The advantage of getting a personal loan is that you can use this money for any reason. If you have credit card debt that you want to pay off more affordably, you can take out a personal loan at a lower interest rate and drop your balances. Or you can take out a personal loan for:
But if you are going to take out a personal loan, it is important that you have a good credit rating when you apply. Here’s why.
Your score could be your most valuable asset
When you take out a mortgage, that home loan is secured by the asset that it is used to finance your home. If you don’t pay off your mortgage, your lender can force the sale of your home in order to be paid off. The same goes for an auto loan. Fall behind on your payments, and 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 that they are not tied to a specific asset. If you don’t pay your personal loans, there is nothing your lender can force you to sell to get their money back.
For this reason, personal lenders can be quite picky about the applicants they approve. And they tend to favor applicants who come in with good credit scores.
The higher your score, the more likely you are to not only get 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 score is not as strong, but you could end up with a high interest rate which makes the loan much less affordable.
How to increase your credit score
If you are looking to apply for a personal loan but are not excited about how your credit score looks, it is worth working on improving it before submitting this application. You can do this in several ways:
- Pay your bills on time, which will result in a more favorable payment history. Your payment history carries more weight than any other factor in calculating your credit score.
- Pay off some existing credit card debt. This will lower your credit usage rate, which is another important factor that goes into determining your score. That said, if you are in a situation where you need to take out a personal loan, you may not be able to afford the debt you already have.
- Check for credit report errors. If there are any mistakes that work against you, correcting them could improve your score quickly.
If you are applying for a personal loan, a good credit score could make it easier to get approved and earn an affordable interest rate. Check your credit score before applying for a personal loan so you don’t be disappointed.