What to Expect From a Bad Credit Lender

In the months following the global financial crisis most bad credit lenders withdrew their products from the market and, for a time, most people with bad credit reports or a poor repayment history were left to fend for themselves and in many cases could not obtain credit anywhere.

As the world economy slowly begins to thaw there are a few lenders reintroducing products into the market that finally fit the bill for borrowers with a poor credit history.

This is an area of lending known as non-conforming, in other words borrowers whose circumstances do not fit normal bank lending requirements because they don't conform to established standards. This non-conforming market comprises not just people with bad credit histories, but also self-employed applicant's who are seeking a more flexible approach from a bank especially when they don't have long trading history or tax returns to back up their application.

Non-conforming lenders provide a flexible environment where almost any application can be considered on its merits. But there is a sting in the tail too.

What do bad credit lenders want? Typically, lenders in this market want their pound of flesh in return for their apparent generosity, and will generally present you with the following loan features.

A higher rate of interest. Naturally if the risk is higher, the interest rate charged for loan will also be higher. You can expect interest rates of around 2% to 3% more than standard variable interest rates charged at retail banks.

Higher application fees. The process for assessing a non-conforming loan can be lengthy and detailed and assessors have to spend more time going over applications with a fine tooth comb. This time must be paid for and, as you may expect, upfront fees are usually expressed as percentage of the loan amount applied for. You can expect to pay at least 1% for an application fee plus extra for property valuations, document preparation and legal fees. A safe estimate is to add $3000 to the application fee.

Higher exit fees. In February 2010 the Federal government began discussing the possibility of penalising banks for charging exorbitant exit fees which prevented people moving their loans to lenders offering a cheaper option. In the non conforming loan market these exit fees are even higher and are usually set at 3% of the original loan amount if you transfer your loan to another lender within the first three years. It is argued that this high exit fee makes up for the extensive upfront costs the lenders incur, but this is something for you to decide yourself.

Ongoing maintenance fees. Most non-conforming lenders will charge a monthly account keeping fee of at least $9 or $12 per month.

Although the raft of fees mentioned above might make a nonconforming lender seem like a daunting prospect, it is a simple fact that if you want the money you will have to pay the price. It is generally agreed that the risk assumed by a nonconforming lender is much higher than any bank would want to risk and, as the loans are not insured in any way, the fee component is simply a method these lenders use to offset likely expenses.

The loan process undertaken by a nonconforming lender is also a little different from a normal retail bank.

Here is what you can expect when the application is lodged.

You will need to provide a detailed story as to how the credit problems you have suffered arose in the first place.

This will entail listing every default on your credit file and giving an explanation about each one. The more information you can give to a conforming lender the better because if there is a good reason they are more likely to accept your explanation and approve your loan at a more favourable rate.

Providing extensive details is also a double-edged sword however, because if there are no clear reasons why the difficulties emerged in the first place it is unlikely the lender will approve the application. If a borrower has a demonstrated record of being incapable of managing his or her finances in a responsible manner, this is an indication to the lender that they are equally unlikely to handle the responsibilities of a new loan.

You will need to provide detailed evidence of all existing credit facilities by way of loan statements covering the last 12 or 18 months.

This information provides undisputed evidence of a person's capacity to maintain a financial commitment. Where irregular payments are made and there is no apparent reason, a lender is likely to seek an explanation as to why this is the case and why they should not expect difficulties in the future. If it can't be explained properly the loan will be declined.

Conforming lenders are much the same as normal retail bank lenders but they take a great deal of care to get a more complete picture of the borrower and his or her prospects.

Copyright © 2010 - Homeloans Central. All rights reserved. Web Design & SEO by Web Profits.