Anyone wanting to borrow money is going to be required to have a credit search. Tenant loans, unsecured personal loans, secured loans and mortgages are all the same in this respect but what is a credit search and what difference could it make to your application?
When people make applications for loans, their chosen lender makes a risk assessment about them and their investment in the loan. For the lender to make a profit, they need the borrower to adhere to the terms of the credit agreement and continue to repay the loan until the total amount borrowed plus the interest that has been agreed, has been paid off. The interest is effectively their profit on the loan.The last thing that the lender wants is for you to fall into arrears and then to default altogether. They stand to lose their initial capital investment plus the interest over the term of the loan.
With a secured loan or a mortgage, the amount that you borrow is guaranteed to be repaid. How? In the worst case scenario where the customer defaults, the lender can force a sale of the property on which the loan is secured. The resultant sale will generate proceeds, out of which, the lender will take out the amount that they are owed. This is why, when the lender is assessing your loan application, they look at your LTV (Loan To Value) which simply means the amount of money that you owe to your mortgage and any other debts secured on your property compared to the value of your property if you were to sell it on the open market. The difference between these figures is known as your equity.
With a tenant loan or any other form of unsecured loan, there is no property to secure the loan against which means that there is a potential of much greater risk for the lender as they are not necessarily guaranteed of recouping their money in the event of a default. This is why the amount of money that you could potentially borrow with a tenant loan is generally speaking, significantly lower than with a form of secured lending. Typically, unsecured loans range (although there are other forms of unsecured credit which may be for very small amounts using such things as credit cards and store cards) from around £500 to £15,000 whereas secured loans range from £5,000 to £250,000 and mortgages cater for much higher figures than these.
During the application process, the lender will want your permission to allow them to check your credit file through one of the large credit reference agencies such as Experian or Equifax. This will show the number of times you have applied for credit and each repayment or default you have made. It enables them to see at a glance, exactly what the likelihood is of you defaulting on the loan in the future.
Is Your Credit History Different From Your Credit Rating?
Although the two terms sound very similar, they are in fact quite different in their meaning. As we have just seen, your credit history is the record of what credit you have applied for and whether you have kept up the repayments or not. Your credit rating is not quite the same.
With most lenders, when you apply for a loan, they use a system called credit scoring. This simply means that they apply a points system to your financial circumstances. They analyse your income, your outgoings, how long you have been in your property, whether you have missed any repayments in the past, how long you have been in your present job and so on. This system builds a picture of whether you can afford the repayments of your new loan and the chances of there being a default.
In this case, if a lender declines your application on the basis of your ‘credit rating’, do not despair as every lender uses a slightly different scoring model. So if you fail because of your credit rating with one lender, you may still pass with others. It is somewhat of a myth that you have a credit rating at all since every lender will most likely apply a different score to you and your financial circumstances.
Is This The Only Reason The Lender Might Reject My Application?
No. A lender can still reject your application even if you have a good credit rating. Why? They are commercial institutions and they need to make a profit. If they do not consider that they can make enough from your application, then they may decline your application. In this way, credit scoring and credit ratings are more about profit than they are about risk. Even the Reverend Timms (fictional character) who has never missed a payment in his life could still potentially be rejected on the basis that the lender could not justify applying a high enough interest rate to make any money out of the deal.
So again, don’t despair. Tenant loans, like any other unsecured loans are judged on a number of factors and if you fail with one lender, it doesn’t necessarily mean that you will fail with every other lender out there. Happy hunting!
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