Find the Best Personal Loan for Your Needs
Personal loans are very popular with people trying to augment their funds, but many are still reluctant to apply because of its negative impact on their credit scores. Fortunately, there is a risk-free way for you to check your interest rate while keeping your rating intact.
What should you know about personal loans?
Personal loans are harder to acquire because of its nature: it is a type of unsecured debt. From the word itself, this means that you are not risking any of your assets even if you default on your loan. While this seems to be a favorable situation for you, you must know that this does not come without anything in return. As such, one of the biggest concerns regarding personal loans is the interest rate. Because you don’t put up any collateral to secure your loan like a secured personal loan, lending institutions deem lending you money to be relatively riskier. So, to compensate for that risk, they will impose higher interest rates.
Aside from that, also consider the possibility that you may not get approved for a personal loan if you have a lower credit score. That's why. Banks have extremely strict requirements with unsecured loans so it is better to manage your expectations. Generally, lending institutions consider the five C’s of credit when deciding whether to grant you a loan and how much to lend you:
- Character. In essence, this refers to your credit history. Everything about your lending activities in the past can work for or against you, depending on what your lending habits are.
- Capacity. This is where your income and job stability come into play. Despite a high credit rating, lenders may not be so eager to give you your desired amount if they feel you can’t afford that high a loan.
- Capital. How much have you taken out of your pocket already for the loan? This doesn’t apply to all cases, especially for credit card applications.
- Collateral. Slash this out for personal loans, but lenders are more willing to loan you a bigger amount if there’s a collateral.
- Conditions. Basically, the conditions are set by the lender on anything regarding the loan like where it’s going to be used, what the interest rate will be, etc.
Even if your loan application gets approved, the amount you will receive would not be as high compared to an unsecured loan. Your best bet is to improve your credit rating to make yourself an attractive borrower.
Soft Credit Inquiry and Hard Credit Inquiry, what’s the difference?
In relation to personal loans and interest rates, there is only one relevant difference between the soft credit inquiry and hard credit inquiry – the former does not affect your credit rating while the latter does.
Soft Credit Inquiry
Unless you're getting no credit check loans there will be at least a soft credit inquiry or a “soft pull” includes all inquiries made that are not made to determine your loan application approval. Moreover, this can be done without your permission like when a bank preapproves you for a loan. It also happens when your employer conducts a background check or when you’re applying to rent an apartment.
Hard Credit Inquiry
Also called the “hard pull,” hard credit inquiries occur when a lender checks your credit report to assess whether you qualify for a loan or not. It is considered as such when the inquiry is tied to any kind of credit application. Why does it affect your credit score in the first place? For creditors, people who attempt to open many new lines of credit are probably having financial troubles or have a risk of overspending.
Unfortunately, because FICO is very tight-lipped about how exactly the credit score is computed, one cannot accurately determine how much your credit rating. What is known for certain is that hard pulls stay on your report for a little over two years, and their effect on your score can lessen over time. So when you apply for a disturbingly high amount of loans in a span of a few months, that would account for multiple hard pulls in your credit report.
On a brighter note, the system also considers that you may just be finding the best deal for you. If multiple inquiries on a specific kind of loan product are made over a short period, it would be counted as only one inquiry. That would still have a negative effect on your credit rating, but not as much as in the first scenario.
Aside from making on-time loan payments, the easiest way to do increase your credit score or at least prevent its decline is by ensuring that no hard credit inquiry takes place without your knowledge or permission. This is not the only factor affecting your credit score. There still are your payment history, length of credit history, types of credit used, and utilization ratio. However, especially with long-term loans, even a few points can have a huge impact. It can mean hundreds or thousands of dollars over time.
Check your interest rate without affecting your credit score
Instead of hoping credit scoring models would not make too big a dent on your credit rating, you can check your personal loan rate without affecting your credit score at all.
Before applying for a personal loan (which you already know negatively affects your credit score), you can simply browse for sites that offer to check your score for free. These are usually promotional in nature and may be higher or lower than the actual interest rate that you will get, but it will at least tell you in which ballpark your rate would be in.
If you want a more accurate answer, you can also visit websites that give you a personalized quote from different lenders.
What to do now?
Now that you already know that hard credit inquiries affect your credit score, acquire a copy of your credit report from any of the major credit bureaus. Check it for unauthorized hard credit pulls to potentially increase your score.
You have absolutely nothing to lose. Plus, if you identify and report errors resulting to even a slight increase to your credit score, you might just a better interest rate for your personal loan and save thousands of dollars in the long run.
Christine has a solid background in personal finance as she spent the last eight years working at one of the biggest banks in the US. She managed her own team of financial advisors that helped hundreds of people with their financing needs. Her innate understanding of different financial products and loans helped her move up the ranks quickly after graduating with a degree in Business Administration.