How Does Untimely Loan Repayment Affect Your Credit Score?



Imagine, a sudden financial expense has hit you, could debt
be the solution to your burden? Possibly, if the debt is a personal loan, it
can help you pay for large immediate expenses when you are short on cash. The
best personal loan in UAE will offer you economical interest rates.

However, a personal loan does impact your credit score, either positively or negatively. The negative impact can be in cases of missed repayment of your personal loan. Therefore, it is important to be well aware of the benefits and risks tied to a personal loan and then evaluate if it is the right pick for you.

What is a Personal Loan?

Personal loans are consumer loans that can be used for any
purpose you want. For example, you can take a personal loan to cover the
expenses for your international trip, or to meet the expenses of a wedding, study
abroad
or to support your child’s further education.

The Best personal loan in dubai generally has a lower interest rate as compared to credit cards. However, these loans do not require any collateral, thereby increasing the risk for the provider and therefore, charge interest rates higher than a car or home loan.

What is a Credit Score?

A credit report is a significant part of your financial
life. It helps the bank evaluate how creditworthy you are. Credit scoring is an
advanced version of the credit report. For the evaluation, data related to you are
analyzed and compiled into a score. This score ranges from 300 to 900. A low
score indicates that you are a risky borrower and a high credit score indicates
that you are a dependable borrower. Your
credit score is flexible. It changes on the basis of your financial behavior.

Banks often pull your credit scores when you are applying for Personal Loan. As a rule, most banks will refuse you a loan in case your credit score is less than 500 or 400. Therefore, if you are planning to buy a home or a vehicle, you need a good credit score.

Untimely Repayment of Personal Loan Decreases Your Credit Score

There are a variety of factors that can affect your credit
score. One of the key factors is missing the repayment of your personal loan.
The consequences you often face if you make an untimely payment of your
personal loan are:

  • Your credit score deteriorates if you miss even
    one single payment for your personal loan.
  • The missed payments and even late payments are
    reflected on your credit report and your credit score. This can be a problem
    for you if you plan on taking a loan any time soon.
  • A major impact is caused on your existing credit
    card applications. If you have a history of missed
    or late repayments
    , the chances of your application getting approved are very
    less.

Other Factors of Personal Loan That Affect Your Credit Score

There are a few more factors of personal loans apart from
untimely repayment that affects your credit score:

  1. Creating an Enquiry on Your Credit Report

When you apply for any type of credit, even personal loans,
lenders often do a credit check on you. This results in a hard inquiry on your
credit report. This negatively impacts your credit score. This impact only lasts
for a few months, but too many hard inquiries can damage your credit score even
more.

You should avoid applying for personal loans through various
lenders in a short period of time, and divide them over a span of time.

It is important to understand all the fees associated with
the  loan in dubai that you
pay on top of the interest charges such as origination fees or late fees.

Taking a personal loan means issuing more debt. If you intend to use the personal loan to pay debts with higher interest, it is important to make sure you change the habits that got you into debt.

On an Endnote

As much as a personal loan can affect your credit score
negatively, it can also help to build your credit score if managed
properly.  The factors of a personal loan
that help in building your credit score are:

  1. A Better Credit Mix

Having a variety of different kinds of credits helps in
boosting your credit score. A personal loan is a kind of installment loan. If
most of your credit consists of revolving credit (eg: credit cards) then a
personal loan can enhance your credit score.

  • Build a Strong Payment History

If you make your personal finance payments on time it helps
in building a positive payment history, thereby, increasing your credit score.

  • Reducing The Credit Utilization Ratio

Being an installment loan, a personal loan does not factor
into your credit utilization ratio. This ratio measures the available revolving
credit you are using.

Even the best personal loan in UAE requires a thorough
evaluation of the costs and benefits as per your needs and requirements.

For more articles, visit OD Blog.

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