For many lenders, your credit history – simply put, your track record of repaying your debts – is one of the most important factors to be weighed up when considering whether to offer you a home improvement loan.
For that reason, borrowers with a bad credit score are often nervous when applying for loans to fund things like loft conversions, new windows or other improvements to living spaces. However, as with many things, the reality is a little more complex. In practice, responsible borrowers may still be able to get a home improvement loan, even with a bad credit score.
In this article, we’ll look at how a credit score is actually calculated, before looking at ways to access credit that apply even if you have a bad credit score.
This article is fairly detailed, but if you’re just looking for a flexible personal loan of £1,500-12,000, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%.
What is a bad credit score?
Lenders don’t have a crystal ball: when writing a new loan, they don’t know for sure whether the borrower will repay it. So, when evaluating a potential borrower, they make some educated guesses, which are based on:
- Your current circumstances
- Do you have lots of different debts outstanding?
- Are you on the electoral register?
- Do you have a high credit utilisation ratio? (To simplify – have you maxed out your credit cards?)
- Your track record
- Have you successfully paid off debts in the past?
- Is there anything in your recent past that suggests difficulties with borrowing, such as CCJs?
This information is consolidated by the UK’s three credit bureaus (Equifax and Experian are the best-known), who sell that data on to would-be lenders. They’ll also provide the information to you when asked, usually simplified into a score. However, there’s one important thing to bear in mind:
There’s no universal score
The three credit bureaus each score using a different scale. So a good score with Experian is more than 881 (1), whereas with Equifax it’s anything above 420 (2).
More interestingly, lenders aren’t actually looking at your score when they carry out a credit check. When you apply for a loan to pay for home improvements, they’ll look at the underlying data and make their own decision.
One lender might want people who don’t have existing credit card debts, while another might prefer borrowers who have a low credit utilisation ratio. So a score is just an indication, based on the credit bureau’s criteria. A perfect score doesn’t mean that you’re eligible for every loan, and a bad score doesn’t mean that you won’t be able to access credit everywhere.
Related post: Does Running A Credit Check Hurt Your Credit Score?
Why traditional lenders focus on track records
For many lenders, the track record is extremely important: lenders normally want to see a history of repaying debts in full and on time.
Because that track record is so important, some promising borrowers can struggle if they haven’t built one up yet. For example, it might be that you’re new to the UK, or simply haven’t needed a loan before.
Unfortunately, many traditional lenders struggle to take this into account, which has led to a new kind of lender that bases lending decisions on affordability, based on Open Banking data – more on that later in the piece.
What credit score is needed for a home improvement loan?
There’s no specific number that all lenders use as a minimum. Remember that the credit score you see is just a reflection of the information that credit bureaus hold on you, and it’s not the only criteria on which they base their decision.
Don’t forget that lenders are businesses, with a P&L, and in general they want to write loans that are profitable. Strangely, in some cases, a loan that’s a “sure thing” might not actually be profitable, because the lender might not be able to charge a high enough rate.
So, as a rule, while you may well still be able to get a loan with a bad credit score:
- You’ll have fewer options to choose from when compared to a borrower with a higher credit score,
- You’ll almost certainly have to pay a higher rate of interest, and
- You’re unlikely to be able to borrow as much.
If you have a track record of missed payments, defaults and CCJs, then you’re likely to have a credit rating falling into the category of “very poor”, and will find it very difficult to access credit. But for other borrowers, it’s often a question of interest rate and loan amount, with a more limited choice.
As the Citizens Advice bureau (3) explains:
Because creditors have different systems to work out credit scores, even if you’re refused by one creditor, you might not be refused by others.
Related post: Have You Been Refused A Loan? Here’s What To Do Next
How can I get a home improvement loan with a bad credit score?
Because lenders have different approaches to credit scores, the key thing to do is to shop around.
