What Is The Impact Of A Personal Loan On Your Credit Score?

impact personal loan credit score effect rating loans

You might have been hit with unexpected medical expenses. Your credit card bills and other existing loan repayments have gotten out of your hand. Your home might require an immediate renovation but you have not enough funds to do something about it. Could taking on more debt be the apt solution to all of these problems? 

In such situations, one of the best options is to opt for a personal loan as it can help you to meet all of your financial requirements. Also, the best personal loan in UAE comes with easy formalities and minimal documentation. 

But there is one thing that plays a significant role in deciding whether you will be eligible to avail a personal loan or any other credit to deal with your financial requirement and that is none than other your credit score. On the basis of your credit score, the lender decides your repayment ability. 

So, the next question is how does personal loan affect your credit score

Well, it may either impact your credit score positively or negatively, depending on the different situations. Keep reading further to know how the personal affect your credit score and whether it is the right option for you to get financial assistance in times of cash crunch. 

What Exactly Is A Personal Loan? 

Personal loan or also known as consumer finance is unsecured in nature. This means that you don’t need to submit any collateral or guarantor to procure one. Unlike auto or home finances that are designed for particular reasons, personal loans are multi-purpose. Be it medical expenses, higher education, international trip, to start a new business or even debt consolidation, PL can be used for any purpose as there is no restriction on the use of the loan amount. 

In fact, the best personal loan in UAE is available at a competitive rate of interest and low processing fee, making it easy for borrowers to pay off their debt or other high-interest debt. 

There is a wide range of banks and financial institutions in the United Arab Emirates that offer consumer finance so you can opt for it from any of them. However, the loan amount and rate of interest you qualify for will be depending on your credit rating and some other eligibility factors. The higher your credit score, the higher will be the chances of approving your loan application. 

How A Personal Loan Can Help You Build A Good Credit Score? 

Based on how you make the use of the personal loan, it can help you to build a good credit score in numerous ways: 

• Lower Credit Utilization Ratio 

When you make large payments against your credit card very frequently, it may result in a hike in your credit utilization ratio (CUR). It is actually a ratio of your monthly expenses to the total available credit limit that has assigned to you. The higher CUR depicts that you have been utilizing the available credit limit irresponsibly and makes the lender find you a credit hungry borrower which could ultimately leave the negative impact on your credit score. It is recommended that you should not exceed your credit consumption ratio of 30 percent of the credit limit in order to maintain a good credit score. 

 Better Credit Mix 

One of the efficient ways to boost your credit rating is an apt credit mix. Yes, you read it right. Having a variety of credit records is better than just having one type of credit. For instance, having a personal finance and credit card on your credit report is better than just having only one credit card. 

 Good Payment History 

When you start paying off your credit card bills and loan repayments in a timely & consistently manner, credit bureaus consider you a responsible borrower. Hence, it helps you to maintain a good payment record as well as an excellent credit score. 

 Debt Consolidation 

Debt consolidation is yet another very simple yet smart financial trick wherein you pay off your multiple credit dues and high-interest finances with the help of single EMI which is usually charged at a low interest rate. Since the new loan charges competitively a low rate of interest, it could be the best way to manage your multiple debts. Not only it prevents you from managing multiple payments every month but also prevents you from bearing the interest outgo towards your credits. Ultimately, it helps you to regular with your repayments thereby refining your credit score significantly. 

How A Personal Loan Can Hurt Your Credit Score? 

Are you ready to apply for a personal loan? Well, do not hurry. Consumer finances may also affect your credit score negatively that you should know before making the final decision. 

 Additional Fee 

Apart from the interest rate, there are some additional fees and charges that are associated with consumer finance. From a mandatory processing fee and prepayment charges to late payment fee, the new loan levy all, thereby making it costlier than what you supposed to pay. And if you are already into debt, these additional fees and charges may increase your financial burden. There are chances that you might not able to repay the loan amount which could take a hit on your credit rating as well. 

 Additional Debt 

It is quite understood that you are procuring PL to consolidate your debt and to improve your credit rating. But if you are not enough financially prepared to repay the monthly installments of your consumer loan then do not go ahead. Because missing your loan repayment will not increase your overall debt but also it will take a toll on your credit score. 

 Additional Inquiries 

When you apply for any type of credit including consumer finance, banks or financial institutions will do a credit check for you. It ultimately results in a hard inquiry on your credit rating, which further hurt your credit score. Too many hard enquiries can negatively affect your credit rating. Reason being, every time you apply for PL, the lender will perform a credit check to know your creditworthiness. Considering you are already running behind on your credit repayments, this inquiry may cause a significant drop in your credit score. 

The Bottom Line 

If you are looking for financial assistance to meet your various monetary needs, then apply for a personal loan without giving a second thought. And keep in mind as long as you are borrowing carefully and will repay the loan on the right time without the default, the consumer finance will only help in boosting your credit score. 

So, instead of believing in stupid myths, it is better to choose the right lender, opt for the best personal loan in UAE and repay it responsibly to make the most of it.

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