Why Your Credit Score Is So Important When Getting A Personal Loan

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Do you want to benefit from a competitive interest rate on a personal loan? You will need good credit.

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 it is used to finance – your home. If you don’t pay off your mortgage, your lender may force the sale of your home in order to be paid off. The same goes for a car 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 any specific asset. If you don’t pay off your personal loans, there is nothing your lender can force you to sell in order 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 big 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 rating can 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.

The Ascent’s Best Personal Loans for 2021

The Ascent team has scanned the market to bring you a list of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate, or need extra cash to make a big purchase, these top choices can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.

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