What if someone says 'no' to your loan

By Stewart Farr
2008

Your loan or mortgage application has been turned down, despite your (to yourself) evident earnings ability to meet repayments. Why?
The lender has checked the system and discovered an adverse credit rating against your name, a financial blemish you were possibly unaware of or had long forgotten. Such a poor credit rating shouldn't, though, prevent you from borrowing the money you need; but it will make it more expensive.

Unless you're a convicted credit felon of epic scale, it's always possible to borrow money if you provide security and/or meet the higher interest charges.
Achieving an adverse credit rating is easy if done deliberately but it's not difficult by accident. Missing a credit card payment or two, overlooking a parking fine, non-payment of a utility bill in the confusion of divorce and changing address; these and other financial mishaps can clock up on your credit record and put you in the sub-prime category where borrowing is concerned.

You don't have to be young and in a low income bracket to be at risk to adverse credit labelling. Research by lender GMAC-RFC shows nearly 75% of people using sub-prime mortgages are 35 to 54-years-old while the findings of BM Solutions reveal the average annual salary of a borrower afflicted with the adverse credit tag is £30, 000.
For many people, failing a lender's credit scoring check may provide the first clue that they have a problem. Remember that county court judgements (CCJs) can be granted by a court in your absence; you may not realise you have one and it will remain on your credit record for six years. Also note that your credit rating could be further blackened by repeated attempts (and rejections) to obtain loans at prime rates.

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First of all, keep tabs on your credit record and eliminate the potential for nasty surprises when you submit a loan application.
The lender, when rejecting your application, does have to tell you which reference agency was used to determine your adverse credit rating. But under data protection laws it cannot tell you what the particular credit problem is; you approach the agency to request further information.
You can contact credit reference agencies to amend any credit details that are incorrect and you can put a note on your file to explain any mitigating circumstances, for instance a divorce, which have affected your credit standing.
You may find a loan is not forthcoming if you have a low credit score, despite being financially secure with no adverse credit history. The low score can be the result of failing to maintain regular employment or a fixed address. Ensure, too, that you are on the electoral register of your local council.

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What to do if refused
Adverse credit means you're not a candidate for a prime borrowing rate. Depending on your credit black marks and the individual policy of the lender you could be treated as near prime, but if your credit unworthiness is severe you're very likely to be designated sub-prime.

Where mortgages are concerned, sub-prime status has achieved alarming notoriety in recent weeks, particularly in the USA. While this might not result in the disintegration of the capitalist economic world as we know it, the attitude to sub-prime borrowers has hardened.

Some lenders have pulled out of the UK market which is being investigated by the Financial Services Authority, concerned about borrowers' ability to meet repayment costs.

The first step is to seek independent financial advice from a mortgage broker. Interest rates (usually starting a couple of percentage points above the lender's standard variable rate) can vary significantly in the sub-prime market depending on the severity of the adverse credit rating.

There's also the possibility of a higher-lending charge, often charged on loans of more than 90% of a property's value. And a reasonably friendly interest rate can come attached to a hefty repayment charge (eg 6%) on redemption.

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This is something to keep in mind if you plan to tough out the increased cost of a sub-prime mortgage for two years, say, using it through assiduous repayment as a chance to repair your credit rating.

Borrowing money in the form of a secured loan is also possible under adverse credit. However, you should assess carefully the terms and conditions attached to the loan (they are binding) and be 100% certain of your ability to repay. Although they tend to be granted quickly and are generally easy to obtain by those with blemished credit ratings, secured loans give the lender security, not you.
If you default the lender can forcibly sell your house (the security) to recover the loan. If the amount of money you need is relatively small (eg £10, 000) a personal unsecured loan could prove the best option. You will have to shop around and the interest rate will be higher than the advertised headline rate. The risk here is that, if turned down, think hard before approaching other 'good deal' lenders, as each will search your credit file, leaving behind a footprint. Your adverse rating could become even more adverse.
 

Courtesy:

http://money.uk.msn.com/loans/loans-guide/article.aspx?cp-documentid=6126285

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