What happens if you miss a personal loan payment? What if you borrow more than what you need? Is there a wrong reason to borrow personal loans? These decisions and practices have a significant impact on your credit score or your chance of getting approved for loans or credit cards in the future, which is why it is important to manage your loans and debt effectively.
Let’s take a look at the importance of managing debt, how loans affect your credit score, and how you can manage your debts effectively.
Why is it important to manage loans and debt effectively?
A credit score is similar to a grade that rates your eligibility. It tells the bank if you’re capable of paying off debt and the chances of you defaulting on your loans. Your credit score is based on the following:
- Credit utilization ratio
- Credit payment history
- Length of credit history
- Types of credit availed
- How often you open or apply for a new credit
So, how do personal loans affect your credit score?
A personal loan adds diversity to your financial profile. It becomes another debt that loan providers consider when assessing your credit score.
One of the factors most affected by personal loans is your credit payment history. An important factor that a loan provider would look for is you pay your debts on time. So, paying your personal loan on time will have a positive impact on your credit score. Aside from the late payment fees or interests, missed payments will pull down your score too.
Another thing to consider is the timing you apply for a personal loan. If you apply for different types of loans at the same time or apply for a personal loan immediately after opening a credit card, this may have a negative effect on your credit score as well and you may not even be able to get a personal loan at all.
A low credit score is a sign of poor financial management. In other words, it tells banks that you are not that responsible as a borrower. As a result, banks and other credible financial institutions may not approve you the next time you apply for a car or home loan or a credit card. If they do give you a loan, you may receive higher interest rates and lower loan amounts and credit limits.
This is why it is always recommended to pay your monthly amortization early or on time, helping you avoid penalties. More importantly, it shows loan providers that you manage your finances well.
How to manage loans effectively
Seeing how a personal loan can make or break your credit score, it’s important to be responsible with your loan application, use, and payment. If you’re new to this, here are important things to remember in managing loans and debt:
Research and compare
There are a lot of lenders in the market claiming to offer lower interest rates and other promises only to charge lots of hidden fees.
Be sure to research the institution and its personal loan offers. Read the fine print to see the interest rate, loan term, processing fees, and requirements. Compare different banks’ loan offers to find the one that suits your needs best.
Borrow for the right reasons
While you can use personal loans for any purpose, you should know how to use personal loans effectively. It can be detrimental to your finances if you use a personal loan for unnecessary purchases, vices, or risky investments because you only end up losing money.
There are other ways to borrow money that are more appropriate for your “wants,” such as credit cards. It would help to know when to use personal loan vs credit cards.
Maximize the benefits of your personal loan by using it only on necessities like unexpected medical expenses or things that will add value such as for business expansion.
Borrow only what you need
Before you apply for a personal loan, assess how much you really need. The larger the amount you borrow, the more you’ll need to pay every month.
So, to avoid biting off more than you can chew, borrow only what is necessary and consider how much you can afford to pay every month.
Always pay on time
Missed payments bring down your credit score so be diligent in paying your personal loan on time. You can set up auto-payment or reminders to make sure that you don’t forget your due date.
This is an important personal loan tip because it helps you avoid late payment fees and has the biggest impact on your credit score.
Monitor cash flow
A personal loan quickly becomes an additional expense for you. Be sure to choose the right amount and tenor that considers your budget and spending habits. Longer tenors have lower interest rates and monthly repayments. This ensures that you have enough to cover your payments without compromising your basic living expenses.
Make the most of your personal loans
Personal loans can help you improve credit scores, grow your assets, and achieve your financial goals if you use them wisely. Your knowledge, attitude, and discipline in relation to your loans can influence your future. So, make sure to be responsible when borrowing money.
If you feel that you’re ready, you can start your Metrobank Personal Loan application today.
