Do Short Term Loans Affect Your Credit Rating?
Your credit rating matters a lot. Short-term loans have positive and negative impact.
No one can claim not to have been in a cash crunch to the extent that you had to borrow quick cash to meet the shortfall. Unexpected costs do crop up, and they do so at the point where you have no room for extra expenditure. The washing machine acts up, or a family member gets admitted into hospital. You wake up one morning, and your car wouldn’t start. Under these circumstances, the most prudent way out is to apply for a short-term credit facility.
Unlike other types, short-term loans consist of small cash advances. Their lending terms are usually restricted to one or two weeks. However, in some cases, you may get a credit period of between one and three months. With the small loan amounts and short repayment periods, dealers charge interest rates that are higher than long-term loans. Interest comes in the form a fee that you pay at the time of making your settlement with the lender. Qualifying requirements, even though they vary from lender to lender, are generally the same.
- You must have a checking account
- You must show proof of employment
- The lenders will place certain monthly income thresholds
- You can get your money in a business day or two
If you need money and would want to pay it back for a term that stretches beyond three months, try short-term installment loans. Unlike cash advances where you pay a lump sum, payment for installment loans takes the form of a series of disbursements over the loan duration. Unlike the cash advances, installment loans attract a lower interest rate. Besides, you can borrow a significant sum and get a longer repayment time frame. However, long time means an additional cost of borrowing. Therefore, always seek a balanced plan that combines a reasonable period with an affordable payment.
Mind your credit file
Short-term lending comes as a reprieve to many. Occasionally you find that you are in a financial emergency and do not have the money. Taking out a payday loan or cash advance from an employer will help you recover before the end of the month arrives. Besides, the lending institutions need not know that you are not eligible to borrow from mainstream banks. However, you need to understand what happens to your credit file each time you apply for a loan. The effect is on both the short and long-term variety. Your data has three types of information:
- Consumer credit
- Commercial credit
- Public credit
You might wonder whether the loan offered imposes restrictions on utilization. There is no need to be anxious since as soon as you have the money, you can use it for any purpose of your liking. Some of the expenses you can meet include:
Credit history – your borrowing background
Therefore, whenever you come across the term “credit history” know that it refers to the way you spend money. That moment when you obtain a loan, use your credit card, pay for utility bills your personal information goes into your credit report. In a nutshell, your history details among other things:
- Timely payment of bills or slackening of the same
- The number and type of loans you have taken
- The credit cards you possess and how you use them
When borrowing money, financial institutions and other non-traditional lenders are always interested in your background. A payday lender, for instance, has an assurance of recovering the loan from your next salary. To minimize risk, they come up with a set of terms and conditions. For example, most of these lenders require you to give them with post-dated checks. Others will insist on a standing order from your checking account to their bank. The objective is to always lend to customers who have shown that they are financially disciplined. Credit reporting companies exist to assist the entities that operate the business of lending money.
Keep your rating at the top
With a favorable credit score, lenders are not afraid of lending you money. Moreover, you get to borrow at reasonable interest rates. To boost your credit rating, always ensure that you pay your loan installments on time. In any case, allowing rollovers attracts more interest and fees resulting in a cash crunch. Carefully track your credit cards. Every time you leave balances on your credit card, your credit score lowers. Avoid having several cards with each having a small outstanding debt. You might think that you are smart, but the approach hurts your score. Instead, consider consolidating all your cards and keep one or two. Alternatively, seek loans for bad credit and be on the safe side.
How the lender apportions repayments
There are no specific guarantees on the principal amount you can borrow, time given to repay the loan, and interest applied. No two lenders are the same, and it is up to both parties to come up with a loan term and a payment schedule. Another critical thing to remember is that every time you pay, a portion of the payment goes towards offsetting the principal amount while the other reduces the interest owed. Also, most financial institutions require that pay off the current loan in full before seeking another facility.
A little planning needed
Signature loans require that you make some consideration beforehand. Assess why you need the money and the amount. Plan carefully and determine whether borrowing money is necessary. Consider other modes of lending such as from credit unions. Also, establish what impact, if any, the borrowed money will have. After the lapse of a grace period, the lender will expect to start receiving your payment. If you do not adjust your budget or plan beforehand, you may struggle with repayment.
Watch those monthly bills
Did you know that utility bills are short-term loans too? Yes, they are a facility that could adversely affect your credit rating. Keep a close tab of your statements; how you pay for water, heating, telephone, and power affects your score by 35 percent. Always keep track of your monthly bills and know when they fall due. You can set up easy online reminders or on your mobile phone. Putting sticky notes on the refrigerator is another creative way of staying on top of bills. Mark your desktop calendar too such that each time you look at the date, there is a constant reminder of what you need to pay.
Short-term loans are an ideal way of meeting unexpected expenses. The application process is simple, plus you can get short term loans on bad credit. Payday loans, cash advances, installment loans, and credit cards are all examples of facilities you can obtain for a short period. Always keep in mind that someone is updating your credit file. Maintain financial discipline by repaying your loans on time to keep your credit scores up.