| Just 8 months ago it was a term that hardly | | | | loans loaded in this way, but now, even "Prime |
| anybody had heard of, or used, now, we turn on the | | | | Borrowers" are treated this way and the reason is |
| radio, TV or pick up any paper and there it is .... Right | | | | simply because the lenders are trying to maintain |
| in our face... 'Credit Crunch'. In fact it has become so | | | | profits while only lending out a fraction of what they |
| common in its use, it is now difficult to understand | | | | did 12 months ago. |
| just what it means to business and the individual. Of | | | | Banking is global. The largest banks control the |
| course, we understand that those with a dubious | | | | worlds' finances. The banks are centred on 3 major |
| credit rating, who therefore represent a high risk for | | | | countries, the UK, China and USA. When one makes |
| a funder, now have no chance of obtaining finance in | | | | an error of judgment in one country, everybody |
| today's market, but what about those with no debt | | | | suffers. |
| or well controlled and managed debt, a good credit | | | | There are 3 basic types of lending (or borrowing, |
| history, a solid job or business with decent accounts? | | | | depending on which side of the fence you happen to |
| Just how will the 'credit crunch' affect them? The | | | | be) |
| answer, surprisingly, is very hard. | | | | 1) Secured - This is where the loan is totally secured |
| Credit ratings for the individual are assessed on a | | | | against a real, cash convertible asset, such as |
| points system from 0-1000 | | | | property. If you default, the lender recoups his |
| Although these ratings do differ this is a guide on the | | | | money by seizing and selling your asset. A mortgage |
| scores and what they mean. Under 400 v.poor: 400 | | | | is a typical example, but you may take out a loan to |
| to 600 poor: 600 to 700 average: 700 to 750 above | | | | buy a car for example or machinery to further you |
| average: 750 to 800 good: above 800 is First Rate. | | | | business and the lender may insist on securing that |
| Businesses also get a 'roughing up' by funders today. | | | | loan on property. Property (real estate) is king! Even |
| Even if your company has excellent accounts for the | | | | in today's market of so called 'falling house prices' |
| last 3 years but one of the directors has less than a | | | | Lenders prefer bricks and mortar or land, to any |
| v.good personal credit rating you are likely to get | | | | other asset. Why? Because despite recent months |
| refused Prime funding. Today, not only has the | | | | where overvalued property has dropped marginally in |
| company accounts got to show enough profits but | | | | value, the 'core' value of property is solid and safe. |
| the directors, all of them, have to be squeaky clean. | | | | History has shown us that the property market |
| No matter where or who you deal with, if you want | | | | always increases and appreciates over the mid to |
| ANY form of funding, you will be "Credit Searched" | | | | long term (7yrs plus). It's as "safe as houses". |
| as the very first hurdle. Any one who tells you | | | | 2) Unsecured / Indemnified - This is where the loan is |
| differently is simply lying to you or giving you very | | | | made for a specific purpose, for goods which do not |
| bad advice. If you pass this first hurdle the chances | | | | appreciate over time but depreciate in value with use. |
| are that the potential funder will 'drill down' through | | | | A vehicle for example. The item in question remains |
| your personal finance files and then may request | | | | yours to use as your own but the 'title' belongs to |
| further information. This is a relatively new | | | | the lender, just like your mortgaged home. If |
| requirement by most funders, created due to the | | | | anything goes wrong they take back the goods, sell |
| funders need to minimize losses from possible | | | | them for their used value and recoup some of their |
| defaults. | | | | capital outlay. But what about the depreciation you |
| In this article I am going to deal with the two major | | | | ask? How does that get paid? This is included in your |
| purchases that you are ever likely to make in your | | | | monthly repayments in one of two ways. |
| life, Property and Vehicles. We will see how the | | | | Let's take a vehicle for example;a) You may choose |
| lenders attitude has changed and just how that will | | | | to buy it on some form of finance. You would be |
| affect those of us who, historically, have never had a | | | | required to put down a deposit (often 20% or more) |
| problem obtaining funding. | | | | and the remainder would be paid to the car provider |
| I don't think I need to explain how funding for | | | | direct from the lender under an agreement you sign. |
| property works but many people don't give any | | | | Under the agreement the lender remains the 'title |
