Credit Risk Assessment

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How we assess our borrowers

Loan applications made to Connective Lending requires due diligence to gain an accurate insight into the borrower, their needs and their plans for requiring funding. Areas that we look to confirm when obtaining information are:

- Who is the borrower and are they creditworthy (only for a property)?
- What is the asset, can we secure it or obtain a first legal charge?
- What is the loan intended for (only for a property)?
- What is the exit strategy and is it achievable (only for a property)?
- What is the requested loan amount and is it appropriate against the type of collateral?

This information provides the foundation for us to set the appropriate risk when completing our due diligence and to the level of risk being undertaken. In all cases for property loans, we will meet with the borrower and carry out a viewing of the asset given as security.


Credit Risk Assessment

Connective Lending carries out credit risk assessments against borrowers who seek to secure short-term bridging loans. The credit risk assessment helps us in determining several factors such as:

  • The borrower's risk.
  • The asset risk.
  • The probability of default.
  • The appropriate interest rate to be applied to the loan.
  • The likelihood of the borrower meeting their repayment obligation (affordability).

Credit risk assessments are carried out using judgement and assumption taking into consideration factors including those listed above. Data that we obtain is converted into scores which are applied against individual criteria’s, to create a total risk assessment score. The data/information which we assess will be for example:

  • Valuation reports.
  • Credit history reports.
  • Independent information sourced directly from borrower.
  • Market data.

We also use the data provided by the credit reference agency towards the probability of default by the borrower. The data assists us in determining the potential outcome for the borrower in the short-term future.

The credit risk assessment is undertaken in three main areas:

  • Property risk: The risk posed by the property (security) to be used for financing the loan.
  • Borrower risk: The risk posed by the borrower taking out the loan.
  • Exit strategy: The method/likelihood of the borrower meeting the exit strategy within the timeframe and method.

For each section, separate scores are applied to each entry. Each section is scored out of 10 and adjusted for their respective weight. Weights are applied as follows:

Area of Assessment Weight
Property Risk 50%
Borrower's risk (creditworthiness) 35%
Exit Strategy (affordability assessment) 15%

Risk Categorisation

A completed credit risk assessment allows us to correctly apply an overall risk category for that borrower/loan. The categorisation process helps us evaluate the risk we believe a loan poses, the interest rate applicable and the probability of default.

We categorise risk by calculating the total score generated by the credit risk assessment. Dependent on the score, we will categorise the risk into one of the following categories:

Credit Assessment Rating Score Card

Credit Risk Assessment Score Credit Rating
7.1 - 10 Unlikely
5.1 - 7.0 Possible
3.0 - 5.0 Likely

The lower the score the higher the risk. Where loans are scored below 2.9, these are categories as 'Intolerable' due to the very high risk posed and are refused at the source.

Risk Categories Explanation

Once we have completed our credit risk assessment and determine the overall score applicable, we are able to apply a score to determine the overall risk category that loan applies to.

The risk categories are:

Unlikely: The loan poses a low risk and a probability of default is 'unlikely' to occur.

Possible: There is a medium risk and a probability of default is 'possible' to occur.

Likely: The loan is deemed as a higher risk and a probability of default is' likely' to occur.

Loans which score 2.9 or below in our credit risk assessment will automatically be refused as they have not met the minimum criteria.

Interest Rate for lenders

Our credit risk assessment assists us in applying an interest rate we deem fair and appropriate against the risk the loan poses. For high-risk loans, we will apply a higher interest rate, compared to those categorised as low risk.

Our firm implements a credit risk management framework which helps us assess ongoing  risk categorisation to ensure that our credit risk assessment is correctly categorising loans based on the assessment we applied.

Where we deem this is not the case, we take immediate action to mitigate the risk by carrying out an internal review of our assessment processes and implement mitigation plans.

Please note we do not undertake credit risk assessments against pawnbroking loans. Our primary observation for pawnbroking is to determine the correct value of the asset that is being provided as security.