Published on January 3rd, 2020 | by Sunit Nandi0
Important Documents Required for Availing Loans in the UK
Applying for a loan can be a daunting task. Most of us aren’t familiar with the terms and conditions used by banks to determine a person’s eligibility. Acquiring a loan has many benefits, not only can it help you in times of a personal financial crunch but can also make it easier and more affordable for you when buying a new car or home, traveling on a holiday or when studying abroad.
To secure a loan in the UK, you need to be at least 18 years of age (for certain student loans). Depending on the nature of the loan requested, some banks list the minimum age as 21 and might also require you to have a steady source of income. Eventually, the deciding factor comes down to the size of your loan and your credit score which is based on your credit rating.
If you have a low credit score then your chances of acquiring a loan are slim but there are ways to maximize your chances of approval depending on the type of loan you wish to avail.
What is a Credit Score?
When applying for a loan, banks check for your creditworthiness. Credit rating companies like Experian and Equifax assign you with a credit score. These Credit rating agencies typically consider the following.
- Your Payment History
- Your Credit Usage
- Credit Mix
There are factors that can have a negative impact on your credit score such as missing credit payments, foreclosures, charge-offs, etc. Your final credit score is a number between 0 and 999. The higher your credit score is, the more likely that you will be approved for a loan. A credit score above 700 is considered good and anything above 800 is considered excellent.
One of the easiest ways to improve your credit score is by paying your credit card bills on time. By doing this, the bank may perceive you to have strong creditworthiness.
What are the different kinds of loans?
There are several different types of loans offered in the UK, each type has their own advantages and disadvantages. Therefore, it is important to know which loan type suits you before applying for one.
A personal loan is generally a loan with a relatively small amount that is given by banks without securing any collateral. This means that there is significantly less risk on a personal loan.
For a secured loan, the lender usually secures an asset before granting the loan. If you fail to repay the loan, the bank has the right to sell your secured asset to raise the capital required to pay off the loan amount due. Since there is less risk for the bank in a secured loan, you’ll get better interest rates, even if you have a low credit score.
In this type of loan, the collateral is put up by someone other than the borrower, also known as a guarantor. A guarantor is required to co-sign the credit agreement which states that if the borrower cannot repay the loan amount, it is the guarantor’s responsibility to do so. This is provided to people who do not have a good credit score or sufficient collateral for acquiring a loan.
How can I get the best interest rates?
Loans in the UK offer amounts ranging from 1,000 to 50,000 pounds. The amount you borrow and the interest rate you are liable for is based on your credit score. Lenders take a look at your credit record and financial information from your loan application and then decide whether you are capable of to repay the loan amount.
When taking out a long term loan, you will get lower repayment installments. As the years go by, you will end up paying a lot more in interest. To pay less interest, the best suggestion would be to pay off the loan amount in the shortest time frame possible.
What are the documents required for loans?
When applying for a loan online, most companies verify your details through a Credit Rating Agency (CRA). However, the CRA may not be able to gather all essential information from its database. At this point you will have to produce some physical form of documentation.
You will have to produce two forms of identification, one will serve as your proof of identity and the second will serve as proof of address. Apart from this, the CRA will also require the following.
- Bank Details. (Account Number, Holder’s Name, etc.)
- Current Address and Previous Address (in case you have moved over the past 3 years).
- Employment details such as employer’s name, years completed under a current employer, salary slips, etc.
- Personal details such as your date of birth, marital status, contact details, etc.
For Proof of ID, any one of the following.
- Driver’s License
- UK Armed Forces ID Card
- Biometric Residence Permit
For Proof of Residence, any one of the following.
- Driver’s License
- HMRC Tax Notification
- A recent utility bill
- A recent bank or building society statement.
As mentioned earlier, when applying for loans in the UK, your credit score should match the criteria of the loan. A low credit score can attract a very high interest rate or make you ineligible for a loan.
What is the procedure when applying for a loan?
In the UK, you can apply for a loan through several means. Most banks offer you loans online, over the phone or at their respective branches. The following steps outline the procedure for availing a loan.
Filling out the loan application form
This gives your lender all the necessary details required for them to complete a credit check.
The lender completes a background check
This is a pretty standard step and the lender will check for any misinformation at this stage.
The bank makes a soft quote
Before a thorough credit check is done, most bank assistants will give you an estimate of how much they can offer.
The bank makes its final quote
Depending on their own criteria, the bank will see how you fit into their loan policies. After a rigorous background check, the bank will make its final offer. It is up to you to accept or decline the loan offered.