How does taking out a personal loan affect your credit score?
Many Aussies use a credit card to pay for their purchases, vacations, and even house and vehicle maintenance. However, credit card companies charge significantly higher interest rates, making personal loans an attractive alternative for some borrowers.
But taking out a personal loan is also a financial act; Lenders will report it to rating agencies as a credit transaction. Typically, both the personal loan size and your ability to make timely repayments can have an impact on your creditworthiness.
Some lenders may not require a credit check for certain loans; like payday loans that do not exceed $ 5,000. However, there are often high fees for these loans.
Does Applying For A Personal Loan Affect Your Credit Score?
Applying for a personal loan can affect your credit score in a number of ways, including the purpose, amount, and duration of the loan. If a lender requests your permission to access your credit file, it could affect your creditworthiness as it is on your credit history. If you check your credit report, you will find that every lender you applied for a loan with reported the application to the credit reporting agency. This means that if you apply for loans frequently, your creditworthiness can also be affected, often within a short period of time and especially shortly after a previous loan application has been rejected. Such incidents can have a negative impact on your creditworthiness.
On the other hand, a personal loan can help you consolidate your debt or reduce your overall debt burden by helping you pay off a higher-interest loan or credit card. If this is the purpose of your personal loan, applying will leave an impression on your loan record. Still, reducing or eliminating debt can help you improve your credit score.
Obtaining a personal loan doesn’t have to be the only solution to bad credit. For example, you could work on having a stable income and paying your bills or other debt installments on time. You can also speak to a financial advisor to see if you have missed alternative opportunities to recover from excessive debt or bad credit.
How does getting a secured personal loan affect your credit score?
A secured personal loan can be more attractive than an unsecured loan because you will likely get lower interest rates. From a lender’s perspective, a secured loan may pose a lower risk of losing their money. If you default, they can sell the asset that the loan is secured against and reclaim at least part of the loan amount.
However, if you as a borrower are already struggling to pay off your debts, taking out a secured personal loan can mean you risk a major default and lose the asset in the process. Borrowers looking to consolidate their debts into a single personal loan could face a significant loss in their creditworthiness if they fail to obtain a secured personal loan.
Personal loans, too, are usually smaller, earmarked debts for which many lenders do not expect collateral. For some smaller loans (such as payday loans), lenders may not require a credit check, although you will still need to provide evidence of stable, sufficient income to cover repayments.
Consider looking for personal loans that allow you to pay more than the intended repayment amount and possibly even offer a repayment option. Ideally, a short-term, unsecured personal loan with no prepayment penalty can help you weigh the cost of borrowing against the potential impact on your creditworthiness.