| thought to how vehicle purchases are funded. Take | | | | holder' of the vehicle until the last payment is made |
| vehicle leasing, it is the fastest growing method of | | | | despite the vehicle being registered in your name. If |
| owning a new vehicle. You see an advert for a | | | | you fail to meet your monthly commitments you lose |
| vehicle you like with a monthly amount you know | | | | your car and any 'equity' you may have in it in the |
| you can afford. In order for you to have your vehicle | | | | form of any deposit you have put down to secure |
| delivered, there is a complicated process that very | | | | the initial deal.b) By far the most cost effective (both |
| few customers ever give any thought to. | | | | tax efficient and for cash flow) is to Lease your |
| A good broker will first run a Credit score search on | | | | vehicle. This requires an extremely small deposit |
| you. This is so that he can offer the very best | | | | (often equal to just 3 to 6 months normal payments) |
| advice to you and put your proposal to the most | | | | and a monthly payment by DD which covers the |
| likely funder for you. Assuming your credit search is | | | | depreciation on the vehicle over whatever period you |
| ok; the broker locates and negotiates the lowest | | | | choose to keep it (usually 2yrs to 3 yrs) and a profit |
| price for your chosen vehicle with a registered 'main | | | | margin for the funder. Leasing is the fastest growing |
| dealer' to ensure you get the best deal. Next, the | | | | way of obtaining a new vehicle. The advantages |
| broker has to find a funder who is willing to purchase | | | | include; better tax efficiency. Top vehicle discounts |
| outright your chosen vehicle from the dealer, but | | | | negotiated by your broker. No hassle or dealing with |
| before the funder will consider this he wants to | | | | salespeople from car dealerships. Care free vehicle |
| know what sort of a risk the customer will be. The | | | | running which usually includes automatic road fund |
| broker needs to be one jump ahead hear to protect | | | | licensing by the funder so that the vehicle never runs |
| your interests because if he doesn't skilfully match | | | | out of tax and you don't even have to do any |
| YOU to a lenders criteria then you will be rejected | | | | paperwork to renew it. And, massive advantages to |
| and each rejection may affect the way the next | | | | your cash flow by not using your own capital for |
| funder views your application. | | | | large deposits now required by HP deals etc. Leaving |
| Poor brokers, and there are a lot of them, are like | | | | your cash free to spend elsewhere. At the end of |
| cheap salespeople. They will tell you what you want | | | | the lease period the vehicle is collected and you don't |
| to hear, make promises they have no hope of | | | | have to try and sell it or worry about advertising it or |
| keeping, just in order to reel you in and tie you | | | | the price you might get for it before you can get |
| down. They don't care if you get rejected and that it | | | | your next new vehicle replacement. It is 'peace of |
| may affect future applications. They will blindly submit | | | | mind' motoring that individuals, small businesses and |
| applications for you without credit searching in the | | | | fleet users are turning to in increasing numbers. |
| vague hope you might go through. In short, they | | | | 3) Unsecured - Typically credit and store cards. This |
| won't tell you the truth about your true position in | | | | money is lent at 'high risk' as a default means that |
| today's difficult market and gradually the truth dawns | | | | recovery of the loan may not be possible. Therefore |
| on you but by then the damage to your credibility | | | | you get charged very high fees. Credit card providers |
| may have been done. | | | | will lure you with 0% transfers and the like for a |
| A good broker will be Data Protection registered and | | | | fixed period, knowing that in excess of 95% of |
| able to perform a credit search, before he makes an | | | | those that join those schemes will be unable to pay |
| application to a funder on your behalf. A basic credit | | | | off their debt in the 'fixed offer period', the loan |
| search does not affect your record and assesses | | | | reverts to high interest rates, usually around 16% to |
| your chances of being accepted by a particular | | | | 25% p.a. the lender makes his profit - and then some! |
| funder, because the broker is in a unique position and | | | | The interest rates are high because the 'good' payers |
| will know what their particular criteria currently are. | | | | have to pay for the defaulters! |
| The broker will determine if YOU fit their criteria | | | | SO HOW IS THE MONTHLY AMOUNT WORKED |
| maximizing the chances of acceptance first time. If | | | | OUT FOR VEHICLE LEASING? |
| you have anything in your credit record that the | | | | The monthly amount you will be asked to pay for |
| funder may challenge, the broker will ask you about | | | | your vehicle is broadly made up of four things. |