However, it’s important to understand the difference between “soft” and “hard” credit searches, which are carried out when you make a loan application. A hard credit search leaves a trace on your credit history, which other lenders can see, and too many of these can act as a red flag to other lenders. So, unless you’re serious about a specific loan and have done your research, it’s usually best to avoid these.
However, many lenders – including Koyo – will carry out a soft search when giving you a quote, and lenders should always make it clear when they’re carrying out a hard quote.
If you think you’re likely to have difficulty accessing credit for home renovations or improvements, a good place to start is an Eligibility Calculator, such as this one offered by Money Saving Expert. It gives you an estimate of which lenders are likely to accept your application so that you can go straight to the lenders who may be open to you.
There are also some simple steps you can take to improving your credit score – there’s a good guide here.
Related post: Recently moved to the UK? You won’t have much of a credit history, which can make access to credit for things like home improvements harder than it should be. We’ve put together a detailed guide on how new immigrants can build credit score.
Secured loans
One other way to access a home improvement loan is to consider a secured (rather than unsecured) loan. These loans are usually “secured” against the value of your home, meaning that a lender can take control of your property if you fail to make repayments.
That means it’s safer for the lender, who may be willing to take a risk on an otherwise risky homeowner and might even be prepared to loan larger amounts or for longer periods of time. However, secured home improvement loans are a big risk for the borrower, and this sort of loan is something to consider very carefully. Your home is at risk if you fail to make full repayments.
Before we finish though, there’s one more type of loan to be aware of: an Open Banking loan, which isn’t based on your credit score at all!
How Open Banking loans can help
Open Banking lenders like Koyo aren’t concerned with what other people – credit bureaus, in this case – say about you. Instead, they use Open Banking to verify your bank data and check that the total amount you’re borrowing is affordable for you.
In a nutshell, Open Banking lenders use technology approved by the Financial Conduct Authority to securely view applicants’ bank account data.
What do Open Banking lenders look for?
Instead of only looking only at your credit history, Open Banking lenders look at your real, verified income and outgoings. By doing this, they’re able to get a much clearer picture of whether you’ll be able to meet the monthly payments for a given loan.
Believe it or not, credit bureaus aren’t able to accurately verify this information, so accessing bank data in this way means that Open Banking lenders may be able to make better-informed lending decisions. The benefit for borrowers is that they may be eligible for a loan even if they don’t have a good credit score, so long as the monthly repayments are affordable.
What to consider when getting a home improvement loan with a bad credit score
To summarise, if you have a bad credit score and don’t want it to get in the way of taking out a home improvement loan, here are some things to consider:
- Your credit score is often an important factor when it comes to getting approved for a loan, but it isn’t the only one.
- It’s worth shopping around (without making applications that lead to a hard credit search) to understand your options – an eligibility calculator can be useful.
- An Open Banking lender – such as Koyo – is interested in affordability, rather than focusing on your credit history, so that can be a good option to consider.
- You can often improve your credit score with just a few simple steps.
- However, as a borrower with a bad credit score, you’re likely to find it harder to access the best deals, and will usually face higher interest rates.
Another common way to fund home improvements is toborrow extra money on your mortgage. It’s also a complicated process: we explain how it works, and the alternatives.
If you want to know more about how home improvement loans work in general, we’ve put together a useful guide on the subject, as well as articles on how to pay for a new roof and how to pay for a new kitchen.
And if you’re looking for a flexible personal loan of £1,500-12,000, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%.
Source:
(1)https://www.experian.co.uk/consumer/experian-credit-score.html
(2) https://www.totallymoney.com/free-credit-report/credit-score-range/
(3)https://www.citizensadvice.org.uk/debt-and-money/borrowing-money/how-lenders-decide-whether-to-give-you-credit/
FAQs
Home Improvement Loans for Bad Credit Scores | Koyo? ›
If you have bad credit, which generally means a score less than 580, you probably won't qualify for a home equity loan. Many lenders require a minimum credit score of 620 to qualify for a home equity loan. However, to receive good terms, you should aim to have a credit score of 700 or higher.
