Personal Finance

How to take advantage of the positive credit information

debt

With the rollout of full file credit information sharing in the reference bureaus, it is easier for one partner to know the loans the other owes, whether defaulted or performing. FILE

Jane and Jack have been running a car hire business as a couple for the last five years. As their business begun to grow, they realised they needed more vehicles in their fleet to meet increasing demand.

Local banks seemed reluctant to provide them with asset financing so the couple opted to approach a local leasing company for financing for five cars.

Given the magnitude of risk exposure, the leasing company insisted on securing personal guarantees of the couple as the key principals and directors of the company.

This would later be subjected to a credit check of the directors’ credit histories.

After several weeks of underwriting, the leasing company rejected the application citing that one of the partners, Jack, had a running credit facility of Sh2.5 million with another bank and, therefore, could not be allowed to give a personal guarantee on behalf of the company.

This revelation led to a conflict between the partners and later collapse of the company as Jane discovered that her partner had secured a loan without her knowledge.

 Jane’s case is analogous to what transpires in many family businesses in the face of information asymmetry.

However, with the rollout of full file credit information sharing in the reference bureaus, today it is easier for one partner to know the loans the other owes, whether defaulted or performing.

With the new credit bureau regulations, local commercial banks are compelled to share data on both non-performing and performing loans through the credit reference bureaus.

If you are a borrower with one of the commercial banks, and you apply for a loan, a lender will be able to see the number of performing loans you currently have, any cases of bounced cheques and the non-performing loans you owe.

Although dreaded by many, positive credit information sharing is a blessing in disguise for potential borrowers. Many potential borrowers have not yet discovered how to take advantage of the information sharing for their own gain.

Here is how you can take advantage as a potential borrower:

Negotiate for loan consolidation

Sometimes, you may be servicing several loans from different lenders and this may prove to be a financial burden, especially on a meagre income.

You can apply for a debt consolidation loan from one of the lenders to be able to offset all other existing loans.

With the prevailing competition amongst local banks, the positive information will work to your advantage as the banks will be able to know your lenders and the amount of loans you owe.

They will strive to give you a debt consolidation loan at a negotiated interest rate to retain or acquire you as their customer. Thus you may get a larger amount of loan that will be able to settle your other loans as well as lower your monthly loan repayments.

Dealing with one lender as opposed to many will be easier and less stressful.

Improve your credit score and rating

Having numerous loans from various lenders may lower your score and overall credit rating. Due to the financial burden involved in servicing the numerous loans, there is high risk of default in case of abrupt loss or slight reduction in the size of income.

As a way of improving one’s credit score through a debt consolidation, you can settle the numerous loans and remain with only one loan.

This will be reflected in your credit report as a good repayment history as it will show that you borrowed loans from various lenders and managed to repay them successfully.

Opportunity for first time defaulters

With the full file information sharing, credit reference bureaus are already developing credit scoring systems that would help to distinguish between first time from serial defaulters.

As a first time default, you can be able to use your credit report to negotiate for a loan by explaining your situational circumstance in the initial default.

If the initial default is situational such as through job loss, accident, lack of a source of income to service an education loan or even unexpected financial obligation such as death of a spouse, the lenders will be able consider a cross lending approaches.

Opiyo is a training manager and coach with Tolerance Employee Financial Advisors Ltd. Email: [email protected]