Open Banking is a secure way of sharing your financial data with trusted third parties. If you permit providers to view the information that your bank stores regarding your income and expenditure, it can improve your access to tailored financial services. Here, we take a closer look at what an Open Banking lender is and how they can help you acquire credit.
The traditional borrowing process
Applying for credit traditionally is pretty simple. You decide that you want a loan, apply for it, and the lender conducts a credit check to determine your creditworthiness. This application process has stayed the same for decades, in spite of the digital transformation of the financial services industry. The most important part of the traditional borrowing process is the credit check. Once you’ve supplied your chosen lender with some basic information, they contact a credit bureau to request your credit score. Credit bureaus also store information regarding how much you currently owe to lenders, whether you have missed or late payments, and whether there are any outstanding CCJs against you,
The bureaus issue a score based on your creditworthiness, which becomes the foundation of your loan application. But crucially, these credit checks don’t consider how much you earn and spend every month. That’s super important information as it helps a lender consider whether or not you’re likely to be able to afford the monthly repayments on a loan. Credit checks aren’t a good measure of creditworthiness for people who have recently arrived in the UK, either, as your credit score doesn’t travel with you. As such, Open Banking is a great option, as we explain below.
Can Open Banking help you get a loan?
You can view Open Banking as the missing piece of the jigsaw puzzle. Because your bank knows how much you earn and spend each month, you can allow trusted third parties to securely access this information to improve your chances of being approved for credit. This is done with the help of an API. You are in full control of which third parties can access your information, and Open Banking is only available to lenders who are authorised by the FCA. Ultimately, Open Banking is a very safe and reliable way to give lenders a clearer idea of your creditworthiness.
Affordability and income verification
Fundamentally, Open Banking helps with affordability checks. For instance, if you borrow £3,000 over a two-year period, you might have to make monthly repayments between £100 and £200. What’s affordable to you depends on how much you earn and spend each month. Because Open Banking can verify your income and expenditure, it helps your lender consider what is affordable for you. This ultimately enables Open Banking lenders to make better-informed decisions that can improve your chances of approval.
What’s more, Open Banking is super helpful for thin-file borrowers. These are people who haven’t borrowed money before or have recently arrived in the UK. Traditional credit checks look at a borrower’s history of repaying the money, but if you’ve never taken a loan, how can you prove your creditworthiness? Unlike traditional credit providers, Open Banking lenders can access real-time data to verify your information and focus on your availability. As a result, they can decide whether to offer you credit based on your actual financial circumstances, even if you don’t have a UK credit history.
Open Banking is a safe and fair way to lend money
Ultimately, Open Banking is a much fairer way to lend money. Traditionally, financial institutions have been reliant on what third parties say about you, which isn’t always accurate. In fact, credit reports often consist of errors, which can unfairly affect your credit applications. Instead of relying on data from credit bureaus, Open Banking lenders deal with real-time, accurate information from your bank, which allows them to make fair and accurate decisions about your creditworthiness. This is a good thing for all lenders, regardless of your credit history.
If you’re interested in borrowing money from an innovative Open Banking lender, get started by using Koyo Loan’s loan calculator to see how much you could borrow today.