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Refused Consolidation

Taking out a new loan can be difficult if you already have significant debts. Several factors influence whether or not a consolidation loan is possible and it is important to seek help from an independent organisation that will give genuinely impartial advice. If you have been refused a consolidation loan or a re-mortgage, ClearStart can help you to understand why and also to explore alternatives such as a Debt Management Plan or an Individual Voluntary Arrangements

If you can refinance your existing debts effectively then it can sometimes be an effective solution and ClearStart has a number of preferred partners who may be able to arrange this. What matters most is doing something as soon as possible before the situation worsens.

Some of the most common reasons why people are turned down for credit are shown below and you may find that a lender will tell you why you have been turned down – if their systems allow this.

Credit rating and credit checking

Most lenders will use the services of a credit reference agency (CRA) such as Callcredit, Experian or Equifax when making a decision on whether to lend money to an individual. These agencies collect information such as your current and previous addresses, electoral roll subscriptions and previous credit history.

Decisions based on your credit rating are usually automated and it can be difficult to get a lender to take an individually reviewed decision. The UK credit rating system is based on negative indicators such as missed payments, legal proceedings or multiple recent applications for credit. Data such as these remain on your file for six years. You can request a paper copy of your credit file and it must cost no more than £2. Alternatively, you can view reports online (which may cost more).

Blacklists and risk scoring

Most lenders will also use internal criteria. Blacklisting is one of the most commonly misunderstood concepts. It is often used by debt collection organisations in an attempt to encourage an individual to promptly repay what they owe. There is not one central blacklist which all banks use – each lender maintains its own list of people to whom it will not lend because of prior borrowing issues.

Risk scoring is also done differently by different lenders. A score is based on many different sources and a bank doesn't have to tell you how it calculates your score.

Maximum personal loan or credit card debt

Unsecured credit is the name given when the loan is not guaranteed against an asset such as a property or car. In most cases this type of credit is a personal loan, credit card or store card. Unsecured credit is governed by the Consumer Credit Act 1974, and has a maximum upper limit of £25,000.

Maximum secured loan or re-mortgage

What you can borrow using a secured loan or re-mortgage is limited by the value of the equity you have in your property – how much more it is worth than the mortgage value (and other secured lending). For example, if a house is worth £100,000 and the mortgage balance is £50,000 then the equity is £50,000.

Lenders control their risk by lending only up to a certain maximum percentage of the value of the property, say for example 75% or 85%. This percentage is called the Loan to Value ratio (LTV). If a property is worth £100,000 and the maximum LTV ratio is 80%, the mortgage can increase their borrowing up to £80,000. Hence if the mortgage balance is already £50,000 then the most that can be borrowed is another £30,000.

Affordability

Some lenders try to make sure that monthly payments can be made reliably. There are two main types of calculation for affordability, one based on monthly disposable income, and the other based on a multiple of annual income.

With monthly income calculations, you can expect a fact-finding exercise adding up various figures and coming up with a 'disposable income' that is compared against the monthly repayments required on the borrowing. For example, a certain lender may only lend up to a point where monthly repayments are 50% of disposable income.

Decisions based on annual income may involve lending you up to four times your before-tax annual income (up to three times a combined household income). Or you may be limited to a percentage of your annual income by an unsecured lender.

Non-conforming borrowing

Some people are seen by most mainstream lenders as too risky or too complicated to lend to. For example, those who have had previous issues with debt, those who are self-employed or those who require borrowing for a specific purpose such as a buy-to-let property.

Around 70% of the UK adult population meet basic criteria for 'conforming' lending. For the remaining 30% of the population lenders have emerged who specialise in 'non-conforming' lending. The extra work and risk involved means higher interest payments and setup fees.

Further reading:
Debt | Debt Solutions | Debt Consolidation | Refused Consolidation | Debt Consolidation FAQs

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