Guaranteed loans, loans with no credit checks and quick loans - what's the danger?

The Financial Conduct Authority (FCA) recently warned UK lenders and brokers to stop using misleading terms in marketing and advertising. These include: "no credit check loans", "loan guaranteed", "pre-approved", or "no credit checks". The FCA reminded lenders and brokers not to make statements that give customers "the impression that they will automatically get a loan if they apply, or that they can get a loan without the lender checking they can afford it".
What are the reasons?

• Pre-approved, guaranteed loans - is there such a thing?
• Is a guarantor loan the same as a guaranteed loan?
• Can I borrow money with no credit checks?
• What is a good credit score in the UK?
• Are quick loans a good idea?
• Are all lenders regulated and authorised in the UK?

Pre-approved, guaranteed loans - is there such a thing?

Lenders cannot guarantee loans will be approved; they are required to perform affordability checks first. When you submit a loan application, the checks performed must be sufficient to ensure you can realistically afford a loan before it is approved or not approved.

Lenders must make their decision based on your current financial situation. This can include checking information on income, expenses, credit history and more. The lender must ensure the information they have is sufficient, accurate and detailed enough to decide whether to lend to you or not.

A responsible lender will also check the product is right for you before approving an application. This can include checking the amount to be borrowed, repayments, duration of the loan and other factors suitable for your financial situation as the borrower.

Whether you are looking at personal loans or credit cards, it would be incorrect for a lender or credit provider to imply a loan is guaranteed to be approved without first performing the necessary checks to ensure you would be approved. These checks help ensure a loan is right for you and that the lender is working in your best interests.

Further, a lender must provide clear information on the loan, such as risks, the total you will pay, the monthly repayments, late fees and more. This way, you can make an informed decision by under-standing the costs and risks before borrowing money.

NOTE: It would be misleading for a credit provider to imply you are guaranteed loan approval before you apply. A lender must perform adequate affordability checks first before lending.

Is a guarantor loan the same as a guaranteed loan?

A guarantor loan is not a "guaranteed loan" in the sense that you will be approved, although they may sound similar. A guarantor is a person or third party that agrees to guarantee a loan should the borrower fail to pay back what is owed. In other words, the guarantor acts as a backup or a guarantee for the lender.

The process of applying for a guarantor loan is similar to when you apply for a personal loan. As with any loan, there is no guarantee you will be approved. Affordability checks must be performed before your application can be approved. Checks are performed on the person applying and the person acting as a guarantor. The interest rates are often higher than most standard bank loans - so you may want to compare loans and alternative credit options before applying for a guarantor loan.

Some guarantor loans may be better suited for a person with a weak or poor credit score, especially if the person willing to act as a guarantor has a good credit score and history. It is also a chance for the person applying to borrow money to build up their own credit by making all loan repayments on time. But what about getting a loan with no credit checks?

Can I borrow money with no credit checks?

UK lenders and credit providers must perform adequate checks before approving a loan. Most of the time, these will include credit checks. But, it is up to the lender to ensure that whatever checks they perform, the information they obtain on you is sufficient to make a correct assessment, whether that includes a credit check or not.

The FCA's rules on assessing creditworthiness states a lender must "undertake a reasonable assessment of the creditworthiness of a customer". The information must be sufficient and "obtained, where appropriate, from the customer, and where necessary from a credit reference agency".

Therefore, a lender may decide that using a credit reference agency (CRA) is unnecessary if they have enough information from other sources to assess your circumstances accurately. But, most lenders will use a CRA to access your credit history, score and additional information when you apply for credit.

There are three main UK credit reference agencies: Equifax, Experian and TransUnion (previously called Call Credit). Lenders can see general information like your address (past and present). They will also see payments for things like credit cards, loans and bank overdrafts, as well as missed payments (in the past six years) and bankruptcies.

It is with good reason that many lenders use CRAs, as the information can help them decide whether to approve your loan application or not. The truth is, it's hard to find loans for persons with bad credit, and even when you see loans for bad credit advertised, a credit check will likely be required at some point.

More recently, some lenders are using Open Banking to perform necessary affordability checks. This also gives lenders a good idea of your monthly expenses, how much you have going in and if you can take on the additional cost of paying back a loan. Some lenders will do both a credit check and check bank statements via Open Banking or other means. They may contact you for additional information too.

