Personal Loans & Your Credit: You NEED To See This
(NewsBroadcast.com) – There are many reasons why someone would take out a personal loan. Some do so to pay off debts, while others use the money to fund home improvements, vacations, or other personal endeavors. The loans typically come with a set monthly payment amount and can be beneficial to the borrower. However, they are still credit instruments and therefore, they do come with a bit of risk.
Types of Personal Loans
There are several types of personal loans one may apply and qualify for. The most common is a fixed-rate loan, where the interest rate and the monthly payment remain steady throughout the term unless it’s refinanced. Variable-rate loans do exist, but they’re not nearly as common — at least not as a personal loan. With this type, the interest rate adjusts to the market, which can result in lower or higher payments depending on the current rate. They’re better suited to short-term use, rather than say a 3 to 5-year loan. Then, there’s a secured loan, where the borrower gives the lender collateral as a backup in case they default.
How Personal Loans Affect Credit
The impact of a personal loan on credit is typically two-fold. When the borrower applies, there’s a credit report hit, which can temporarily lower one’s score. It’s a good idea to shop around before applying, because the more credit inquiries that a person has, the more significant the impact. Inquiries typically fall off a credit report within 2 years.
Revolving loans are a good tool for boosting one’s credit, especially when used responsibly, which brings us to the next point.
Responsibility Is Key
As with any credit instrument, it’s important to be responsible. This means making monthly payments on time, every time. One missed payment can not only lower one’s score, but it also affects a person’s payment history, which is a significant part of what makes up the number. Too many missed payment may result in a collections account, which will inevitably tank all the hard work someone puts into maintaining good credit. If someone defaults on a secured loan, they also stand to risk the collateral as payment.
So the answer to the original question is yes, taking out a personal loan may hurt a credit score temporarily in terms of a hard inquiry, but if the borrower makes all the payments on time and pays the loan off successfully, it will only serve to help increase or maintain one’s credit standing.
Personal loans are not for everyone, and they have more stringent requirements than a car loan, for example. But they can be a useful tool when you need extra money.
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