The Loans Canada team sits down with Gary Schwartz of the Canadian Lenders Association to talk about open banking.
What Is a Credit Reference?
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Before approving an application, many lenders will ask that applicants provide at least one suitable reference. These are requested as a standard of practice for everything from personal loans to auto loans. While the type of reference necessary may differ, the reason remains the same. References can attest to your ability to adhere to your financial obligations. It offers a more complete picture of you and how you stand as a credit liability.
What Is a Credit Reference?
This type of reference comes in many different forms. It is a form of paperwork that highlights your credit history. One is a standard credit report. You can find these through TransUnion and Equifax. Together, the two offer a fairly comprehensive picture of your credit history. Conversely, you can also use a previous lender as a credit reference. If the letter provided thoroughly outlines your payment details as they relate to the original arrangement, it should be sufficient. Sometimes, especially if you have limited credit or are seeking larger sums, both may be required.
Who Can Be a Credit Reference?
Effectively, anything that documents your history within the binds of a financial arrangement can work as a credit reference. It can be a personal loan attestation from a lending party. You could use your previous car loan information to prove your creditworthiness. Alternately, rental history or mortgage records can be applied to this purpose. It is usually easier to access a credit reference from a long-term arrangement; though, provided you keep sufficient documentation you will be able to use any of the above references.
Reasons Lenders Ask For Credit References
The major reason lenders request credit references is to better assess your borrowing or financial history. There can be many different causes for this information being requested, including:
Default on a Previous Arrangement
Anytime you fail to pay a bill (even a phone payment) on time, the record of the default shows up on your credit report. Therefore, if a potential lender can see that you have even a small history of defaults, they may want something to substantiate your lending worthiness.
History of Exiting Your Agreements Early
While not technically a default, if you left arrangements early and simply paid the fees, it can impact your ability to get a loan. For instance, if you had a loan for a vehicle and sold it early, it may give pause to a potential lender. Since most of the profit is in the interest, it matters that the client sees loans through. Therefore, they may request a credit reference.
Learn how to get out of your car loan early.
Limited Credit Information
Another reason that lenders request references is simply a lack of credit information associated with you. Perhaps you lived off of savings for some time, dealt mainly at arms-length, or have just begun your career. These are common scenarios wherein the person won’t have an active credit profile. To get a better picture of your credit situation, the lender is likely to request some form of attestation.
Bankruptcy or Consumer Proposal
It takes quite some time for both a bankruptcy filing and a consumer proposal to leave your credit record. If years have passed but they are still apparent, you can expect any future lenders to request a statement from a reference.
High Debt-to-Income Ratio
While there are general requirements regarding a borrower’s debt-to-income ratio, some lenders may have an even more stringent ratio. If you plan to request an exception, be prepared to offer up references to substantiate your ability to pay and track record of so doing.
What Kind of Information Do You Have to Provide on Your Credit References?
The information requested from your loan references is fairly straightforward. There is no extraneous information, generally, that does not deal specifically with your lending history. Certain pieces of information may seem unique, such as your location throughout the loan payment. However, this relates directly to your credibility and stability. Standard inquiries start off with the basics. The reference should note the name, location, and contact information for both you and the lender. The nature of the loan should also be noted. Finally, you should have a financial breakdown of the payment amounts, any down payment offered, the percentage of interest, and term of the loan. Records of timely payments are helpful as they highlight your diligence with respect to making payments when required.
What are bad credit lenders looking for when they approve an application?
What Are Your References Responsible For?
Your references are responsible for the accuracy and validity of the information provided. Most of the time, it is through a financial institution with the fiduciary responsibility to offer accurate details. Plus, this situation leaves them responsible for acting in your best interest provided you are currently engaged with their services. The references have the onus of correctness since the reference itself is a declaration made by your lender. This does not mean that you cannot contribute in terms of gathering records and organizing the documentation. It simply refers to the fact that the lender is attesting and therefore liable for the accuracy. Additionally, there is a reasonable expectation of good faith when you’re dealing with a lender. This basically means that the lender, regardless of personal opinion, cannot make a harmful statement which is untrue or knowingly harms your chances through any kind of bias.
What Kind of Lenders Ask For Credit References?
There are several situations in which a lender can be expected to request a reference. Since there are different lines of credit and lending situations, each different sector can be expected to have a unique standard of practice. Some common situations which call for a reference include:
Depending on your credit history, another time you may need a reference to get a car loan. Usually, the standards for the reference mean you cannot use anyone with whom you cohabit. Sometimes, an employer can work as a credit reference, though landlords, your bank, and credit card companies are also viable options. Some lenders who deal in subprime arrangements look for references as a method of solidifying your contact details. By learning where you reside and your contact details, they have recourse should the situation call for such actions.
In certain situations, banks will request a credit reference. This is not typical, since the bank will generally rely on internal records supplemented by your credit history. Still, should you have a small credit history, be new to the country, or just starting out, there is limited information on your file. The bank may seek out a reference to attest to the truth of your personal situation. Generally, the bank will accept a broad range of sources, provided they are comprehensive and correctly completed.
Usually, alternative lenders are a smaller business that may offer higher rates though have less stringent regulations for credit scores and the like. Especially when someone with a limited credit history seeks out a loan from this source, it is only prudent for the lender to get all the necessary information. Particularly since many of these companies don’t have access to the same resources as major banks, prudence in lending practices is essential. This way, they can continue to offer loans that are often easier to access to those who don’t have a full credit history.
Find out where you fall in the credit score range.
While finding out that your lender is requesting a reference may sound stressful, it is actually standard practice. It has a lot of benefits such as saving time in the administrative process and offering opportunities to those who could not otherwise access credit. Depending on your situation, you may have access to a few or several reference sources. Provided you continue to uphold your financial responsibilities with your existing creditors, you can arrange a reference further down the line. Additionally, personal sources such as landlords, employers, and the like are able to offer the same benefits that may be easier to reach. Even those with excellent credit may come across the need to file a reference letter, so it is best to plan ahead and know your resources.
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