Whenever you take out a loan, you need to do so with the knowledge and understanding of how best to manage the debt you’re taking on. Regardless of whether you’re applying for a full mortgage with your bank, or you’re in need of help from 12 month loans bad credit lenders, being able to effectively keep on top of what you owe is a guaranteed way to ensure your credit score isn’t harmed.
From picking the right type of loan for your situation to making sure your credit score is in the best possible state when you apply, managing loans isn’t as daunting or overwhelming as it might initially seem.
Pick The Right Type Of Loan
The type of loan that’ll suit you best ultimately comes down to what you need it for. The intended use for the money will alter what is available to you, so you need to have a clear understanding and knowledge of what you need before you come to apply for anything. For example, buying a car will require a much smaller loan than buying a home, and debt consolidation will benefit more from fixed rates than a small loan designed to make a purchase before your next payday, which could work out cheaper on a variable rate. Generally speaking, you’ll need to focus on two different types of loan:
Unsecured
Unsecured loans are a form of finance designed to offer a monetary amount without the need for any assets as collateral. These are loans that you will not need to provide a security for, so your home and other valuable assets will remain yours if you default on a payment. They can typically be used for anything that you choose but will come in smaller amounts so aren’t usually suitable for purchases such as a home or vehicle.
Some of the unsecured loans available to you include:
- Personal Loans
- Peer-To-Peer Loans
- Guarantor Loans
- Bad Credit Loans
- Debt Consolidation Loans (To A Certain Amount)
- Business Loans
Secured
Secured loans, however, require collateral from you in order to be taken out. This is usually an asset of a similar cost to the loan, such as your home, car or another valuable piece of equipment. These loans usually enable you to take out more than with an unsecured loan due to the reduced risk to the lender, as the asset your loan is secured against can be repossessed by the bank or lender if you do not make the required payments.
Some secured loans available to you include:
- Homeowner Loans (Mortgages)
- Logbook Loans
- Bridging Loans
- Vehicle Finance
- Debt Consolidation Loans (Over A Certain Amount)
Once you have determined the kind of loan suitable for you, you can begin to look into the amount you need to borrow and the terms that suit your budget best.
Calculate The Right Amount
Before you hit that apply button, you need to make sure that you’re only taking out the amount that you need, and nothing more (with exceptions). Typically, unsecured loans will enable you to borrow between £1000 and £25,000, while anything above £25,000 will require you to take out a secured loan. You can take out a secured loan against assets worth less than £25,000, such as car finance.
In some cases, the interest rates charged can be lower on larger amounts and in these cases, could mean the overall cost of the loan is cheaper. Make sure you use a lender’s free loan calculator to determine this for yourself before you apply, but be advised that they can, and often do change the interest rates depending on your financial situation. Lenders are only required to offer 51% of their customers the advertised interest rates, and those with poorer credit scores could face higher rates to counter the risk to the lender.
Choose A Loan Term That Suits Your Budget
Once you have the amount you need, you can put this against the loan terms that would suit your budget and lifestyle best. The longer the loan, the more expensive a loan will be, but in cases where you may be on a strict monthly budget, a longer-term may be your only option.
Similarly to the point above, you can use a lender’s loan calculator to get a provisional idea of how much you will need to pay per month for the period of choice and adjust this to find the right loan term for you and your budget. Different loans will have different terms that you can opt for, though most begin at 12 months and extend to anything between 5 and 10 years. Some smaller personal loans could be available to consumers for less than 12 months, but this is as the lender’s discretion.
Credit Score Quick Fixes
If your credit score is poor, you’ll want to see if there are any ways of improving this before you apply for a loan. In most cases, improving a credit score is a marathon rather than a race, but there are a few quick fixes that may solve issues with the report. Some of the quick fixes you could try include:
- Register to Vote – If you’re over the age of 18 and haven’t yet registered to vote – do it! You could find it difficult to be approved for credit or a loan if you aren’t already registered, and this also plays a part in the overall score Credit Reference Agencies will give you.
- Check for Errors – Errors such as spelling mistakes in your name or address could be flagging up issues in your report, whether that’s incorrect data or being unable to find a certain credit file that could benefit your application. Any fraudulent activity should also be reported and amended to prevent unnecessary negative marks on the file.
- Get Credit If You Don’t Have Any – If you’re new to the world of finance, your credit score might be low simply because there is nothing to go off. If you can, apply for credit such as a credit card or phone contract (the latter may not be possible with a low score), in order to build up your score.
