Getting a loan for a first-time borrower is not as easy as suggested on the market. High claims made through advertisements throw borrowers off balance when they bump into reality. They are usually caught in a cleft stick: in both the situations – whether they borrow or not – the problem is not going to let up. It is understandable that a borrower with bad credit history is more likely to commit a default, which is why lenders charge high-interest rates, but what about first-time borrowers? They would not have a credit report as they never felt the need of taking out a loan.

The lending industry has become very convenient when it comes to helping people tide over. However, there is still a lot that borrowers need to understand. For loan companies, the goal is not to assist you when you need money during an emergency but to make profits. Many direct lenders claim that they can provide loans at affordable interest rates, but when the borrower signs the deal, they find themselves tied up with high APRs.

A survey revealed that 30% of borrowers did not know which situation was ideal to take out a particular type of loan, and 15% disclosed that they took out cash loans with intention to improve credit score. Here is the case of Ian, one of the participants of the survey.

Small loans do not help build up a credit history

Ian was 28-years-old and working in an MNC as a Management Trainer. He had just married and most of the savings he had spent at his wedding that is why he and his wife, Sara, had decided to tighten their belts. It was not easy to quickly reach that level while leaving room for unforeseen expenses. A quarter after marriage, Ian’s laptop had gone out of commission. First off, he had decided to dip into his savings, but future worries had not allowed him doing that. In the survey, he also said: “I decided to take out a loan to build my credit history with a loan company”.

Loan Amount £800

Repayment Length 30 days

Interest Payment £192

APR 0.8% per day (£24 for every £100 borrowed)

Total Amount to be Paid £992

12-month loans exhibit financial commitment of a borrower

Ian told the surveyor that he had not had his credit history built up despite timely repayment. Eventually, he had discovered that small loans contribute no role to build a credit history. Afterwards, he had contacted British lender, a prominent lender in the UK, offering 12 month loans at competitive interest rates. 

Loan Amount £5000

Repayment Length 1 Year (12 equal instalments)

APR 10.5%

Monthly Payment £439.64

Total Interest to be Paid £275.68

Total Amount to be Paid Back £5275.68

Ian told that British Lenders had reported credit reference agencies of all of his timely payments that made him eligible to borrow money at a lower interest rate. According to Ian, compared to other direct lenders, British Lenders charges lower interest rates and does not restrict borrowers to pay off the debt in advance and it looks over the bank statement to decide on the disbursal limit.

Borrowers should take out 12-month loans if they have no or very little credit history and want to build it. Since the repayment is to be done over an extended period, it proves your financial commitment. Borrowers must note that short-term instalment loans will build up credit history only when they make all payments on time and the lender informs credit reference agencies of your timely repayments. Borrowers should analyse their repayment capacity before applying for the loan, otherwise, it may take a toll on their credit history. 

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