When you apply for a loan, the lender will use various factors to determine whether or not you are eligible. They make these decisions by assessing the likelihood that you will be able to repay the loan, as well as your potential risk factors. Different types of loans can have different requirements; for example, a loan with collateral carries less risk because there is collateral attached. Bad credit direct lenders provide another kind of loan specifically for people with bad credit. Read on to find out what factors lenders use to make loan decisions.
Credit Scoring
The first step in obtaining a loan is to fill out the loan application. This application contains information about the borrower, and at the end of the form, the borrower must give the lender permission to look up the credit reference score. This allows the lender to access the credit reference file, which is kept by a credit reference agency, such as Experian, Equifax, or Transunion. The lender will use this information to make a decision about whether or not to give the loan.
Credit Reference Agencies
Experian, Equifax, and Transunion are third-party services that keep information about all people, and a lender can access them if a borrower signs the application, which gives permission. These agencies keep the following types of information:
- Public Records: This will include bankruptcies and court judgments. In England, Northern Ireland, and Wales, it will also include IVAs, Debt Relief Orders, and Administration Orders. In Scotland, it can include degrees, DAS Debt Payment Programmes, Trust Deeds, and Sequestration Orders.
- Electoral Roll: This is a record of the dates you registered to vote and where you lived.
- Accounts: This includes bank accounts and credit cards, and it keeps a record of late payments.
- Home Repossessions: This will show if you have ever had a home repossessed.
- Financial Associations: This is a record of anyone that you have applied for credit with or had financial ties to.
- Linked Addresses: This shows anywhere you have lived.
- Previous Searches: This shows anyone who has checked your credit scoring in the past year.
Credit reference agencies usually hold information for six years, at which time it will be removed from your report. If you find something on this report that is older than six years, you can submit a request to remove it, and it will usually be removed.
What to Do If You Are Denied a Loan
Sometimes, lenders at traditional institutions have strict rules and will not lend to you if you have any poor payment history. Once they determine your risk factor, they will decide whether or not to advance the loan. Different things can happen at this stage. The lender may simply reject the application. On the other hand, the lender may agree to advance the loan. However, the credit scoring can determine what the terms of the loan will be.
The higher a credit risk the lender sees you as, the higher the interest rate. When someone is a higher risk, the lender wants to make more money for advancing the credit.
Another possibility is that the lender will request that you find a guarantor. The guarantor will sign the loan papers and agree to repay the money if you default on the loan. In this case, you are using another person’s credit scoring to get the loan.
When you use a Guarantor to obtain a loan, that person will also have to fill out the application. They will have their credit scoring checked the same way. It is important to understand that the guarantor is assuming the risk in these cases. If the borrower doesn’t pay the loan, the guarantor will have to. In addition, missing payments on the loan will hurt the Guarantors credit scoring.
What to Do If You Are Denied a Loan
If you are denied a loan and you are unable to find a Guarantor, there are still ways to borrow the money you need. Odds are that the problem is that somewhere along the way, you have had difficulty in paying your bills on time.
The first step is to make a budget and determine where your money is spent each month. If you have debt and have not been able to pay it off, you need to write out your budget so that you can make a plan. You may find out that you are spending money in some category where you could be saving.
The next step will depend on the purpose of your loan. For instance, if you have an emergency and need to purchase a washing machine, but you can’t afford it, there may be an organisation that can help you get one. You should check a list of resources for buying appliances that you need.
You can also apply to other lenders. Each lender has its own factoring score to determine whether or not it will lend to you. Different companies have different guidelines, so you may have better luck with another lender.
You may find that a credit union has less strict guidelines for borrowing money. There are also lenders that specialise in bad credit loans. You will want to find out who they are because they may be able to loan you the money when a traditional lender cannot.
Finally, you may want to clean up your credit reference file. The best way to do this is to get a copy of your credit scoring and go through it. If you see any inaccurate information, you should make an effort to have it changed or removed.
Final Words
Lenders have a system that they use to decide whether or not to lend money to individuals and businesses. They take the information in your application and they check your screed scoring. Your credit scoring is a collection of information that is kept on file to show lenders whether or not you are a good risk for borrowing money. If your past payment records indicate that you pay your bills on time, lenders are more likely to advance the loan. It is important to do everything you can to keep your credit reference file up-to-date and accurate.
If you are denied a loan, you may be able to get one using a Guarantor. It can be hard to find someone who is willing to sign his or her name on your loan account, and people usually ask a parent, family member, or a close friend.
Finally, you may be able to borrow from a lender that specialises in bad credit loans. Bad credit direct lenders use different factors including your income and your ability to pay the loan back. This can often be a solution to cash flow needs because their focus provides opportunities for a wider range of people.
The best way to improve your borrowing power is to make sure that your credit reference file is up-to-date. If there are late payments and unpaid bills on it, most lenders will turn you down. The best way to handle this is to work on building up your credit reference file by making your payments on time and working out arrangements to pay off your debt.