Lenders: The Other Side of Borrowing

During the past few years, the British government has passed a number of legislations in order to make it easier for lender to assess the financial status of a borrower. However, these legislations were not primarily meant to make the job of lenders easier, but to improve the process by which they are able to make the right decision when handling a loan application. This streamlining of the lending process has provided financing companies with the necessary tools required to make the right decision while being fully informed of the application details.

As a result, a decrease in the application process time has been observed by a lending market information company based in London. This has also encouraged more people to apply for a rising amount of loans in the country. The Citizen’s Advice Bureaux has reported a steep rise in credit being sought for a wider range of purchases in the last five years. This includes the majority of financial sectors which are responsible for the continued growth of the GDP. These sectors are domestic spending, real estate and small and medium businesses. The growth in these sectors are the chief reason the U.K. is seeing an economic resurgence in recent years. This article will examine the lending side of loan application and what a financer is looking for to grant it an approval.

Credit Ratings for Personal Loans

Creditors have to assess the financial situation of an applicant to decide if their application possess the weight to be granted an approval. The credit rating of a person is a combination of financial and social situations including the history of payments made by the applicant. A credit score can be improved upon by taking certain steps as highlighted by the Money Advice Service (MAS) of the U.K.

If a borrower expects their credit score to be good simply because they have never taken out a loan, they could be facing an unwelcome surprise. A credit score does not exist without taking out credit. As arbitrary as this might sound, explains MAS, taking out loans improves the appearance of a borrower as it establishes their presence in the credit market. Although, of course this depends upon regular repayments of this loan.

Other factors that are contributory to improving a credit score is whether or not an applicant is signed up to the electoral register, length or residency to one address and number of current loans. The importance of knowing how long a potential borrower has lived at an address is indicative of their financial stability and their standing in the community. An applicant that has moved around from address to address would raise red flags for a lender as it would give an impression that the borrower does not have the financial stability to maintain residence at one property.

The credit rating would determine how much the lender considers an applicant a risk for financing. This would be reflected in the outcome of the application, and upon the interest rate, if it is approved.

Another important aspect of lending from various financers is that each application leaves a trail on the borrower’s credit report. A lender would see this as an act of financial desperation and would likely deem the applicant a risk of payment default.

Mortgages

Lenders use a number of tools and algorithms to analyse the application of a mortgage. As this type of lending spans over decades and would require a fairly large sum of money to be invested, a lender has to examine several financial indicators of a borrower.

The first and foremost aspect that is examined is the total income of the applicant. If a joint application is being made, the income of both applicants is figured in the assessment. This would paint a primary picture of affordability of the loan. After figuring in the incomings of an application, the lender would calculate all the outgoing due that would have to be paid from the sum of incomes. This would include council tax, bills, loans, credit cards and any other dues that have a claim in that sum.

The creditor would also perform a stress test on the finances to see if it has a reasonable chance to continue making mortgage payments. This stress test would run simulated financial difficulties to ascertain how well and applicant can manage their dues. A sudden increase in the mortgage interest rate, a sickness of the primary income earner or any other emergency that requires a diversion of fund would be factored in the stress test.

Other factors that a lender might look at could be novel to different companies offering a loan. For example, the number of children that an applicant cares for is also a major source of outgoings from the income. MAS has calculated that to raise a child from birth till the age of 21 years old would cost a parent an average of £31.23 per day.