Can I get a home equity loan with a 500 credit score? ›If you have bad credit, which generally means a score less than 580, you probably won't qualify for a home equity loan. Many lenders require a minimum credit score of 620 to qualify for a home equity loan. However, to receive good terms, you should aim to have a credit score of 700 or higher.
What will a lender say that someone is when they do not have good enough credit for a loan? ›Insufficient credit history is a term that lenders use to tell you that there is not enough information in your credit report to approve you for a loan or credit card.
What is the minimum credit score for a home equity loan? ›Not all home equity lenders have the same borrowing criteria, but the general requirements include: A minimum credit score of 620. At least 15 percent to 20 percent equity in your home.
What credit score do you need for Acorn financing? ›Anyone can check for offers on Acorn Finance. Generally speaking, the minimum credit score our lenders consider is around 560.
What disqualifies you for a HELOC? ›Borrowers with credit scores below 680 may have a more difficult time qualifying for a HELOC. It's important to note that lenders also consider a borrower's credit history in addition to their score. Borrowers with a history of late payments or other negative credit events may have a harder time qualifying for a HELOC.
What kind of loan can I get with a 500 credit score? ›You can likely borrow anywhere from a few hundred dollars to $50,000 with a 500 credit score. The exact amount of money you will get depends on other factors besides your credit score, such as your income, your employment status, the type of loan you get, and even the lender.
What is most likely to cause a lender to deny credit? ›Credit denial is the rejection of a credit application by a lender. Credit denial is common for individuals who miss or delay payments or default entirely on their debts. Other creditors deny consumers credit because of missing or incorrect information or a lack of credit history.
How do you explain bad credit to a lender? ›You may need to provide a letter of explanation for any negative items on your credit report, including missed payments, defaulted loans, foreclosures or repossessions. The letter should include an explanation regarding the negative event, the date it happened, the name of the creditor and your account number.
What are the 3 C's lenders consider when deciding whom to give credit to? ›Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these character- istics, and then decide whether or not to approve or deny the loan request.
What is the monthly payment on a $50000 HELOC? ›
Loan payment example: on a $50,000 loan for 120 months at 7.50% interest rate, monthly payments would be $593.51. Payment example does not include amounts for taxes and insurance premiums.
Do you need an appraisal for a home equity loan? ›Does Your Home Equity Loan Require An Appraisal? Yes, your home equity loan will typically require an appraisal to protect your mortgage lender. Because you're using your home as collateral, a home equity loan is considered a secured loan.
How can I get equity out of my house without refinancing? ›Home equity loans and HELOCs are two of the most common ways homeowners tap into their equity without refinancing. Both allow you to borrow against your home equity, just in slightly different ways. With a home equity loan, you get a lump-sum payment and then repay the loan monthly over time.
What is the lowest credit score that will qualify a potential borrower for maximum financing for FHA loans? ›Generally speaking, to get maximum financing on typical new home purchases, applicants should have a credit score of 580 or better. Those with credit scores between 500 and 579 are, according the FHA guidelines, "limited to 90 percent LTV".
What credit score is needed to finance with Capital One? ›Credit requirements vary by auto lender, but Capital One's lowest rates are typically available only to borrowers with good or excellent credit (generally a FICO score of 690 and above). Borrowers with bad or fair credit won't qualify for the lowest interest rates.
What credit score is necessary for financial success? ›The average homebuyer, with a good credit score – somewhere above 700 – will pay thousands (maybe tens of thousands) less over the life of a 30-year mortgage than someone with a credit score of 620 or under. A credit score of 730 to 760 is required to get the best rates on loans.
Why do home equity loans get denied? ›Poor credit score. Insufficient home equity. Unstable employment or income history. Poor debt-to-income ratio.
Do home equity loans ever get denied? ›Home equity loan denial is often out of your hands
While you might expect to be turned down for a home equity loan if you have a poor credit score or unverifiable income, the fact is, even with good credit, a bank can still turn you down.
