Credit Score or Affordability (1)
May 6, 2020

When it comes to borrowing money from a financial institution, you go through several formalities like checking your credit score, monitoring your financial circumstances and affordability. Whether you borrow from a direct lender or a bank, you will have to prove your affordability. However, if your credit score is low, you cannot be in the list of borrowers of any bank. In this scenario, the only source you have left is direct lenders.

Since online lending introduced, it has become more accessible for people to borrow money. Whenever you need money, you have to put in the application form online, and the funds will be transferred to your account the same day. Another benefit of online loans in Ireland is you can borrow money despite a bad credit score.

There may be several causes for poor credit score like multiple debts, defaults, credit card max out, no credit history at all, identity theft, errors in your credit report, and the like. Even though your credit file is not up-to-par, direct lenders may help you tide over, but the interest rates will be higher.

However, this raises an intriguing question – do lenders give priority to affordability? Many borrowers think that affordability is the benchmark they follow for lending money as they can borrow cash despite a less-than-stellar credit rating. Well, this is not the fact.

To ignore credit score entirely is not possible

No lender will completely ignore your credit score while making a lending decision. A credit score gives an insight into how you have been sensible with managing your debts in the past. A lender will ask credit reference agencies for the copy of your credit file. It will give details about your financial behaviour.

The decision of lending money solely based on affordability is not good at all. What if you seem to be financially sound to bear the cost of the loan you want to take out, but your credit file has a CCJ? There are many details lenders can get to know about you from your credit file only.

Though affordability is a must for any lender to check before signing off on your loan application, it cannot overcome the importance of credit score under some circumstances. For instance, if you have a CCJ in your report – settled or unsettled – lenders may not approve your application.

Remember that they have to follow some benchmarks and FCA guidelines while lending you money. You will likely be not able to meet the criteria they follow despite having a sound financial condition. This is why lenders take into account your credit score.

Another reason for checking your credit score is to determine the risk. All borrowers with a credit score between 561 and 720 are subprime borrowers.

Though all subprime borrowers will get the loan at a high-interest rate, it depends on how close you are to a fair credit score. For instance, a borrower with 561 score will be paying higher interest than a borrower with 700 score.

Affordability also matters

Affordability is also a crucial factor to approve your loan application. According to FCA guidelines, no lender can lend you money more than your affordability. It is the responsibility of every lender to look over your financial circumstances to get an idea of whether you will be able to pay back the debt or not.

A credit score can help a lender to get an insight into your financial behaviour in the past, but it cannot tell them your current ability to pay off debt. Your credit score may be useful, but you may not have a repaying capacity. For instance, you are borrowing €1,000 because you have been laid off. Your credit score is stellar, but you have only unemployment benefits as an income source to pay off the debt. Of course, you will hardly be left with any money after paying you regular expenses, and hence it is hard to pay back the loan. In this case, the lender will not approve your application.

Now you must have understood both a credit score and affordability are essential factors to consider making a lending decision. You can take out a loan despite a bad credit score, but you must have a repaying capacity.

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