There’s a wide range of lenders who are willing to loan money to people who have a low credit score. Many insist that you provide personal possessions as security, which you could lose if you don’t pay back the loan on time. Interest rates and charges from these lenders are significantly higher than banks and mainstream lenders. We’ve provided a summary of some options you may come across – but we recommend you follow the guidance on alternative lending options from the Money Advice Service.
Using a pawnbroker
Pawnbrokers lend money secured on personal items, which are returned to you if you pay back what you’ve borrowed along with any interest and charges agreed. Interest rates are often much higher than you’d pay to banks or loan companies. If you don’t repay in time, the pawnbroker can sell the item you’ve pawned, although they might agree to an extension with additional fees.
These short-term loans are designed to tide people over until payday, although some lenders now let you repay over three months or more. Payday loan costs are now capped by law, but they’re much higher than bank rates and you’ll have to agree to let the lender take payments from your account or debit card automatically each month. The risk is that the lender takes money you need for necessities like rent or mortgage payments, or which leave you facing bank charges for being overdrawn. If you struggle to repay, the lender could offer you an extension, or another loan – be very wary of this, as taking out debt to pay off debt means you’ll have to pay back more overall.
Logbook loans are secured on your car, van or motorcycle. You hand over the vehicle’s logbook as part of the agreement and sign a bill of sale, which means you no longer own it. If you repay what you borrow, with interest and any charges agreed, the logbook and ownership are handed back to you. MoneyHelper warns that logbook loans are a particularly expensive type of credit, with annual percentage rates of 400% or more. If you don’t repay everything you owe, bailiffs can repossess your car so the loan provider can sell it.
Home credit or ‘doorstep lenders’
Doorstep lenders typically lend small amounts, which they collect in person every month. Interest rates are typically much higher than with other types of loan. Never borrow from people who show up at your home offering to lend to you. Home credit lenders need permission to visit you, and they need to be registered with the Financial Conduct Authority (FCA). If you’ve invited a home credit lender to visit you, and they can’t show verifiable proof of their FCA registration, then they may be a loan shark and you should report them to the FCA. If you feel intimidated in any way, call the police.
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