Why Your Credit Score Is So Important When Obtaining a Personal Loan
The advantage of a personal loan is that you can use that money for any reason. If you have credit card debt that you want to pay off more cheaply, you can take out a personal loan at a lower interest rate and let your balance go. Or you take out a personal loan:
However, if you are looking to take out a personal loan, it is important that you have a good credit rating at the time of application. Here’s why.
Your score could be your most valuable asset
When you take out a mortgage, that home loan is backed by the asset that finances it – your home. If you fail to pay back your mortgage, your lender may force you to sell your home in order to get the repayment. The same goes for a car loan. If you default on your payments, your lender can repossess your car and sell it to meet your loan obligation.
However, personal loans work differently. Personal loans are unsecured loans, which means they are not tied to any particular asset. If you cannot make your personal loan payments, your lender cannot force you to sell to get their money back.
Because of this, personal lenders can be quite picky about the candidates they approve. And they tend to favor applicants who have strong credit ratings.
The higher your score, the more likely it is that you will not only be approved but also get a competitive interest rate on a personal loan. To be clear, it is It is possible to qualify for a personal loan if your credit rating is not that good, but you could be stuck with a high interest rate that makes the loan much less affordable.
How to Increase Your Credit Score
If you’re looking to apply for a personal loan but aren’t excited about your credit score, it is worth working on improving it before submitting this application. You can do this in a number of ways:
- Pay your bills on time, which translates into cheaper payment behavior. Your payment history carries more weight in calculating your credit score than any other factor.
- Pay off some existing credit card debt. This will reduce your credit utilization, which is another important factor that goes into determining your score. That said, if you are able to obtain a personal loan, you may not have the funds to pay off your pre-existing debts.
- Check for errors in the credit report. If there are mistakes working against you, correcting them could quickly improve your score.
When applying for a personal loan, a good credit rating can make it easier to get approval and get an affordable interest rate. Check your creditworthiness before applying for a personal loan so you don’t get disappointed.