3 Things To Remember When Getting A Loan
One way of thinking of credit is as measurement of the probability that you will repay your debt. High scores mean that you will almost certainly pay back your loan, whereas a low score means you have a high risk of defaulting. The low risk of lending to people with good credit allows them to get lower interest rate, pay less in fees, and borrow more money. A credit score is kind of tricky to manage, however, because the more you take advantage of a good credit score, the lower it gets. Kind of.
Here are three things to remember when you consider getting a loan.
- Inquiring for a loan will lower your credit
Every time you fill out paper work to ask for a loan, you create what is called an inquiry. Credit companies keep track of these inquiries and use them to determine part of your credit score. So whether or not you actually get the loan you are asking for, your credit score is reduced by roughly five points with each inquiry. The theory here seems to be that the more debt you acquire the less likely you are to be able to pay it back, so an individual inquiring for more loans is less likely to be able to repay loans and their credit score is lowered to reflect that. In order to avoid this five point reduction, many people advise that you don’t inquire for any new loans, but that advice is problematic because it can make establishing and rebuilding credit very difficult.
2.Sometime you need a loan to raise your credit
Credit is calculated as a FICO score, a number that ranges from 300 to 850, 850 being the best and anything lower than 650 being labeled “subprime.” Your credit score is generally calculated according to the following criteria:
Payment History 35%
Amounts Owed 30%
Length of Credit History 15%
New Credit 10%
Types of Credit Used 10%
These criteria show the problem in avoiding inquiring for a loan. If you don’t inquire for a loan, your payment history and the length of your history may suffer. Without a loan, you will not have a credit score at all, and without making timely payments on a loan, you will not be able to replace a troubled payment history with a good one. Whether or not to get a loan is again a delicate balancing act because the amount of debt you have is the second most important factor in determining your credit score.
3.Remember the 40% rule
When creditors calculate your FICO score, they look at the amount of debt you owe. Now remember, a credit score is a measure of how likely you are to repay your loan, so a person with a lot of debt is going to have a lower score than a person with little. But what counts as a lot of debt? Most financial advisors would say that an appropriate amount of debt is less than 40% of your available credit. If you are using more than 40% of your available credit then your credit score is less than it could be. Using 40% of your available credit is the right amount to balance a healthy payment history with a manageable amount of debt.
You might be hesitant to apply for a loan if you have bad or no credit, but realize that obtaining a loan or a credit card is the only way to establish credit. True, inquiring after a loan will initially lower your credit score, but consistent payments over time will boost your credit above any lost points if you utilize less than 40% of your available credit. Always be cautious in your decisions to get a loan and consider the unique situation of your family and goals before taking on a loan.
If you are like most people, your credit score has taken quite a hit over the past few years. There was a time when the average credit score was in the low 700’s, but now it is in the low 600’s. What isn’t fair is that most lenders won’t lend to anyone who isn’t 750 or above without imposing strict restrictions or extremely high interest rates. So, what do you do if your credit isn’t great and you need an easy personal loan?
Everyone knows that times are tough right now and with the holidays just around the corner, you certainly aren’t the only one who is hurting for cash. Whether you are young or old, working or not, man or woman, we are all in the same boat – things are costing more and more and none of us, it seems, are making enough money to keep up. It is in times like these that many people apply for a personal loan to help them get through the hard times.
If you have ever driven on the “wrong side of town”, you have probably come across your fair share of payday loan or cash advance loan offices. These loan companies are completely legitimate and they cater to people with bad credit that are in immediate need of small amounts of money. They loan to virtually anyone, and although the interest rates can be a little steep, they serve a purpose. If, however, you are looking for long term personal loans, then you would want to look elsewhere.
There may be times in your life when you need a little extra money, you need it fast, and you really don’t want anyone knowing that you are asking for a loan. Maybe you are paying off a debt that you don’t want your spouse to know about, or maybe you had a little run-in with the law and you need to pay a lawyer. Some people simply don’t want anyone knowing about their financial dealings and that is why they go looking for a private personal loan.
I have a friend who has a credit score in the low 500’s and who filed for bankruptcy almost four years ago. She has a good job, a credit card that is not maxed out, and a checking account, yet she thought that she couldn’t get personal loans. The truth is that she can and so can you – in fact, almost every American can get their hands on at least a little cash by using one of several ways of obtaining a loan.