Loan Finance: How to Shop Around Without Damaging Your Credit
When you apply for a loan, whether it be an online finance application or in person at a bank branch, there's are a whole list of criteria that you will need to meet in order to:
- get approved for a loan that meets your needs
- get the best interest rate for the loan finance you want
Whilst your income, your age and your employment history are all important determinants for your loan eligibility, your credit rating may be the most important factor that a lender will use in:
- determining your loan eligibility and
- the loan interest rate that you'll be offered if you do qualify
Ok, most everyone knows that you need a good credit rating to get a good loan - but many don't necessarily understand all of the factors that can damage your credit rating.
Late payments, defaults, bankruptcy, etc, rep some of the obvious things that will negatively impact your credit rating, but there is one key thing that a large proportion of would-be borrowers overlook ... and that is multiple loan applications.
Multiple Loan Applications
If you're in the market for a loan to finance a home or a car (or anything for that matter), it seems reasonable that you'd apply with a few lenders and pick the one offering the best deal. Right?
After all, there are so many loan offers at your fingertips, they all make it really easy apply and comparing the responses is the best way to test for a loan approval and know that you'll get the best deal. Right?
You'd be wrong on all counts ... and here's why.
Each time you make a loan enquiry, the lender checks your credit file in order to very information that you have provided and to determine the risk to them in lending you money.
Each time a lender accesses your credit file, the enquiry is recorded on your credit file. In other words, whenever you go shopping for a loan, the lenders all get to see all your other enquires.
Each loan application, mortgage enquiry, credit cards, personal loans etc are all listed in your credit file.
Here's the Problem
Lenders do not like to see multiple loan applications on your credit file. In fact, most lenders have automatic disqualification rules for multiple applications.
The reason why lenders can be so inflexible on multiple applications is because they view anyone who has made more than a given number of loan enquiries in the last 12 months as a higher risk. And for lenders, it's all about risk.
If you are making multiple enquiries, it's probably because you are either
- already having trouble getting approved and trying as many lenders as it takes in order to get approved or
- just "shopping around" without any real commitment to proceed with a loan.
It's important to note that it costs a lender money when you make a loan enquiry because they can't give you an approval or even a quote without processing a loan application and assuming all of the costs that go with that process (including the cost of acquiring your credit report).
When you do take out a loan, it can take a few years for the lender to recover costs and make a profit.
So, if a lender sees you as a "shopper", even though you may have a perfectly clean repayment history and a great job, they see some risks:
- they will need to spend money and resources on processing a loan enquiry that probably won't proceed because you've already been approved elsewhere
- you'll possibly jump ship part way through the loan should you find a better rate. That's not profitable business for them
- if you've racked up multiple enquiries whilst shopping for an approval because you've been declined elsewhere, every additional enquiry will make your position worse. Only a brave lender goes against the tide!
The lenders' attitude is, if they can clearly identify you as a shopper, they are unlikely to write the loan! The result, application rejected, reason: too many credit enquiries!
Here's the Solution
Find a good Finance or Mortgage Broker because they:
have access to most banks and lending institutions.
know all the deals and where to obtain the best deals for you.
identify which lender/s offer the most likelihood for getting your loan application approved.
So, it's only after you've found the loan you want that you need to make a loan application. You have only one application recorded on your credit file and you are not seen as a shopper.
Some people think that they can do just as good an analysis as a Broker. But, without access to the research technology available to the Broker, the most likely outcome would be an inferior deal and/or you mess up your credit rating in the process. Counter productive.
When dealing through a mortgage or finance broker, be sure to tell them everything. It's only by providing the broker with a complete picture of your situation and circumstances can he or she will be able to get you the deal that's best for you.
By definition, a Broker represents you and is not an employee or agent of the lender/s. If you are not completely honest with your broker, you run a high risk of being recommended to the wrong lender for your situation. This can result in you being approved at a higher interest rate than initially quoted for your loan - or your application might be rejected entirely.
That could serve to damage your reputation with the broker and lenders. Avoid!