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In the financial world, a company who provides a person (or a company) money is known as a lender.
A loan with an authorised FCA lender is a legitimate financial agreement that enables money to be transferred to a person (or company) over a predefined period. This is called credit. Every lender in the UK will have their very own stance towards credit risk, some lenders will provide finance to all credit types, some will only provide to individuals with bad or poor credit. Typically, a lender who provides a loan to an individual with bad credit will charge a higher interest rate.
When a lender assesses the level of risk prepared to take when providing loans, they must ensure that all factors are considered. If an individual has a poor or bad credit rating then there is a likelihood that the applicant has had a history of missed payments, makes irregular payments, has defaults and/or has possibly been issued court proceeding for not paying their credit agreements for their contracted obligations. There are other factors such as IVA’s and bankruptcy that may be deemed as ‘high risk’ or a ‘red flags’ which could result in a lender not approving an application.
As a person with bad credit are deemed to be a higher risk, lenders will charge a higher interest rate as this is the way that the lender counterbalances this risk as there is, unfortunately, a high default rate when lending to persons with bad credit.
There are 3 main providers of credit scoring organisations in the UK. These companies are used by retailers, financers and loan providers. It is really important that you know your credit rating and you employ good financial etiquette by meeting your payments on the day that they are due as this will send positive signals to the credit reference agencies who will, in turn, elevate your credit score.
Experian are a well-known Global credit reference agency that operate in the UK who have been established since 1996. Their UK website can be foud by clicking here.
Equifax is one of the oldest credit checking agencies. They operate globally and were founded in 1899. Their UK website can be found by clicking here.
TransUnion is a global credit reference agency that operates in the UK under the brand name credit karma. Their UK website can be found by clicking here.
A credit score has 5 points of reference ranging from ‘Very poor’ to ‘Excellent’. If you had a score in either of the 1st and 2nd segments (Very poor – Poor) the majority of lenders would consider that to be a bad credit rating. To see more on loans for people with bad credit and credit scores the please see our a more detailed explanation here.
Credit scores are only a small part of what a lender looks at to determine if they would like to lend to someone & some loan providers may not rely on a credit check agency at all. A lending decision is made (underwritten) on the answers you give during the application process. All of your answers are checked against the lenders score card to determine if you meet their minimum lending criteria. This lending criteria is the lending weighing up your suitability against what risks they are prepared to take. This is known as a credit risk analysis.
A lenders scorecard is the model that a lender uses to decide weather an individual meets their specific lending criteria. This is more commonly known as a Credit Scorecard. This modelling provides a lender with an evaluation of the person who would like to borrow money and provides an overview of the risk that the lender would have exposed themselves to. A lenders scorecard is one of their most important tools and will be used to determine the interest rate that should be paid by the borrower.
Having a good credit rating is paramount if you want to borrow money and pay as little interest as possible. Having a poor credit rating will limit the number of lenders that will be prepared to lend to you and if you have a bad credit rating you will definitely pay a higher interest rate as you will be deemed a high-risk borrower.
Only look at borrowing from reputable organisations, these companies must registered with the Financial Conduct Authority. The FCA register can be found here.
Take some time to understand how you are seen by lenders by researching your credit rating and overcoming any bad financial habits you may have, i.e. regularly missing payments. You should attempt to adopt best practises to help elevate your credit rating so you are seen as someone who is creditworthy. It is never too late to make changes to your financial lifestyle that will in time, help to increase your overall credit rating. Do not apply to multiple lenders in quick succession as this will result in your credit score being adversely affected.