| this and if he submits to that funder then he will add | | | | 1) The total depreciation of the vehicle for the |
| a note of explanation which greatly increases your | | | | mileage and period it is leased divided by the number |
| chances of acceptance. If they feel you will not | | | | of months. Different makes and models depreciate at |
| match any of the 'Prime Lenders' criteria (and since | | | | different rates. So in simple terms if your car cost |
| the criteria have been significantly raised due to the | | | | £10,000 and at the end of say a 36 month |
| credit crunch, more than 66% of applicants will not | | | | term is has completed 30,000 miles it will be worth |
| now meet that criteria) the broker should not try to | | | | £5,500 then you will experienced a |
| make an application but should tell you the very thing | | | | £4,500 drop in value (depreciation) / 36 = |
| you don't want to hear! "I think we ought to make a | | | | £125 p.m. Therefore the ability for your broker |
| sub prime application for you because of 'xyz'." Of | | | | to have good contacts with car main dealer groups is |
| course, many uneducated customers refuse this | | | | essential to being able to negotiate you the lowest |
| advice since the vehicle of their choice may cost an | | | | price. If a cars retail price is £12,000 and he |
| extra few quid per month with a sub prime lender | | | | manages to negotiate a price of say £10,000 |
| and so insist on making the prime application, which | | | | (based upon the level of business the broker places) |
| inevitably, will be rejected. Remember the broker | | | | then clearly he has wiped off £2000 of |
| wants you accepted so he will give you the best | | | | depreciation that you would otherwise have to pay |
| advice he can to make this happen. A good broker | | | | for. |
| knows his market. He only gets paid if he is able to | | | | 2) The broker's payment for his work in brining the |
| get you what you want, so working against him is | | | | customer, the car dealer and the funder together, is |
| not in your best interest. | | | | built into the price. Usually around £5 to |
| Typically, at this stage a customer may remember | | | | £15 per month |
| another advert for the same car that was cheaper | | | | 3) The profit the funder makes is in the form of |
| than is now being proposed by the broker but if you | | | | interest or 'return on investment' (ROI). Prime Rates |
| 'jump ship' now the likelihood of you getting your | | | | usually offer slightly better interest rates and |
| vehicle (at any cost) diminishes with every credit | | | | therefore slightly lower monthly payments. They also |
| application from a sub standard broker. By performing | | | | usually require only 3 months deposit payment. A Sub |
| a credit search for you at the very outset, the | | | | Prime rate, will offer a slightly higher rate of interest |
| broker is doing you a huge favor by preventing you | | | | to reflect the 'added risk' and usually up to 6 months |
| making a funding application that he knows will fail | | | | deposit. As a guide, the difference between a 'Prime |
| and ultimately may affect your ability to secure your | | | | Deal' and a 'Sub Prime' may be between £5 |
| new vehicle. Those requiring funding in today's tough | | | | & £25 p.m. |
| market conditions have to realize that funders are no | | | | 4) Up front deposit. This is usually equal to 3 months |
| longer falling over themselves to do business with | | | | payments for Prime deals and up to 6 months for |
| you. There are far more wanting their services and | | | | Sub Prime and includes your first monthly payment. |
| so little funding to go round. | | | | Therefore the formula is: depreciation (spread over |
| Let me put you in the position of the funder for a | | | | the lease period) + Brokers Commission (paid by the |
| moment: | | | | funder) + Interest on the vehicle cost (spread over |
| You and a group of friends all have money to lend | | | | the lease period) which equals your regular monthly |
| but it is very limited. Your friends are broadly split into | | | | payment. + initial deposit and first monthly payment. |
| two groups those that will lend only to very low risk | | | | All this is worked out by the broker and put into a |
| applicants (prime lender) and those who will take a | | | | proposal for both you and the funder. |
| slightly larger risk at an additional 3% interest per | | | | WILL MY BUSINESS SURVIVE THE CREDIT |
| annum. (sub prime lender - pretend you are one of | | | | CRUNCH? |
| these lenders) A central data base is kept, where all | | | | That largely depends on how far ahead you can plan |
| applications for funding and the outcome of those | | | | and take actions now, to bring about those plans, |
| applications are recorded along with any payment | | | | rather than reacting too late. What this latest round |
| record of similar such funding going back years. You | | | | of 'economic problems' is bound to unleash is a long |