While qualifying for a HELOC depends more on your home equity than your credit score, good or excellent credit can simplify the process and make it a lot easier to qualify for a HELOC. A good average to shoot for is 645 or higher. Plus, the better your credit score, the better your interest rate.
Can I get a loan with a 524 credit score? ›Credit Rating: 524 is considered a bad credit score. Borrowing Options: Most borrowing options are available, but the terms are unlikely to be attractive. For example, you could borrow a small amount with certain unsecured credit cards or a personal loan with no credit check, but the interest rate is likely to be high.
What kind of loan can I get with a 582 credit score? ›
| Type of Credit | Do You Qualify? |
|---|---|
| Unsecured Credit Card | YES |
| Home Loan | YES (FHA Loan) |
| Personal Loan | MAYBE |
| Auto Loan | MAYBE |
Requirements for a $5,000 loan vary by lender. But in general, you should have at least Fair credit, which is a score of 580 or above. Lenders may also look at other factors, such as your income and your debt-to-income ratio (DTI), during the application process.
Why won't anyone give me a loan? ›The most common reasons for rejection include a low credit score or bad credit history, a high debt-to-income ratio, unstable employment history, too low of income for the desired loan amount, or missing important information or paperwork within your application.
Why is that all my loans getting rejected? ›The most common errors in your credit report can be incorrect reporting of some payments, mistakes in your personal details, a closed account still shown as active, PAN Details, and more. Such errors in your credit report can also lead to the rejection of your loan application.
What are the only three reasons a person can be denied credit? ›The reasons they give for rejecting your application must be specific, such as, “Your income is too low,” “You have not been working long enough,” or “You didn't receive enough points on our credit scoring system.”
What are the 5 C's of bad loans? ›Each lender has its own method for analyzing a borrower's creditworthiness. Most lenders use the five Cs—character, capacity, capital, collateral, and conditions—when analyzing individual or business credit applications.
What are the 5 C's of bad credit? ›This review process is based on a review of five key factors that predict the probability of a borrower defaulting on his debt. Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral.
Will a bank approve a loan with bad credit? ›Various banks, credit unions and online lenders offer loans to those with poor credit, but the threshold for what's considered a “creditworthy borrower” varies by institution. Some lenders have stricter requirements than others, which makes it important to shop around for the best option.
What are the five P's of credit? ›Since the birth of formal banking, banks have relied on the “five p's” – people, physical cash, premises, processes and paper. Customers could not bank without being exposed to the five p's.
What kind of credit card can you get with bad credit or no credit score? ›We believe the best credit cards for bad credit are secured cards. With these cards, you provide a security deposit, which protects the issuer in case you don't pay. (When you close or upgrade the account, you can get your deposit back.)
What is a springing loan? ›
A lien on assets of a company that will arise on the occurrence of a specific event. For example, a loan agreement may include a springing lien that requires the borrower to pledge its assets to secure the loan if the borrower's credit rating falls below a specified level.
What is the average monthly payment on a $50000 loan? ›How much would a monthly payment be on a $50,000 personal loan? If you take a $50,000 personal loan at a 6.99% interest rate and a 12-year repayment term your monthly payment should be around $462. If you take the full 12 years to repay the loan you should pay about $16,556 in interest.
What is the monthly payment on a $150 000 home equity loan? ›...
See your monthly payments by interest rate.
| Interest | Mortgage term | Monthly payments |
|---|---|---|
| 8.00% | 30 years | $1,101 |
| 8.25% | 15 years | $1,455 |
| 8.25% | 30 years | $1,127 |
Home equity loans can be a good option if you know exactly how much you need to borrow and you want the stability of a fixed rate and fixed monthly payment. HELOCs come with variable rates, which make them less predictable. But rates are expected to drop this year, which means getting a HELOC might be the smarter move.
