some other form of capital, as it opens up the option of secured loans to you.

However, if you fail to keep up repayments you will lose your car. Losing capital is the last thing you need when you’re already in a tight spot, therefore you have to asses the risk you are taking very carefully.

In other instances you may be asked by a lender to pawn some of your possessions in order to get access to a loan. This is similar but less risky as you know where you stand and, generally, the possessions will be worth less than a car. Again the interest rates are very high, so there’s no point sacrificing your possessions if you can’t afford the repayments anyway. You’d be better of selling them for cash. The amount raised would be smaller but at least you’d avoid accruing interest or harming your credit rating.

We all know credit references determine our worth to banks and other financial institutions. We know those credit scores can either haunt us or they can move mountains for us. What we might not know is how the scores are calculated, what the factors are that deem us worthy (or not) and who incorporates them into their decisions. You might be surprised at what these gems can and can’t do.

It’s important to understand what factors play a role in figuring one’s credit scores. You can be sure there’s a formula that’s used and it’s been the best kept secret in the free world for as long as there have been scores. These factors include:

• Payment Histories – Do you pay creditors on time? ie) have you paid your credit card every month?
• Debt to Income – Sometimes referred to as DTI and too much debt carried can drive scores down.
• Tax Liens – Is the IRS on the lookout for you? If so, they can haunt you forever (unlike traditional banks and credit card companies).
• Child Support Arrears – Yes, if you’ve been delinquent on child support payments, there’s a good
  chance it’s noted on your credit report.

Many people mistakenly believe only those businesses who lend money are looking at your credit report. Not so! A majority of employers are now pulling credit reports to determine if an applicant is responsible. If he’s having financial problems, there’s a good chance his mind won’t be on his work. Further, many employers won’t hire someone with bankruptcies or delinquent child support payments. If you’re looking at signing a morals clause for an employer, rest assured, your credit score is factored in to whether or not you’re offered a contract.

Just as banks and mortgage companies will obtain a credit history before they agree to carry your home loan, you also stand a chance of having apartment complexes or even individuals who rent houses request credit reports. It’s not uncommon these days.

The computer formulas that calculate a credit score are only as good as the humans who key your information. Mistakes happen. If you believe any of your three credit reports contain errors, your first move is to visit the three major agencies’ websites. From there, you can request a copy of your credit report to ensure the information is accurate. If it’s not, you can easily request to have the information investigated. If it turns out the information is indeed in error, the agencies will remove it; however, if the information is accurate, there’s a good chance it will remain on your report for up to ten years.