UNIT 21: FORMS OF CREDIT: PERSONAL LOANS AND CREDIT

SCORES

(A) TAKING OUT A PERSONAL LOAN

When an individual takes out a personal loan he or she borrows a fixed
amount of money and agrees to repay it in fixed, scheduled payments
over a fixed period of time. This type of loan is not secured against any
asset such as the borrower's home, but the lender will consider several
factors before granting the loan, including the borrower's employment
status and credit score.
The amount of the loan and the rate of interest charged by the lender will
also depend on these factors, as will the term of the loan. In the UK, a
borrower has a 14-day 'cooling-off period' in which to change his or her
mind about taking out the loan. Borrowers take out personal loans for a
variety of reasons, including consolidating existing debt. If the
borrower falls into arrears, compound interest may be charged on the
outstanding sum. 'Arrears' in relation to a loan means an instalment has
not been paid by the due date. So, a borrower who has missed three
monthly instalments is described as being 'three months in arrears.

(B) ARREARS AND DEFAULT

Personal loans are regulated in the UK by the Consumer Credit Act. This
obliges lenders to send a borrower with significant arrears a Default
Notice, which contains a warning that the borrower is about to default
on the Loan Agreement. A borrower is considered to have defaulted
when the lender decides that there is no way for the borrower to get
back on track with his or her repayments. The notice gives the
borrower a chance to pay off the arrears. However, if this does not
happen within 14 days, the Consumer Credit Act allows the lender to go
ahead with action to attempt to recover the full amount of the loan and
any interest due. A default will appear on the borrower's credit file for
six years, even in cases where the borrower manages to pay off the debt
in full within the six-year time period. This makes it difficult for the
borrower to obtain further credit until the defaulted debt is removed
from the file, which it will be at the end of the six years.

(C) WHAT IS A CREDIT SCORE?

A credit score is a three-digit number that is generated by a consumer
credit reporting agency which shows how likely a person is to be
accepted for credit. This 3-digit number is based on that person's credit
report, which is a record of how they have handled credit in the past.
Generally speaking, the higher the score, the less risk that person is
believed to pose to the lender and the more creditworthy they are
considered to be. Someone with a credit score of 800, for example, is
seen as far less a risk of default than someone with a score of 400. The
UK has several professional credit agencies which hold information
about financial behaviour and generate a credit score on that basis. Some
lenders use credit scores to assess who will be the most profitable
borrowers, which are not necessarily those who pay on time.

(D) THE LEGAL AUTHORITY TO HOLD FINANCIAL DATA

James Jones is Head of Consumer Affairs at Experian ple, a major UK

consumer credit reporting agency. Below, he answers a query from a
consumer about Experian's legal authority to store and share data.
"We collect information from a variety of sources, including publicly
available records (such as court judgments and electoral roll
information) and information from banks and other lenders (such as
loans and credit cards). The latter information is stored with us and
accessed by other lenders with your agreement, which lenders obtain
each time you apply for credit. To provide this data-sharing service we
are authorised by the Financial Conduct Authority (FCA) to run a
credit reference agency and are also registered with the Information
Commissioner's Office (ICO) to process personal information. As
custodians of large amounts of personal data, we have a responsibility to
look after it very carefully, something that we take very seriously indeed.
So, we act as gatekeepers, controlling who can see the data, promoting
data quality and helping the public see and, importantly, understand their
credit reports. We can run a credit report on anyone
- with their permission of course - even if there's no data registered at all.
A copy of your credit report will show you exactly what data we do hold
on you."

Exercise

Read A opposite and replace the underlined word in each of the

sentences below to make the sentences correct.

1. Pablo is paying back his loan in 6o timetabled scheduled

payments.

2. Juan fell into debt arrears last month because I received my salary
two days late.

3. I decided during the cancelling cooling-off period that I didn't want

the loan after all.

4. When Juan was in arrears the bank demanded charged interest at a

very high rate.
5. Martina fall into arrears when you fail to pay on the appointed due
date.

6 Last year Juan borrowed took out a loan of 62,500 as it was cheaper
than having an overdraft.

7. My employment situation status is that I have been with the same

employer for 10 years.

8. Estela is in arrears and the unpaid outstanding sum currently stands

at $3,200.

9. I have just received notification from the bank that they have awarded
granted me a loan.

10. I have a credit card and an overdraft and I'm thinking of combining
consolidating my debt into a single loan.

EXERCISE
Read B opposite and write a brief email to a client using the information
you have read. Your client, Chloe Moreton, has received a Default
Notice from her bank. Chloe has sent you the email below.

When you answer Chloe include the following:

• Explain the difference between a letter about falling into arrears and a
Default Notice.
Explain the purpose of the Default Notice.
• Explain the legal situation and possible consequences.

Hi Taylor
This morning, on top of the letters I've had about arrears, I've received
something called a 'Default Notice' regarding my loan and I'd like to
know what my rights are. If I understand it correctly, the bank wants the
full amount of the loan back just because I've missed 3 payments. Can
they do that? It's £6,400 with all of the interest on it and I don't have it.
Thanks, Chloe

EXERCISE

Read C and D opposite and match the following questions with the
answers below.
A credit score is a device used by lenders to assess an individual's
creditworthiness.

A credit score is calculated by using a mathematical model based on

the potential borrower's previous conduct in order to generate a number.

A low credit score is a negative thing because the system used for
calculating the score awards low numbers for high-risk behaviour.

The electoral roll is a public register listing the names and addresses of
people who are entitled to vote in elections.

The authority that is needed to run a credit reference agency is the

authority of the FCA, whose general role is to make sure that financial
markets in the UK are honest, fair and acting within the law.

The name of the UK authority which upholds data privacy rights for
individuals is the Information Commissioner's Office (ICO).