| can all access this data but you have no need to | | | | term 'clearing out' of businesses who have no vision, |
| unless you receive an application. | | | | little planning or idea of where they are heading. In |
| An application is received by one of your 'Prime' | | | | effect, it should clear out the weak, the clueless |
| colleagues from a broker to lease a car for an | | | | & the cowboys! This will, eventually be to the |
| applicant; we'll call him "JOE". Under the data | | | | advantage of those who have planned, have taken |
| protection act you are not aware of this at this time | | | | action and who ultimately survive. Those that come |
| because the application has not been made to you. | | | | out the other end will be stronger, better equipped |
| The car Joe wants costs £10,000 to buy from | | | | and more profitable with far less competition. So |
| the dealer. The lender needs to know what sort of | | | | what tips should you consider? |
| risk Joe is so looks at his credit record. He finds that | | | | Work out realistically what business you can |
| despite a basic good credit score and sound record | | | | reasonably expect to win over the next 12 months, |
| there has been one or two late payments by a few | | | | 24 months & 36 months respectively. What |
| days over the last 12 months on a store card and he | | | | cash flow or Capital will you need to achieve this? |
| decides that he doesn't wish to lend to this client | | | | Where is this cash or capital going to come from? |
| because he has other applicants which have an | | | | What will finance cost and how can I factor that |
| unblemished record, so he won't entertain Joe. | | | | cost into my product/service? The banks and lenders |
| The broker reports back to Joe and tells him funding | | | | already realize and accept that they will be doing up |
| was refused by the Prime lender and recommends an | | | | to 30% less business over the coming years so they |
| application to a sub prime lender. Joe refuses to take | | | | have put in place plans to earn almost as much profit |
| the advice because he doesn't want to pay the | | | | from the remaining 70% of the customers as they |
| extra monthly amount and insists on another | | | | did 12 months ago with many more customers. Can |
| application to another prime lender. This is made and | | | | you put in place a similar plan of action? Remember, |
| again, is rejected for the same reasons. Joe has seen | | | | unless your business is one which your customers |
| another advert from another broker and decides to | | | | cannot do without, an increase in prices must be |
| switch brokers and starts again (of course he is not | | | | accompanied by an increase in 'customer value' so |
| going to tell the second broker he's been rejected | | | | think of ways of providing 'added customer value' to |
| twice already!) and Joe repeats the same mistakes | | | | your service that will cost you nothing but a bit of |
| again. Finally Joe agrees to pay the £25 extra | | | | organization and ingenuity. |
| to get his vehicle and to be put forward to a sub | | | | If you need vehicles to operate your business you |
| prime lender. | | | | will need to be able to fix those costs and reduce |
| You, as that sub prime lender, receive the application | | | | capital outlay, the best way of doing that is to lease |
| from Joe's broker along with another customer, Bill | | | | and reserve what capital you have. Get rid of old |
| who is also making a similar application. You have | | | | vehicles that cost a hidden fortune on maintenance, |
| enough money available this month to lend to only | | | | breakdowns, fuel efficiency, security etc. All these |
| one of them. Which one? You look through both | | | | are 'unknown costs' and could put you out of |
| credit records both are similar, both have a couple of | | | | business in a single stroke! I know a business that |
| late payments, Bill has one missed mortgage | | | | spent over £17,700 on unforeseen repairs and |
| payment 8 months ago but this has subsequently | | | | maintenance on three old vehicles in a single year, he |
| been 'satisfied' and a note accompanies the | | | | replaced those with 3 new leased vehicles which cost |
| application and his recent credit history looks good. | | | | him only £1100 per month for all 3 - with |
| Joe's application however, shows 4 very recent | | | | KNOWN costs. The fact is that you can budget and |
| funding rejections. You don't know if the rejections | | | | plan with known costs but unknown costs can be |
| are from prime or sub prime lenders or what they | | | | the killer. |
| are for, you just know that 4 of your colleagues | | | | Plan your tax affairs in advance with your |
| don't consider him a good risk despite his credit score | | | | accountant. |
| being ok. Anyhow, perhaps there is something going | | | | How can you cut overheads to maintain profits? |
