How Does Untimely Loan Repayment Affect Your Credit Score?

How Untimely Loan Repayment Affects 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.

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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, expand your business or to meet the expenses of a wedding, 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:

Creating an Enquiry on Your Credit Report

When you apply for personal loans in Dubai or any type of credit, even home 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.

Additional Fees

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

Deep in Debt

Taking a Best personal loan in Dubai 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:

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.