Would A Loan Affect Your Credit Score?

Most people do not have the financial resources to be able to buy major purchases such as an auto outright and rely on credit to be able to fund their needs. However, the way in which a loan is managed can have longer lasting consequences than just the duration of the borrowing and can end up either costing or saving money in the longer term.

Most lenders base their decision on whether to provide finance on an individual’s credit score and with an increasing number of individuals having money problems, underwriters are scrutinizing every last detail to look for signs that the loan could be a high risk. Those who are lucky enough to have a high credit score will qualify for the best loans, whereas those with lower scores will have to pay more to borrow money, if they get approved at all.

Taking out a loan can actually help to improve a credit score, as demonstrating that you are a reliable borrower who makes their repayments punctually bumps up the rating. Conversely, messing a lender about by forgetting to make the payment when it is due, underpaying or bouncing checks can all lead to much longer term effects than the late payment penalty.

Any negative entries in the credit bureaus can stay on a record for as long as seven years, other than bankruptcy, which is allowed to remain for ten years. This means that simply missing payments will haunt your credit score for seven years and may well prevent you qualifying for the best loans, even if you clean up your act.

Being late or missing repayments can not only have an effect on future credit, it can also serve to increase the interest rates applied to existing forms of lending, such as credit cards, under the universal default rule. This piece of legislation means that lenders can re-score their customers if their risk profile changes after making their application.

In other words, if you are late with a payment on your loan, your credit card company may push up the interest rate you pay, as you no longer qualify for preferential rates. The only exception to this is that firms are not allowed to apply increases in interest retrospectively, so cannot start charging more on the existing balance, just new charges.

By making payments on time and improving your overall score, future applications for credit will be viewed more favorably and may be offered at a cheaper rate, with lenders who offer the best loans willing to consider you, as they can see you borrow money responsibly.

Of course, many people hit financial problems and simply do not have the funds to pay their lender and in these cases, there is little value in borrowing elsewhere to try and meet the payments. Ultimately, this will end up in greater problems.

If you are unable to make your loan repayments, rather than avoiding the lender, which is the course of action many people choose, it is far better to contact them proactively, explain the problem and see if there is a way that payments can either be put on hold or reduced, even on a temporary basis. If you miss or are late on payments, it will adversely affect your credit score. If that happens, you won’t be able to qualify for some of the best loans with the lowest interest rates the next time you need to borrow. Think of loans a bit like an investment plan; the better managed the account, the more you will save in the future.

About The Author

Edwin is a marketer, social media influencer and head writer here at Daily Finance Options. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.


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