In recent years it has become much harder for an individual to be accepted for a new loan or credit card, largely due to the financial problems in the banking sector since the credit crunch, but also due to the fact that many people have damaged their credit rating by missing payments on existing loans and cards and building up loan arrears.
As a result of this, more than a quarter of potential borrowers who have applied for a new loan or credit card over the course of the last twelve months, have ended up being rejected by the lender, according to new research.
The report comes from Moneysupermarket.com, who estimate that somewhere in the region of 4.5 million individuals have been turned down for a new loan or other form of credit within the last year, due to their credit report and have therefore possibly damaged their credit rating yet further, as loan applications and rejections leave a footprint on a person’s credit file.
This emphasises the need for people to check their credit profile before they apply for a new personal loan or credit card of any kind, in order to check they are likely to be accepted for the loan.
Even someone who has had a good credit rating could be rejected if they have already made several loan applications within a short period of time.
Kevin Mountford of Moneysupermarket.com said “The decision to borrow should never be taken lightly, but credit cards still have a huge role to play in the nation’s finances if used correctly.”
“However, it’s worrying to see such a huge number of people being rejected for credit cards and loans, especially as you could avoid being declined by taking time to research the best deal for their needs.”
“Rejected applications can have a damaging effect on your credit score and further reduce the chances of you qualifying for another credit product in the future.”
People who take out a second charge loan, or secured loan on their home are to receive a higher level of protection from later on this year, when the whole of the secured loan market becomes regulated by the Financial Services Authority (FSA).
At the moment, mortgages and first legal charge home owner loans are already regulated by the FSA an this offers borrowers a much higher level of protection if they should fall into arrears or default on their loan, making repossession an absolute last resort for a lender.
However, there is currently no such regulation in place for secured loans, or second charge loans and as a result of this, a large proportion of properties which end up being repossessed by the lender are due to the borrower defaulting on a secured loan and not the main mortgage or home owner loan.
Currently, secured loans are covered by the Office of Fair Trading (OFT), but the Treasury has said that regulation will be shifted across to the FSA, probably at some time later this year, thereby providing a much higher level of protection for secured loan borrowers taking out a new loan.
The changes in regulation will only apply to new secured loans which are being taken out following the introduction of regulation and not to any existing loans already in force.
Paul Broadhead of the Building Societies Association said “In principle, the measures announced by the Government are sensible. Any tightening of the underwriting criteria of first charge mortgages, through rules imposed by the FSA, has the potential to drive customers to other forms of credit, such as second charge mortgages. These loans are often more expensive and are subject to a different regulatory structure.”
“Bringing second charge loans under the FSA remit will help ensure that there is a consistency in regulation and could make it simpler for consumers.”
One of the biggest difficulties stopping first time buyers getting into the housing and home owner loan market in recent years, has been that of raising a large enough deposit to be able to meet lenders strict criteria on loan to value ratios.
One solution to this problem could be a “do it yourself” loan from family members, to help get them a lower loan to value and therefore a more competitive cheap loan deal, according to one mortgage industry expert.
Ray Boulger of John Charcoal mortgage and home owner loan brokers, said that potential first time buyers could borrow the deposit they required from relatives with savings at a lower rate of interest than they would typically be forced to pay for an equivalent unsecured loan with their bank or other lender.
Not only would this benefit first time buyers, who would receive a cheap loan to help with their deposit, but also their relative who provide the loan, as they would receive a better rate of interest on their money than they would be likely to get from a traditional deposit account.
In addition to the obvious benefits of a family loan, taking out a home owner loan with a lower loan to value would improve a first time buyer’s chances of being accepted for the loan they required and also give them a more competitive interest rate from the lender, due to a reduced loan risk level.
We reported recently that Hitachi Capital has also launched a scheme in connection with Barratt homes, which allows parents to take out an unsecured loan to help their children with a deposit.
Ray Boulger of John Charcoal said “The differences between interest rates charged for a 75 per cent loan to value mortgage and one at 85 per cent is so high that a first time buyer could afford to pay a family member an increased rate of interest.”
Many individuals who have attempted to get a new loan over the course of the past couple of years or so, may well think that lending criteria has become so tight that it is almost impossible to be accepted for the loan they require.
However, the situation for applying for an unsecured loan or credit card could become a lot tougher still from the beginning of next month, according to a report from moneysupermarket.com, as a new directive is to be introduced for lenders to assess the affordability of a loan for their customers.
The Consumer Credit Directive will come into force on the 1st of February this year and will apply to loan application across the whole of Europe. The Directive is designed to create a greater level of transparency for unsecured loan applicants and more protection for borrowers.
One down side of the new rules is that far fewer loan applications made in the UK will actually end up with a loan which has the interest rate which was initially advertised by the lender, as the rate charged will be based on a credit assessment of the individual who applies for the loan.
This means that only those with a perfect credit rating are likely to get the advertised loan rate, with many others paying a higher rate, depending on their circumstances. It is estimated that only around half of all loan applications in the UK will end up with the advertised rate under the new scheme. Currently the figure is around two thirds of loan applicants.
Tim Moss of Moneysupermarket.com said “If you are looking to apply for a credit card or personal loan then you should look to apply before February when the chances of being accepted at the advertised rate diminishes.”
“However, it is important to understand your credit file before you apply. Those with less than perfect credit histories are more likely to receive higher rates so understanding your credit file will be more important than ever.”
Although last year saw some slight signs of economic improvement in the UK, for many consumers 2010 was a complete year of doom and gloom, particularly when it came to their finances and managing their personal loan and credit card debts.
And it would appear that the situation has not improved for many, as around one third of all consumers in the country expect their financial situation to get worse over the course of the next twelve months, rather than improve, according to a recent survey.
The survey was carried out by the insolvency trade body R3, who found that a growing number of individuals in the UK are expecting to face a greater struggle to stay on top of their personal loans, credit cards and home owner loan repayments throughout the coming year, than they did over the course of the previous twelve months.
When a similar survey was conducted last year, around 35 per cent of those interviewed said that they expected their finances and loan situation to improve in the next twelve months. However, this year that figure has fallen to just 22 per cent.
Worries over proposed government spending cuts and the possibility of interest rate rises on their home owner loan or mortgage, has left many borrowers particularly worried about their ability to be able to maintain their loan repayments over the course of the next year.
Steven Law of R3, said that he was not surprised at the increased concern amongst borrowers who were worried about their loan and credit card repayments and he expected the figure to increase over the course of the next year.
“Since we last carried out the survey, the government has issued the comprehensive spending review that announced job cuts and welfare cuts, so it is unsurprising that fewer people are feeling optimistic about their financial outlook.”