| on in Joe's very recent history which is dubious. Why | | | | Monitor the effectiveness of everything you spend |
| should you take the risk or spend time looking for | | | | on advertising and promotion, if it is not cost |
| reasons to justify lending to Joe when Bill already | | | | efficient, drop it. Attention to detail. Duncan |
| meets all your criteria? | | | | Bannatyne (of Dragons Den fame) once ordered his |
| Bill gets the funding and his car. If only Joe had taken | | | | staff not to order paper clips because they were |
| the brokers advice or had not changed brokers, | | | | unnecessary as they received more in than the sent |
| chasing a deal that he was never going to get in | | | | out..... Attention to detail! |
| today's tough market! It would have been him in that | | | | A crisis market is no time to get into a price war, |
| new car. 12 months ago lenders would have been | | | | instead, increase your perceived value to allow you |
| falling over themselves to lend to Joe, now due to | | | | to raise prices, not drop them, separate yourself for |
| market changes and Joe's stubborn streak, he is | | | | your competition or you may die the death of a |
| unlikely to get funding anywhere for his new car and | | | | thousands discounts before you even know you are |
| the more times he tries, the worst it gets! | | | | dead! |
| This is the reality of today's market for those even | | | | To sum up: |
| with good credit. | | | | If you have had no problem obtaining credit or |
| MOVING THE GOAL POSTS: In the past, lenders | | | | passing finance in the past, then 3 out of 5 of you |
| would have lent a mortgage to those with a score in | | | | won't now be able to get funding from a 'prime |
| the range of the top end of "poor" credit rating and | | | | lender', have one stab at passing as a Prime |
| funding, for example, for car leasing, if they had a | | | | application, then realistically get what you need via |
| "good" credit rating. In today's 'Credit Crunch' market | | | | sub prime. |
| those same people would have to have a "good" and | | | | What does the future hold? It is now July 2008 and I |
| "excellent" scores respectively to get exactly the | | | | foresee a slight 'softening' of the criteria of lenders |
| same consideration. Many of those, who would have | | | | by October 2008 onwards simply because they will |
| flown through finance 6 months ago for vehicle | | | | be unable to maintain profits unless they lend their |
| leasing, would now be rejected by the Prime funders. | | | | money and that means lowering their sights a bit! |
| As a result, many people feel offended and insulted | | | | House prices will stabilize around this time. The |
| when they are told they have been rejected for | | | | government can still pull strings behind the scenes to |
| 'prime lending' when they know that their credit rating | | | | build confidence back up between the banks moving |
| is "good". The problem is that GOOD is no longer | | | | money between each other again and that will help |
| acceptable to a lender specializing in the 'Prime' | | | | free up more money for the finance industry. |
| market. All is not lost however! There are still a few | | | | The situation though is set to be problematic with |
| 'sub prime' lenders who will provide funding so you | | | | minimal economic growth until around late 2010. It is |
| can get that vehicle for business or pleasure, | | | | possible that we may officially hit a 'recession'. |
| providing your credit history is reasonably clear and | | | | (Officially 3 consecutive quarters of negative equity |
| you are prepared to pay a little extra each month in | | | | growth in the economy) Although, for many, it may |
| repayments AND.... Take good guidance from your | | | | feel that we are already in a recession, we can take |
| broker. | | | | heart that our financial and economic situation is only |
| As a result, out of every 5 that would have passed | | | | 30% as severe as that faced by the USA. Finance is |
| a finance check for Prime funding 12 months ago, | | | | going to continue to be hard to come by and more |
| only 2 of those will do so today. The remainder will | | | | costly than we have been used to for decades. |
| need to go to the sub prime lenders and even they | | | | We are not in recession, yet! In fact, the economy |
| are only lending to those who would have passed as | | | | still retains a small annual growth rate despite the odd |
| 'prime' 12 months ago. It is equivalent to an exam | | | | quarter being in negative growth. Despite the media's |
| pass mark being 65% one day and then the pass | | | | best efforts to talk us into a recession, (apparently |
| mark is raised to 85% the next day! Your abilities | | | | doom and gloom sells!) the economy remains fairly |
| haven't changed but the bar has been raised all the | | | | resilient with good 'mid' to 'long' term prospects. |
| same, many more will now be unable to reach that | | | | There is one proviso however, if access to finance |