- Remove Any Negative Associations – If you’ve ever taken out a loan with someone else or have a joint bank account with someone who has a poor credit history, remove yourself from these associations. They can have an effect on your credit score.
Improving Your Credit Score For The Long-Term
Over the long term, you should always be trying to improve your credit score to set yourself up in a stronger position for alternative loans in the future. You are unlikely to get a mortgage, for example, without a strong credit score. You can build up your credit score on a long-term basis by:
- Ensuring all credit is paid back on time and in full for all loans and credit you have.
- Don’t apply for too much new credit, as the enquiries alone can harm your credit score if done over a short period of time.
- If you have any defaults CCJs or Bankruptcies that happened over six years ago, you can request to have these removed from your file unless a court has ruled otherwise.
Managing Your Debts
If you’ve already taken out a loan and are looking for ways to better manage your debts, you need to start setting yourself up for a more controlled debt management process. Knowing how much you owe and to who is the first step to keeping yourself afloat and ensuring that nothing is missed, but it really is just the beginning. You need to have access to the money needed to pay off these debts in order to do so effectively.
To do this, make sure you’re creating monthly bill payment calendars and that you treat these bills as a priority within your monthly budgets. Late payments can negatively affect your credit score, particularly if you’re missing payments more than just once, and can lead to court judgements in the worst-case scenario. For this reason, you need to stay on top of what you owe and make sure that any and all payments are made.
You can make the minimum payments on everything, then decide which debts to pay off first with anything you have to spare. High-interest debts, for example, should always be paid off first as these will accrue the most in extra costs. Some loans might not allow you to pay anything more than the agreed payment amount without additional charges, so it’s important to make note of this.
If you’re struggling with your debts, you should always turn to help from debt advice agencies to ensure that you don’t become overwhelmed or reach further financial hardship. Credit counselling agencies can help you with debt relief, or you could opt for debt consolidation to bring together any high-interest loans that are causing more harm than they are solving.
Can I Pay Off Loans Early?
While some lenders will allow you to repay what you owe without any excess fees, there are a number who will charge this if you want to pay off more than the agreed amount in a month or if you want to close the loan early. This is because they will miss out on the accrued interest. You should check the terms and conditions of the loan before you sign for this reason.
If you aren’t planning on paying off any extra throughout the duration of your loan, these charges may not affect you at all, but for anyone planning on paying back extra when they can afford it, this is important to check. It can actually work out more expensive to repay early than it is to continue repayments for the duration of the loan.
Will A Loan Affect My Credit Score?
Just as your existing loans and credit will affect your credit score, any new loans you apply for will also have an effect. A loan can affect your credit score by:
Building Credit
If you apply and maintain repayments on a loan, you can showcase your ability to borrow from lenders and reliably repay what is owed. By providing a history that portrays you as a trustworthy borrower, you can build up a positive credit history that, in turn, will translate into a healthy credit score. If you have an existing credit score that is considered poor, a loan could help you build your score back up if you meet all of the repayments on time, or even provide a credit score to those who may not have an existing credit history.
Hurting Your Credit
Loans can also harm your credit score if you aren’t able to meet the repayments on time. If you’re late making a payment or stop completely, your credit score will reflect this by dropping and making it harder to get a loan or credit in the future. It is a much faster process to make your credit score drop than it is to raise it again, so it’s important to take care with your payments and contact your lender if you believe you won’t be able to meet a payment.
Reducing Your Ability To Borrow
When you take out a new loan, you reduce your ability to borrow again in the near future. Your credit report is a history and real-time listing of all of the debts and loans you have currently which can ultimately lead lenders to reject applications if they believe you’re unable to afford another line of credit. Every new loan or credit you take out leads to a heightened debt to income ratio, which lenders use to determine the realistic likelihood of being able to afford another set of repayments.
Initial Damage Which Is Fixed Over Time
When you first apply for the loan, it’s likely that your credit score will take a hit. This can be built up again with regular repayments, but if you’re hoping to take out another loan, such as a mortgage, in the near future, it’s best to avoid taking out a smaller loan initially. While the dip in your credit score might only be a small dip, it can often be enough to deter lenders if they believe that you’re in need of financial help.
Additionally, even just an inquiry made by a lender can be harmful to your score. Make sure you do your research before applying for a loan to prevent too many inquiries being made from companies you aren’t planning to borrow money from.
Managing debt is a personal thing, with different people coping in different ways. From strict monthly budgets to knowing how your credit score will be affected, hopefully this guide has given you a strong starting point.
