Many Australians use a credit card to pay for purchases, vacations, and even home and vehicle maintenance. However, credit card companies charge a significantly higher interest rate, making personal loans an attractive alternative for some borrowers.
But contracting a personal loan is also a financial act; lenders will report it as a credit transaction to the credit rating agencies. Generally, the personal loan amount and your ability to make timely repayments can affect your credit score.
Some lenders may not require a credit check for certain size loans; such as payday loans that do not exceed $ 5,000. However, these loans often charge high fees.
Does Applying For A Personal Loan Affect Your Credit Rating?
Applying for a personal loan can affect your credit score in several ways, with the purpose, amount and duration of the loan all playing a role. When a lender asks for your permission to access your credit report, it can affect your credit score as shown on your credit history. If you check your credit report, you will find that any lender you have applied for for credit has reported the request to the credit bureau. This means that your credit score can also be affected if you apply for loans frequently, often for a short period of time and, in particular, soon after a previous credit application has been rejected. Such incidents can negatively affect your credit score.
On the other hand, a personal loan can help you consolidate your debt or reduce your overall debt by helping you pay off a loan or credit card with a higher interest rate. If this is the purpose of your personal loan, applying for it will leave a mark on your credit report. Nonetheless, reducing or eliminating debt can help improve your credit score.
Taking out a personal loan doesn’t have to be the only solution to a bad credit score. You could, for example, make sure you earn a stable income and pay your bills or other debt payments on time. You can also talk to a financial advisor to see if you’ve been missing out on other ways to recover from excessive debt or bad credit.
How Does a Secured Personal Loan Affect Your Credit Score?
A secured personal loan may be more attractive than an unsecured loan because you will likely get lower interest rates. From a lender’s perspective, a secured loan may present less risk of losing money. If you default, they can sell the asset against which the loan is secured and recover at least part of the loan amount.
However, as a borrower, if you are already struggling to repay your debts, taking out a secured personal loan could mean risking a larger default and losing the asset in the process. Borrowers looking to consolidate their debts into one personal loan could find themselves facing a significant impact on their credit score if they fail to secure a secured personal loan.
Personal loans also tend to be smaller and more specific debts, for which many lenders do not expect any collateral. For some smaller loans (like payday loans), lenders may not ask for a credit check, but you will still need to provide proof of stable and sufficient income to cover repayments.
Consider looking for personal loans that allow you to pay more than your expected repayment amount and maybe even give you a buy-out option. Ideally, an unsecured short-term personal loan with no prepayment charge can help you balance the cost of the loan against the potential effect on your credit score.