How loans can affect your credit score

credit score document

What is a loan? A loan is an agreement you make with a lender. It often involves signing a contract, stating how much you will be expected to pay on a specific day each month, for how many months or years. Paying it back takes commitment, and you need to be prepared, or face the consequences of debt.

Taking out loans is a norm these days, whether it’s for a mortgage, personal, or a car. But did you know that these loans have an effect on your current credit score? Here are a few ways it can do just that:

Loan applications

Did you know that enquiring about a loan can have a negative impact on your credit score? When you inquire about a loan, lenders will take a peek at your credit record which can then negatively affect it.

Now, the effect is minor; but if you’ve made several enquiries within a short span of time, it can prove troublesome. It says to potential lenders that you are in desperate need of a loan, or have taken in more loan than what your current income can handle.

However there is a bright side to this; you have a grace period while you are shopping around for a loan, wherein your credit report will remain unscathed. This grace period can last anywhere between 14 to 45 days, so make sure you have made a decision about which loan to take before your time is up.

Paying on time

On a more positive note, making your loan payments on time and finishing within the contract’s given time frame has a positive impact on your credit score.

Now, if you were late to pay or miss even a month, it can have a negative impact on your credit score. If you continue to do it for months on end, then you may face a more substantial debt or even repossession of your items, or even foreclosure on your home.

Higher loan balance is bad

The entire point of the contract you sign with the lender is so that you are bound legally to pay them back for the money you decided to borrow. As mentioned above, you won’t have much to worry about if you make it a point to hold up your end of the deal and make sure that you make the payments each month on time. Eventually, you’ll see your debt reducing, and before you know it, you’re free.

However, if there is little to no change from your initial loan and you continue to miss payments, then you can expect your credit score to go down.

Before you take out a loan, make sure that you can commit to the payments and pay it off in time. What’s more, instead of getting a car loan, another great option if you need a vehicle is leasing it instead. That way, one payment will cover both insurance and the car itself. And all you have to worry about is the vehicle’s maintenance and planning your next destination.

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