What is the Significance of Credit Scores in Private Lending?

There is a misconception amongst some brokers that all private lenders focus on the security property with little consideration given to the borrower and their credit profile.

This is incorrect as significant weight is given to the character test which includes a borrowers repayment history. In this article we discuss credit scores and why they may have an impact on your private loan application.

A credit score is a three-digit number, typically between 300 and 850, designed to represent your credit risk, or the likelihood you will pay your bills on time. Creditors and lenders consider your credit scores as one factor when deciding whether to approve you for a new account. Your credit scores may also impact the interest rate and other terms on any loan or other credit account for which you qualify.

What determines a credit score?

A credit score is determined by several factors including:

1. Repayment history. This determines majority of the credit score, with data collected on repayment history of any active loans, missed repayments, defaults (paid and unpaid), debt recovery, judgments etc. 
2. Length of credit history. This represents the period a credit account has been open. A lack of transactional history with no active accounts can result in a low credit score.
3. Credit enquiries. Excessive number of credit enquiries for secured or unsecured loans can negatively impact the borrowers credit score. For some lenders this could result in an automatic system based decline.

Typical credit score ranges are outlined below:

• 300-579: Poor
• 580-669: Fair
• 670-739: Good
• 740-799: Very good
• 800-850: Excellent

 How do Vado Private view credit scores?

As part of our loan assessment process, we conduct credit checks for any corporate borrowing entity and individual guarantors.

We assess loan applications holistically. A poor score doesn’t necessarily translate into a declined application. However, we would need more colour around reasons for the lower score.

Some of the mitigating factors we consider are:

1. Can the borrower provide a clear explanation for missed loan repayments?
2. Was there legitimate hardship and circumstances that will not be recurring?
3. Were the missed repayments remedied in a timely manner?
4. Was there an agreement to pause or reduce the repayment amount with the incumbent lender?
5. Will the credit score improve during the term of the private loan?
6. Is the exit strategy from the proposed loan not reliant on a refinance to another lender?

Whilst a credit score is important, it is never viewed in isolation. Understanding the reasons for any adversaries and the mitigating circumstances will largely influence whether a loan is approved.

For assistance

We would love the opportunity to chat to you regarding any scenarios or questions you might have for any of your clients seeking funding. Please contact the Business Development team at Vado Private to discuss any opportunities on the details below, or you can submit a scenario online via our website.