In the current economy, many people have debts ranging from credit cards and buy-now-pay-later schemes to other, non-mortgage loans. In many cases, this can make it tricky to get a loan in the future – lenders are reluctant to loan to you if they believe there’s a significant risk you won’t be able to repay.
However, not all loan applications are assessed in the same way. For many, bridging finance is still available with or without a high credit score.
In this blog, we explore how credit scores are calculated and why you might be eligible for a bridging loan despite yours.
How are credit scores calculated?
Every time you take out a loan or credit card, the lender makes a report to a credit scoring company about how well you manage your debts. If you always pay off your balance on time, then you’ll receive a good credit score, while delays in repayments – or not repaying at all – can mean your credit score drops.
Remember, credit scores aren’t just for individuals. Companies are monitored as well, and a business that pays its invoices late is also likely to be reported to a credit scoring agency.
Other financial factors taken into account include:
- County court judgements (CCJs)
- Bankruptcy
- Property repossessions
- Individual voluntary arrangements (IVAs)
- Insolvency orders.
These are all public records and can affect credit scores. However, your credit score won’t look at council tax arrears, driving or parking fines or student loans awarded after 1998.
In general, most minor debt problems fall off your credit record after six years, but more serious situations like bankruptcies may stay on your file for up to 15 years. You may be able to check your credit file with a credit reference agency to see what is affecting your credit score.
Your actual credit score will be a number between 0 and 1,000 – the lower the number, the riskier you appear to lenders and the harder it will typically be for you to be approved for a loan.
Can you get a bridge loan with a poor credit score?
Bridging loans differ from other loans in several ways, and one of the most important differences is that poor credit doesn’t automatically disqualify you from bridging finance. This is because a poor credit score isn’t always an accurate indicator of your current situation, but of your overall situation over the last few years.
For instance, it’s possible that you might have some debt problems in your credit history, but that you’re now debt-free thanks to hard work to repay your financial obligations.
It’s also the case that bridging lenders don’t focus entirely on your current income to outgoings ratio, but also look at what you have planned for the future.
As an example, many people use bridging finance when they need to buy a new home before the old one has sold. Since the loan will be repaid with the proceeds of the sale of the old home, lenders are less concerned about your regular finances and more about whether the sale is likely to generate enough money to repay the loan. The lender also needs to be convinced that the local property market is buoyant so that buyers will be easy to find.
This means lenders focus on what’s called an ‘exit strategy’ – in other words, how you intend to pay off the loan. This is one of the most important factors in the decision of whether or not to grant you bridging finance.
Of course, even the best laid plans can sometimes fail, which brings us to the other vital factor in your application: security.
Bridging loans are secured against a valuable asset – often but not always a property – which they can take away from you if you fail to repay the loan during the agreed terms. This helps to ensure lenders don’t lose out if your plans fall through, and so if you can’t offer up an asset worth enough, your application may be rejected.
Alternatively, you may be offered a smaller loan that befits the value of your security. The maximum loan available is expressed as a loan-to-value percentage; for example, if the property is worth £100,000 and the loan-to-value is 70%, then the maximum bridging loan available will be £70,000.
This isn’t to say that your credit history is entirely irrelevant. If you have a particularly low credit score or you’ve been bankrupted before, you may still be rejected on the grounds that you’re too high risk. But bridging lenders are more likely than most to look at your history in the context of your loan application to make a fair decision.
The likelihood of approval can also vary from lender to lender, so it’s worth shopping around if you’re rejected. You should also bear in mind that having a low credit score may still result in higher interest rates or stricter repayment terms as you are more of a risk than someone with a high credit score.
How to apply
Whether you need a bridging loan for business or personal reasons, if you have a less than perfect credit record, we’re here for you. We’ll help you to assess your exit strategy and security offering to find the best bridging finance deal for you. Get in touch today.
