A personal loan is money that you can borrow from a bank or credit union, which you can use for almost any purpose. Unlike home loans or automobile loans, which are specialized, you can use personal loans for paying off medical bills, emergency home repair, purchasing a new home appliance or even consolidating multiple loans that you may be currently juggling.
Many personal loans have lower interest rates than credit cards. So, people often take out a personal loan to close their credit card payments. These are typically unsecured loans, which means they don’t require collateral against the sanction of the loan. Your credit score determines the terms of the loan including the repayment terms, interest rate and the amount. A good credit score should enable you to qualify for a personal loan.
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Many people are not aware that handling personal loans in a disciplined manner can boost your credit score. Let us find out how –
- Build a good payment history – always make your personal loan payments on time to build a good payment history. Strong payment history can reflect positively on your credit bureau score. Always remember to make the payments in full every month. Standard Chartered helps its customers to build a good payment history by allowing its customers to set up automated payments. Find out more!
- Lower your credit utilization – Credit utilization refers to how much you owe with respect to the spending limit on your credit card(s). Most adults have a mix of revolving lines of credit including high-interest credit cards. Adding a personal loan to the lot can reduce the credit utilization score and affect the credit score positively.
- Enhancing the credit mix – the credit-scoring formula takes credit mix into account. Credit mix is the diversification of the different types of loans or lines of credits you are currently paying off. Adding personal loan to the mix can have a positive impact on your credit score as it indicates that the individual has experience of handling different types of credit.
Already geared up for applying for a personal loan. Hold up! Here’s what you need to know about the potential negative impact it can have on your credit score –
- Hard inquiries on credit report – each time you apply for a loan, the potential lenders issue a hard inquiry on your credit report. While this has negligible impact if one inquiry is made, but it can add up in case of many inquiries leading to a negative impact. Remember, each time a potential lender runs a hard inquiry, you will lose points from your score. If your credit score is already in bad shape, you definitely don’t want your scores to dip for the next couple of months.
- Adding onto a mountain of debt – a personal loan may be harmful to your credit score if you are already sitting neck deep in unpaid credit card debts. You should always aim to exchange a bad form of credit you already have, like a high-interest credit card, with a good form of credit. So, verify the terms of your personal loan before you sign.
Know more about Standard Chartered Personal Loans
Now that you have a brief idea about the nature of the loan, its pros and cons, you should also know about the right time to apply for a personal loan.
- You are faced with a costly emergency – it can be a health emergency or a family crisis. Taking a loan on your credit card proves to be much higher in such scenarios, so the best option would be to apply for a personal loan.
- You are paying a high-interest debt – personal loans are excellent for consolidating existing high-interest loans including the payment of multiple credit cards.
- You don’t want to risk your assets – unlike home equity loans that are only available against your home as collateral, you can get personal loans without collateral. Although personal loans may charge an interest rate higher than the fixed-rate home equity or similar loans, it is a safer option for those struggling to improve their credit score by taking the minimum risk. Check out collateral-free personal loan with low procession fee and flexible solutions!
While some take personal loans to fund vacations and weddings, the use of your personal loan amount can only be justified by your personal finances.
Living on a tight budget calls for closer scrutiny of repayment terms of personal loans. Since defaulting on payments will take a toll on your credit history and make it even more difficult for you to qualify for any form of credit in the future.