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I’ve been involved in the personal loan industry for many years now, and one area I’ve seen a substantial change in is the importance of credit score analysis and its growing impact on personal loans.
In light of this, and alongside feedback from a recent broker survey, I felt it was timely to discuss:
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- Credit scores; why they’re used and why they’re important
- How credit scores affect a personal loan application
- What it means for you as a broker
Credit scores; why they’re used and why they’re important
“Character” once formed an integral part of the assessment criteria used to determine a customer’s ability and likelihood to repay a loan. It was common practice for Mr and Mrs Jones to meet with their enduring bank manager whenever they needed finance. However, with the emergence of online lending and technology, this “character reference” soon lost its worth.
Consequently, the credit score stepped into the spotlight.
Credit scores were introduced to provide lenders’ the probability of a person defaulting in a period of time.
Today, the credit score is a result of elaborate algorithms which reference a range of data points including a person’s credit history, demographic information and the types of credit applied for. It has effectively replaced the need for long-term bank manager relationships, and the credit bureau’s responsible for them continue to improve and adapt it to our changing society.
Now credit scores form an essential part of most lender’s assessment process. They also provide invaluable preliminary information to brokers, enabling best practice when it comes to their lender/product recommendations.
So how does a credit score impact a personal loan application?
Today, just like mortgages and asset finance, personal loans have progressed and are now segmented into risk categories. Broadly, there are three categories (or bands) based on credit score. These scores allow lenders to immediately sort applicants into a risk band and determine if the applicant is within their target market and lending parameters. The below chart helps explains these bands, the range relevant to those bands, the types of lenders who target those bands and the typical interest rates associated.
|
Credit Band |
Veda Score Apply Range |
Example Lenders |
Typical Interest Rate |
|
Prime |
+650 |
Banks, Peer-to-Peer |
5% - 15% |
|
Near Prime |
450 – 650 |
Independent Financial Service Providers |
15 – 22% |
|
Sub Prime |
sub 450 |
Fair Go Finance |
23 – 48% |
An applicant’s credit score impacts their personal loan application at the start of the assessment process. Once known, the credit score can cause an application to be accepted, referred or declined. This highlights the importance of knowing the applicant’s credit score. Even the lender’s specific lending rules, compliance and other risk requirements have yet to be considered.
So what are the takeaways for you as a broker?
Firstly, brokers should use credit scores as an essential reference tool. Knowing your customers score will improve your research parameters and aid your discussions regarding pricing and eligibility.
Secondly, the reliance on credit scores by lenders gives a clear message to brokers not to shop your customer’s application around. Doing so creates unnecessary and damaging credit enquiries, negatively impacting the customer’s credit score, and reducing their ability to access fair priced credit.
Thirdly, brokers should appreciate how a customer’s credit score immediately impacts their personal loan application. Not knowing your customers score prior to submission opens you up to incorrect lender and product selection, and potential decline. To avoid this, obtain your customer’s credit score without impacting it through an “Access Seeker” enquiry. This type of enquiry does not leave a credit enquiry or “footprint” on the customer’s credit file but gives you, the Broker, valuable information to assist with your recommendations.
But overall, my message is simply this: as a broker, being armed with a customer’s credit score when sourcing a personal loan is key to understanding your customers’ eligibility and facilitating the most suitable personal loan product for them. Credit scores are becoming one of the most dominant criteria for determining eligibility within the personal loan industry, already automating much of the preliminary processing requirements. If you, the broker, educate your customers and encourage them to have active credit score awareness, your book will reap the benefits.
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