So, you have finally decided to get a new car and buy your own home. Like the majority of the people around the world, you are planning to get a mortgage or an auto loan. You start exploring all the possible financing options in the market, and then you get to know that the chances of you getting a loan are close minimum. Can you imagine anything more frustrating and demotivating than this?
Well, you are most likely to find yourself in such a situation if you are surviving in the world with a bad credit score. It is difficult for every bad credit score holder. Be it a mortgage, auto loan, small business loan, or working capital loans, with bad credit, you can expect rejection of your loan applications.
Understanding the Credit Score
The credit score has such a huge impact on one’s capability to get a loan; therefore, it is crucial for every individual to have a thorough understanding of it. Before you get into the depth of credit score, you need to have a clear concept of credit history. It is a record of your ability to repay the payment. It contains information about your debt repayment, including mortgage, credit card bill, and others. It also includes the payment history of your bills. All these records have a major impact on your credit score. Your credit score is a statistical number that includes an evaluation of one’s creditworthiness. It depends upon the credit history, and lenders look at the score before they approve your applications. Other than credit history, there are other elements that make up your credit score. These elements include total debt, length of credit history, types of credits, and new credits.
The range of credit score, as per FICO, start from 300 and go as high as 850. The better your credit history, the higher your credit score and the higher are the chances of getting a loan. A score higher than 669 comes under the category of good, the score between 580 t0 669 come under fair, and one below 579 is bad credit. More than 60% of the people with a credit score of less than 579 are most likely to have difficulty repaying their debts.
Bad Credit Score and Ability to Get a Loan
A bad credit score will negatively impact your ability to get a loan, regardless of how big or small the loan you need. There is no hidden truth behind it. With a bad credit score, your chances of getting an approval on your loan application are close to the minimum. There are a number of ways that your bad credit can affect your ability to get a loan.
Rejection of Loan
The first and most obvious effect of a bad credit score is the rejection of loan applications. If you are applying for a loan with bad credit at a bank, expect to receive a rejection. Among all financial institutes, banks are the strictest about giving out loans. If they detect any flaws in your credit history, they will reject your application without even giving it a second thought. You might have a chance at a private lender, but there is no guarantee that you will get a loan.
Longer Time of Loan Approval
The second possibility in this situation is that your loan application might take way longer than usual to get approval. It is common among lenders to properly check the history of a borrower before giving them a loan. As this is lender’s money, they cannot risk it by handing it over to someone who is most likely to fail to repay the loan.
If you do get a loan, do not expect to get it on terms that suit you. When you have a bad credit score, the ball is in the lender’s court, and you will have to get a loan on their terms. In a case with a bad credit score, you will get a loan on high-interest rates. The reason why people keep working to improve their credit score is that they do not want to get a loan with high-interest rates. Getting a high-interest loan is not at all a situation anyone wants to be in as it ends up in payment, which is much higher than the loan that one took.
High Monthly Payments
With high-interest rates, you will have to make high monthly payments. Defaulting on these payments will further deteriorate your credit score. You will not have a say in it, and soon it will become difficult for you to make these monthly payments.
These are the side-effects of bad credit on your ability to get a loan. A low credit score has other negative impacts on your life, and it can damage your financial stability. Other problems that you might have to face with a bad credit score include the possibility of paying a security deposit on utilities. Moreover, landlords check a potential tenant’s credit history; therefore, getting a good apartment becomes difficult with a low credit score. If things get worse and you are in bad luck, you might even get denied for a job. It is majorly a requirement in the finance industry. No company would risk their financial decisions in a man’s hand who could not even manage his personal financials. Then, how can we forget about the calls from debt collectors and lenders? They want their money, and they will bug you till the time you finally pay them back. It is a risky situation for them, as well.
Maintaining a fair, if not good, a credit score is a high-priority matter in life. Many significant phases of life depend upon your ability to get a loan, and when you do not have the basic asset in your hand, your financial situation will keep on deteriorating. The majority of the world’s population take up a mortgage to get a home or a car, and without a strong credit score, you will not get a chance to own any of these basic commodities of life. It is, therefore, the best approach to improve your credit score and apply for a loan only when you have a strong credit history. There are many different ways you can improve your credit score. You need to pay attention to improve your credit score. If you are a business owner, you will have to borrow money at some point or the other. With a bad credit score, you will not get approval for working capital or small business loans.