When it comes to your credit history, there is a lot of speculation around how this applies to a personal loan application. The question always remains, how crucial is your credit history when you are applying for a personal loan?
The definition of a personal loan is when a financier gives you money for personal use. While they are not limited to a single area, these loans could be used for various reasons. There are also multiple types of personal loans available, and your credit rating plays a crucial role in the kind of loans you have access to, as well as which ones you will be approved for. Most personal loans require that you have an excellent credit history. A negative, or poor credit score, can adversely affect your loan limit.
How Personal Loans Work
Personal loans work similar to other loan types. The lender will give you a specific amount of money so that you can use that money to pay for an unexpected expense or for other purposes. The lender will determine the amount you can borrow as well as the terms of your loan, such as the interest rate. You are then required to pay back your loan in installments plus the accrued interest.
Personal loans are primarily available from credit unions, lenders, and banks. They can be literally used for anything from going on vacation or buying a car, through to settling your bills. Once you take a personal loan, it is mandatory that you make repayments accordingly. Typically, repayments are usually on a monthly basis, but in some instances, it could be fortnightly or weekly. The amount to be repaid is composed of the principal (the initial amount you borrowed) as well as the interest accrued on this original amount.
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How Credit Affects Your Ability To Get Personal Loans
Your credit file has a significant effect on your ability to secure a personal loan. Before a lender can approve your personal loan application, one of the things they need to do first is to check your credit file. The lender will scrutinize your record and look for any warning signs or bad marks like bankruptcy, loan defaults or late repayments. Your credit history is one parameter that lenders use to assess your ability to pay your loan depending on your past credit. Your credit history shows your capacity to make repayments successfully as well as your previous dealings with credit. If you have negative marks and bad credit history on file, you will be limited regarding your personal loan access options which could even result in the rejection of your application. While you might still get approved for a personal loan even with a bad credit history, it will not be straightforward.
Personal Loan Options For People With Bad Credit Scores
If your credit score is weak, there are still options at your disposal to acquire personal loans.
Debt Consolidation Loans: If lousy credit has hit you, the best way to go is to consolidate your debts into a single loan. This leads to the better management of your loan repayments and when done well, it could even lower your fees and interest.
Payday Loans: These loans provide you with some little money (up to $2,000) over a small period. Payday lenders are usually flexible in their loan application criteria and will approve your loan application even with a bad credit history. Unfortunately, payday lenders typically have higher charges.
Secured Loans: With this loan option, your asset is used as collateral. These loans are popular for people who have poor credit scores, and you are more likely to have a successful application when you apply for this loan. The reason for this is because your bank has security for your loan, thus more or less making your credit history irrelevant as part of the application.
Bad Credit Lenders: Normally, bad credit lenders are usually more flexible with their loan application criteria. Their specialty is in lending to people with bad credit histories hence making them a good option for anyone with bad credit.
Improving Your Likelihood of Your Application Being Approved
Luckily, there are a few ways in which you can improve your credit score and consequently improve the chances of your personal loan being approved.
Frequently check your credit file. Requesting for your credit file and checking it regularly is the best way to monitor your credit as well as pinpoint any possible errors. This could, in turn, boost your chances of getting approved for a personal loan.
Pay your bills on time. Late payment of your bills has a direct impact on your credit file. An excellent way to improve your chances of getting approved is ensuring you pay your bills on time so you can maintain a good credit rating.
Consolidate your debts. When you consolidate your debts into one the chances of your personal loan application being approved are increased considerably. Combining your debt and having your debt situation under control will reflect positively on your credit file.
Credit Repair. You might also consider repairing your credit. Credit repair specialists will look into your credit files, isolate the errors and then have them deleted from the credit file. Your bad credit rating could be as a result of a mistake from your lender, and this could be corrected through credit repair. There are fees usually involved in this process.
Control your spending and credit cards. A majority of individuals fall into credit trouble by using credit cards. To boost your chances of getting an approval, you will need to control your spending, make your credit card payments on time and spend only within your means.
Types of Personal Loans
Secured Loans. These loans need you to use an asset as collateral. When you do not make your repayments entirely, the lender can take over the asset. These loans are usually more secure and have lower interest rates. They could be a good option for anyone with a poor credit rating.
Unsecured Loans. With unsecured loans, you don’t have to use an asset as collateral. This type of loan is usually a higher risk to borrowers and thus often has a high-interest rate. You will need a good credit history for you to be eligible for this loan type.
Fixed Loans. Fixed loans are often very secure. The interest rate is usually locked in for a specific term between 1 to 5 years. During the set time, interest rates and repayments do not change. However, these loans do not have many features. Fixed loans could be the best option for anyone who has previously had trouble with repayments since it allows for budgeting.
Variable Loans. With this loan option, the interest rate usually varies with the interest rate announcements. They often have lower interest rates, but you should always be ready for an increase in the interest rate. These loans usually also have numerous features.
Car Loans. These loans are financing options which are specifically meant for buying a car. They provide you with the capital to buy a car and could either be unsecured or secured, often using another vehicle as collateral. There are several car loan options for people with a poor credit score.
Payday Loans. These loans are smaller and usually, have a shorter term. Their turnaround times are generally fast, and you could receive funding in less than 24 hours, hence the name payday loans. You can get up to $2,000, but you should be aware of the high-interest rates and only choose them in the case of an emergency.
Debt Consolidation Loans. These types of loans let you consolidate your debts into a single loan. It enables you to be in full control of your debts and often have lower interest rates.
With bad credit, you will realise that it will not be easy to apply for a personal loan. However, there are various steps you could take to gradually improve your position so that you will be a favourable borrower. Diligence and patience are crucial if you want your financial life back in good shape so that you have numerous personal loan options.