Does a messy house affect an appraisal? ›If you are ready to have your home appraised, you should address any significant issues that may affect your home's value—such as damaged flooring, outdated appliances, and broken windows. A messy home should not affect an appraisal, but signs of neglect may influence how much lenders are willing to let you borrow.
What is the difference between a HELOC and home equity loan? ›With a home equity loan, you receive the money you are borrowing in a lump sum payment and you usually have a fixed interest rate. With a home equity line of credit (HELOC), you have the ability to borrow or draw money multiple times from an available maximum amount.
What are the steps to getting a home equity loan? ›- Decide how much cash you need.
- Check your credit before applying.
- Get quotes and compare interest rates.
- Complete your application and turn in financial documents.
- Wait for approval, including underwriting and appraisal.
- Close on the loan and receive funds.
Home equity loans are secured against your home, so you can't borrow more than the value of the equity you hold in your home. Your equity is the value of your home minus the amount you owe on your first mortgage. Lenders may be able to lend you up to 85% of this value.
How soon can I borrow against my house? ›A HELOC can be obtained 30-45 days after the purchase of a home. However, borrowers will need to meet all of the necessary lender requirements, including 15-20% equity in home, good repayment history, and more.
What is the interest rate on a home equity loan? ›...
What are current home equity interest rates?
| LOAN TYPE | AVERAGE RATE | AVERAGE RATE RANGE |
|---|---|---|
| Home equity loan | 8.15% | 7.43% - 9.75% |
What is the typical accepted amount for a home equity line of credit? ›
Lender guidelines vary, but the average HELOC limit offered by most lenders is 80%-85%. That means your HELOC amount and your current mortgage balance, when combined, can't exceed 80%-85% of the home's appraised value. Some lenders allow up to 90%, and some even as high as 100%.
What is the typical accepted amount for a home equity loan? ›How much can you borrow with a home equity loan? A home equity loan generally allows you to borrow around 80% to 85% of your home's value, minus what you owe on your mortgage. Some lenders allow you to borrow significantly more — even as much as 100% in some instances.
Can I get a mortgage with a 530 credit score? ›Credit scores from 500 to 579: Theoretically, you can qualify for a mortgage with a credit score as low as 500, but you'll be limited to a loan insured by the Federal Housing Administration. With a credit score from 500 to 579, you'll need a down payment of at least 10% for an FHA loan.
Can you get a HELOC with bad credit? ›It depends on what your credit report looks like and the lender's requirements. That said, you often need a credit score of at least 680 to get a home equity loan. Some lenders will go below that number, but in general, the lower your credit score, the harder it will be to find a lender and get favorable terms.
How much would a $50000 home equity loan cost per month? ›Loan payment example: on a $50,000 loan for 120 months at 7.50% interest rate, monthly payments would be $593.51. Payment example does not include amounts for taxes and insurance premiums.
Do I need an appraisal for a HELOC? ›When you apply for a HELOC, lenders typically require an appraisal to get an accurate property valuation. That's because your home's value—along with your mortgage balance and creditworthiness—determines whether you qualify for a HELOC, and if so, the amount you can borrow against your home.
How hard is it to get a HELOC? ›While qualifying for a HELOC depends more on your home equity than your credit score, good or excellent credit can simplify the process and make it a lot easier to qualify for a HELOC. A good average to shoot for is 645 or higher. Plus, the better your credit score, the better your interest rate.
Can I get equity without refinancing? ›Home equity loans and HELOCs are two of the most common ways homeowners tap into their equity without refinancing. Both allow you to borrow against your home equity, just in slightly different ways. With a home equity loan, you get a lump-sum payment and then repay the loan monthly over time.
What credit score do you need for a Wells Fargo home equity loan? ›Wells Fargo lays out the eligibility requirements on its website. To take out a home equity line of credit, you'll need good to excellent credit of 700 or better. The lender said it considers people with fair credit, but charge more expensive rates.