Are You a “Loan Prisoner”?
For the majority of loans that are granted, lenders look at two important factors prior to granting or rejecting the loan:
* Credit history, or more importantly, credit score
Naturally from a lenders viewpoint they want to insure first off that you will repay the loan. Having the means to do so, which is affordability, and the track record showing this, credit history, allows lender to make a reasonably sound decision and do so with the knowledge the loan will be repaid.
However, not everyone will meet some lenders criteria, or guidelines in order to qualify for a loan.
There are some things a borrower can do to improve their chances of getting a loan, such as improve their credit score, and if affordability is a concern of a lender, pay off some other bills and accounts.
All of which can take time to do.
And we must remind ourselves, this is all before we are granted the loan.
We can review our credit history, and make adjustments and work towards improving it, and also review our income and expenses prior to applying for a loan, all to improve our chances of getting the loan approved.
It does us as borrowers, and lenders no good to apply for a loan we will not be approved for. It is frustrating at both ends.
However, during the course of a loan, and some loans are for longer periods of time, 40 months (4 years), 60 months (5 years), or in the example of many mortgages 120 months, which is 10 years, and mortgages can be for longer terms.
When someone has a loan they are paying, in many instances, as long as they can afford the loan, they will pay the loan. It is as simple as that. However, sometimes during the course of a loan things can change.
A borrower may enter into a loan agreement with the full expectation of repaying the loan, they know they can afford to repay the loan. The lender knows they can afford to repay the loan, or they would not have approved the loan.
Remember, affordability is one of the main criteria lenders use to approve loans.
However, something may have changed in the borrower’s circumstance during the loan term, which may have now caused them to struggle to afford to repay the loan.
What options are available to them?
Loan Affordability Issues
Life does not always run smooth, and there can be blips and bumps in our finances, and these blips
And financial bumps, can create havoc with our paying the bills and loans we may have.
Whatever has caused a change in your finances, the first thing to do is to sit down and work out what your finances are, money you have coming in, money you have going out, and prioritise your bills.
A budget sheet can help with this.
Hopefully the change in your finances is transit and will pass, but you still need to get a grasp on matters.
If this is going to be an ongoing issue, what can you do?
Speak to the lender, ask them what options they may have.
If the financial blip is a short-lived matter, perhaps a payment holiday is the answer. If this is an ongoing problem with a light at the end of the tunnel, the lender may be able to recast or restructure the loan; this will depend on the type of loan it is, and also how far into the loan you have paid.
If your circumstance has changed drastically for the worse and there is not going to be a change anytime soon, you may need third party assistance through a debt management plan, or possibly insolvency options.
There are always options, we just need to be open minded about them.
There are instances where people feel trapped by the loans they may have, and even though there are options, these debt or loan options, may not pertain to them or their type of loan, I am referring to mortgages.
Having a mortgage on your home is more than just a loan, it is your home loan. A loan which allowed you to buy your home, and while a mortgage is a priority debt, and you may always pay the mortgage loan, you may be struggling to pay it.
The struggle may have come from a change in your finances and money you have coming in, and it could also come from the fact many mortgages are tracker mortgages, and there is the possibility that loan payments can increase after a period of time, thus creating an affordability issue.
One answer to having an affordability issue with your mortgage is to look to remortgage to a better deal, a lower rate, or a longer term, to reduce the monthly payments.
However, if you cannot show affordability, then the new loan would be rejected.
If we cast our eyes over the Great Pond to our Colonial friends in America, home owners with mortgages experience the same issues and problems, and financial blips that we do here in the Mother Land.
However, in America there is a financial tool, a “mortgage product” that can help those borrowers in making their mortgages more affordable, it is called a “streamlined refinance”.
How this type of mortgage woks is that in essence if you have been making your mortgage payment son time for a period of 12 months, or whatever the set period may be, and you are making these payments on time to a higher amount than what your new mortgage payments may be if you refinance (remortgage), then the loan can be approved with minimal effort and documentation.
The logic is that if you can afford to pay your mortgage each month of say $1,000, then why would you not pay the mortgage on time each month if it was now $900, or less, say $800.
There are some rules and criteria to follow, but the basics are, if you can lower your mortgage payment, and you afforded the higher payment on time, you can afford the lower mortgage payment.
No need to prove affordability to such an extent as a new mortgage loan.
It is great logic, and a mortgage programme that works.
In fact it works so well, the FCA is looking into having something similar introduced here in the UK.
There are those home owners that feel they are “mortgage prisoners” and cannot get a lower mortgage payment, and are locked into a higher payment, which they are paying on time, but struggling.
Andrew Bailey, the Chief Executive of the FCA said, “The test would be whether the new mortgage costs are more affordable than the current mortgage costs.“
UK Finance’s Director of Mortgages, Jackie Bennett said, “We will continue to work constructively with our broad range of members and the FCA to help ensure those customers who want a like-for-like mortgage can switch lenders more easily.”
This type of loan product or mortgage programme just makes sense! It also frees many borrowers from the worry and struggle of paying other bills, it will free-up money for them.
Martin Lewis who is the Founder of MoneySavingExpert said, “Finally, a welcome and sensible move. For over four years we’ve been saying that it’s ludicrous that people are failing affordability tests because they’re absurdly told they cannot afford a cheaper deal than the one they’re already on.“
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