Regardless, just like a lender, you can check your credit score and history. Some providers offer access at no cost. It's also worth knowing what a good credit score is, as a good score can mean you get better deals.

What is a good credit score in the UK?

Depending on the credit reference agency (CRA) used, a good UK credit score is:

• Experian from 881 to 960
• Equifax from 531 to 810
• TransUnion from 604 to 627

All scores start from zero. However, each CRA has a different maximum score. The closer your score is to the maximum, the better. The maximum score for each CRA is:

• 999 for Experian
• 1,000 for Equifax 1,000 (this used to be 700)
• 710 for TransUnion

Fortunately, even if you don't have good credit, you can take steps to improve your credit score. These include keeping up with your payments and avoiding things that lenders can view negatively, such as a cash advance on credit cards and applying for credit several times in quick succession. It will take time to see improvements. However, as mentioned before, you could be rewarded with more options and, likely, better deals.

But, what if you need money fast?

Are quick loans a good idea?

The idea of rushing into a loan or borrowing money for the sake of speed and convenience can be dangerous. It is best to avoid making a rash decision in panic, particularly if you don't take the time to consider alternative options and shop around. Some alternatives could be cheaper. There are also risks to consider before you apply, such as can you realistically afford to repay the loan on time?

There is little doubt that the cost of living is hurting many pockets in the UK. Utility bills are set to rise again. Some things can be done to save on electricity bills and gas costs, but with inflation hitting a 40-year high in July 2022, more interest rate rises on the horizon, it is hard to escape the cost of living crisis.

Sadly, many people struggle to make it to payday at the end of the month. Credit card borrowing jumped by £1.5 billion in February 2022, the most since the Bank of England records began in 1993. It has caused some to rush to other expensive forms of borrowing too. Between March and April this year, there was a 12 month online search spike for loans to payday and related searches.

Most short term loans, such as payday loans, are expensive, which is why they are best only for one-off occasions to address an unexpected expense. These types of loans are often viewed as quick loans, but despite this convenience, they should not be used for continuous borrowing, especially if you are struggling financially. Additionally, you may consider it worth looking at payday loan alternatives, even if other options seem less convenient they will often be cheaper.

TIP: Even if you need money quickly, don't rush into borrowing. It could make your situation worse. Remember, take your time. Do your research. What sometimes seems quick and convenient may not always be the best or cheapest option.

Are all lenders regulated and authorised in the UK?

All money lenders must be authorised and regulated by the FCA to operate in the UK legally. One of the main FCA objectives is to provide an appropriate degree of protection for consumers. The FCA also requires financial services companies to provide transparent information and be upfront about risks. This includes, as mentioned at the outset, not using misleading advertising.

Other regulatory bodies, such as the Financial Ombudsman Service (FOS), ensure lenders address customer disputes and complaints fairly. FOS will investigate a complaint when requested and act on behalf of customers when required. These organisations help maintain consumer confidence in the financial services sector and provide some protection for consumers.

A word of warning: there are rogue lenders and individuals who illegally operate using different rules or none. Some are fraudsters who may pretend to be acting legally as lenders; they intentionally make it hard to identify an online scam to get your personal and bank details. Others are loan sharks who charge high-interest rates and may use illegal methods to collect money, including taking possessions or threatening violence.

IMPORTANT: Before you borrow money, research and check that a lender is authorised and regulated by the FCA by searching the FCA register.

In summary

You may see words like "loans for bad credit guaranteed approval" advertised, however, an authorised lender must first perform adequate checks before approving an application. So approval is not guaranteed until a loan application is submitted and reviewed. Finding loans with no credit checks is hard as responsible lenders want to obtain sufficient information to reasonably assess your current situation. To do this, many will require a credit check at some point.

If you have bad credit, it may be better to focus on improving it rather than looking for loans that appear to be easier to get. A better credit score will mean you have more options available. If you need money urgently, try to avoid making a rushed decision in panic, this can result in your financial situation becoming worse. Remember to take your time and do your research.

And finally, check out who you are borrowing from. Unfortunately, unscrupulous individuals pretend to be authorised lenders, and there are loan sharks who do not put customers' needs first. We at MustCompare are authorised and regulated by the FCA. We also ensure all providers on MustCompare.co.uk are FCA approved and have a complaints procedure in place.