Back in 2008, the financial crash led to the loss of thousands of jobs, and the government having to step in and secure the future of banks such as the Royal Bank of Scotland. When the causes of the crash were fully investigated, it was found that one of the main causes was what was termed subprime lending. In basic terms, this meant that the banks were offering credit to people or companies who were a precarious financial situation, and when energy prices started to rise in 2007, these bad risks started defaulting on their loan or mortgage payments.
One of the main consequences of the 2008 credit crunch was that the banks totally changed the way in which they approach lending decisions. It’s now all about affordability for the customer, not just at the time when the credit is taken out, but also in the future. Responsible lending is the term most often used by the financial services industry, but what does this mean from the point of view of someone thinking of applying for a new mortgage or credit card?
Importance of Soft Searches
The first thing to think about is that different lenders prefer to deal with different types of customers. Some banks, building societies or credit card companies for example target very high net worth individuals who earn £100k a year or more, so even if your credit score is as good as it could be, you are wasting your time applying for a credit card with them if you are in a minimum wage job. Similarly, one company may be willing to take a risk on someone with one or two late payments on their credit report, whereas another may not risk lending to anyone in that situation. One good way of working out whether you are likely to be accepted for a loan or other agreement is to carry out a soft search, on a site branded as an eligibility calculator or checker. These sites can’t ever give a cast iron guarantee that you will or will not be accepted but can give a general probability. Most sites will rank all lenders in order of probability, allowing you to quickly select the lenders which you stand the highest chance of success with. This is known as a “soft search” and won’t show on your credit record like a firm application for credit.
Factors Considered by Lenders
Apart from companies which target borrowers in a specific salary bracket, or who live in a certain location, there are some other more general factors which lenders will look when evaluating how risky you are as a potential customer.
The most important of these is your credit score. Your credit score and related credit history will tell a lender whether you are currently managing your money, and whether you have missed payments of been taken to court over not paying back loans in the past. You can check your own credit score by requesting your credit file from Experian, Equifax, or TransUnion, or by downloading one of their smartphone apps.
Many credit agreements, especially for larger amounts, will have an affordability checker questionnaire. Applicants will be asked about their income and outgoings, so that the lender can work out whether they are on a tight budget or have plenty of extra cash coming into the household. If the bank decides that your finances might be too stretched to meet payments if your situation changes, they might either decline the application altogether, offer a smaller amount, or increase the interest rate to cover the additional risk that you won’t pay back.