| pass level. | | | | (especially to developing businesses and individuals) |
| To understand things better, here are some facts | | | | dries up for those looking to 'buy' the two biggest |
| and then explanations of how the changes, in the | | | | purchases of their lives, their property and their |
| money lending market place, will affect those of us | | | | vehicle/s or plant, then the economy could be forced |
| with good, excellent and even first rate credit scores. | | | | into deeper trouble; For a healthy economy to exist, |
| 8 months ago 60% of those who applied for vehicle | | | | money must freely circulate. |
| funding passed credit checks with a Prime lender. | | | | But, we are a long way from that problem yet. |
| Today only 20% pass credit checks with those same | | | | Meanwhile, we are just going to have to get used to |
| prime lenders. | | | | jumping through more hoops than ever before to |
| 12 months ago there were more than 300 mortgage | | | | get finance and paying more for it. Get used to it, it |
| products in the UK available to a home buyer; today | | | | is the foreseeable future! Cheap finance has gone, if |
| this has been cut to around 90. Deals are not such | | | | not for good then for a good while! |
| good value and the lender has little to no competition | | | | WHY IS THERE A CREDIT CRUNCH? |
| so they dictate who they lend to, using much tighter | | | | Over the last decade credit has been very easy to |
| criteria and higher interest rates. | | | | get. Employment was high, wages high, the economy |
| A typical mortgage 12 months ago would be for 95% | | | | was booming and everything looked rosy. Mortgage |
| of the property value. This is called "Loan to Value" | | | | lenders and other funding methods were prepared to |
| or LTV for short. Today the LTV is typically reduced | | | | lend to just about anyone who had a pulse. |
| to just 75% or 80%. This means that even if | | | | The Major Banks are global players and the basis for |
| property prices fall 4% (as they have over the last 9 | | | | providing credit. If one bank committed to providing |
| months in most areas of England, but much more in | | | | more funding than they had access to, they would |
| Ireland, Scotland & Wales bringing the average | | | | simply cover it by borrowing from another major |
| price drop for the UK as a whole to 8%.) the lender | | | | bank. Banks would lend freely to each other in the |
| faces next to no exposure to risk since the property | | | | UK at a set percentage rate this is known as LIBOR |
| would have to fall 20% or more before it became a | | | | (London Inter-Bank Offered Rate). Due to London's |
| worry. | | | | importance as a global financial centre, LIBOR applies |
| Financiers earn profits only when they lend their | | | | not only to the Pound Sterling, but also to major |
| money. Over the last 6 months mortgage lenders | | | | currencies such as the US Dollar, Swiss Franc, |
| have lent 33% less funds than they did for the same | | | | Japanese Yen and Canadian Dollar. |
| period last year. Funding other than for mortgage | | | | Reality began to hit home around 2006 when banks |
| purposes for things like vehicle leasing etc is down by | | | | realized that more and more mortgages were being |
| whopping 66% Yet they are still all under pressure to | | | | defaulted on and more and more repossessions were |
| maintain profits for their share-holders. How can they | | | | taking place. Nothing to worry about, these major |
| achieve this? A three pronged attack! | | | | loans were secured on the property; except, that |
| 1) Excluding risk. They reject 60% + of those they | | | | the mortgages loaned in many cases, exceeded the |
| would have previously given funding to and only pick | | | | market value of the property and the banks began |
| those with the very cleanest records. | | | | to experience negative equity. Normally, banks who |
| 2) Reducing the amount loaned. Meaning that higher | | | | don't have the money to make new loans, borrowed |
| deposits or up front payments are needed. Since only | | | | it from each other on short term lending using the |
| those with the very highest credit can comply, this | | | | LIBOR exchange. No one seemed too bothered. |
| tactic goes hand in hand with tactic 1 and also helps | | | | Everything tripped along. |
| cut the risk. | | | | We, and other countries will be affected by this |
| 3) Make more profit from each funding case. | | | | knock-on effect but it is, in the main, essentially a |
| Mortgage application fees have seen increases in the | | | | USA financial problem because no one thought to |
| last 6 months of between 400% & 600% and | | | | regulate and lend sensibly there, we all have to |
| we all know what has happened to interest rates. | | | | suffer! Thanks President Bush! (that's irony by the |
| Prior to the credit crunch only those with less than | | | | way George, if you are reading this! |
| "good" credit (sub prime borrowers) would have their | | | | |