Feeling rejected?
Recent data suggests the conversion from application to acceptance is between 30-40%, meaning banks are cherry-picking the best prospects and rejecting up to 70 per cent of loan applications. In the adverse and secured loans market, finance companies say that, from April 2007 to April 2008, their rejection rate was 21%.
These are but two examples of lenders tightening their criteria for lending; and, although few lenders are willing to go into specific detail what they look for on a loan application, that could be the difference between acceptance and rejection. If youre looking for a personal loan, there are a number of things you can you do to shorten the odds in your favour of being accepted.
Many believe that the first step in the applications procedure for a personal loan is to look for the lowest rate on the amount you need to borrow, and that's the first mistake the potential borrower makes. Banks rarely make the decision to lend to you based solely on the information you've put on the application form. They also rely on third part sources such as credit reference agencies.
How to 'score' a loan
The first thing credit reference agencies look for for on the lenders behalf is whether or not the applicant is on the electoral roll. Data from CIFAS, the UK's Fraud Prevention Service, shows that fraudulent applications rose by over 20% in 2007 compared to 2006. And worryingly, the numbers of fraudulent applications that succeeded in being granted credit were up by nearly 65% year on year. The first thing a finance company wants to know is that you live at the address you've supplied and the easiest way of checking this is with the electoral roll.
The leading credit reference agencies "score" potential borrowers with points allocated for various lending criteria and the more points on the score, the more creditworthy the borrower. The agencies themselves don't approve your application, but the information they provide influences the lender and is a large contributing factor in whether you qualify for a loan or not.
There are a number of steps you can take to help improve your credit score. The first - obviously - is getting on the electoral roll. If you have outstanding balances on your credit cards, try to pay more than the minimum each month as this will not only help you build a better credit history, but also reduce the debt quicker and save you interest.
Avoid carrying a balance that is more than 30% of your credit limit (on a £5,000 card limit, this means anything over £1,500); creditors may view it as excessive debt and conclude that, if you can't keep up repayments on current debts, you'll struggle taking on more debt.
Two final points about your credit rating:
The first is to avoid multiple loan applications as each application - successful or not - leaves a "footprint" on your credit file. Lenders may view a flurry of credit application searches as indication that youre desperate for money, over-extended or even that your identity has been "cloned" and all the applications are fraudulent.
The final word on your credit rating is this: avoid credit repair companies. These are not credit reference agencies and don't have the authority to amend your credit report. Don't be tricked into paying for services you don't need when you can do it directly with a credit reference agency for a nominal fee.
It's only when you've sorted this out should you think of filling out an application form. The only criterion for filling in a loan application form in is: be honest. Telling lies on the application form is not a good idea for a number of reasons, not least because it's fraud.
You may think being economical with the truth is OK, but the lenders will merely consider you a criminal. For one thing, any "discrepancies" between your declared existing debts and what a reference agency discovers will be dimly viewed and could go on your credit record, making it even harder for you to get credit.
It also helps your case if you have what banks call an "existing and ongoing relationship" with the institution and they have evidence to suggest you manage your finances well. If your finances are a mess, you may think you're being clever by avoiding banks you've dealt with in the past - this is good in theory but, in practice, you could come a cropper. Many seemingly independent lenders are owned by the same corporation for example, you could be in arrears with a loan from Nat West, behind on your Mint credit card and apply to RBS for another loan only then to discover RBS owns both.
Your loan application will hopefully be successful.
13 May 2008