When you feel the need for external funds, a few factors draw your attention. Credit history is one of them, but many of you are still unsure about its actual significance. You have heard about loan applications getting rejected because of bad credit.
However, your credit history cannot be the only decisive factor for loan approval. Many of you do not realise this and end up giving up your search. When you are struggling with credit scores, all you need is to look for the right loan option.
Besides, it is crucial for you to find the right lending source. For example, getting financial help from traditional lenders with bad credit tags might be difficult. On the flip side, you can get poor credit loans in the UK from direct lenders.
Does this mean that the loan provider has ignored your credit score? Absolutely not! In fact, you must know that this is a vital parameter based on which approval is given. There are different stages when the lender will conduct an in-depth analysis of your credit history.
You must figure out how the loan approval decision works with your credit history. No need to look further, as you can go through this blog to understand the importance of your credit scores in your borrowing process.
How does a lender see your credit history?
Your credit profile unveils your borrowing and repayment activities. Lenders can rely on this information to assess your previous financial behaviour. If you have a track record of payments made on time, this may have a positive impact on your credit application.
When your credit scores are assessed, the following factors are analysed.
- (35%) Payment history
It tells about the payments made on time and those that have been missed. Timely payments boost your credit score, while missed payments penalise your score heavily.
- (30%) Credit utilisation ratio
It shows the amount of money you owe. In simple words, it displays the amount of available credit you have been utilising. It is a great idea to keep the limit as low as possible.
- (15%) Length of credit history
With an older credit account, you can portray a longer credit history. This can help in building a positive credit track record. The longer your credit profile, the more credible you are considered.
- (10%) New credit application
Hard inquiries you face while applying for a loan or a credit card leave an imprint on your credit score. They drop immediately, but only for a time. Be careful at the time of sending out a loan request.
- (10%) Credit mix
Managing payments of different types of credit can work in favour of building a strong credit profile. It will also help in demonstrating that you are capable of handling a credit mix. This ensures the lender that you have experience with the present form of credit.
How your credit history can shape your personal loan application?
When you submit your loan application, your credit scores are evaluated to figure out the following things:
- Loan approval decision
Your credit history cannot single-handedly decide if you should be given approval or not. However, it can combine with other factors to improve your chances of getting a positive decision from the loan provider.
For example, if you have good credit scores and stable income, the lender might not explore your financial profile further. These might be enough to provide solid repayment assurance. Now, this perception may vary from lender to lender.
- Interest rates and risk factor
Your credit history can strongly influence the borrowing cost, which largely includes interest rates. The lender determines the extent of risk with the help of the borrower’s credit scores. Now, this means that if you have poor credit scores, you should be ready to accept high rates of interest.
With good credit scores, the chances of getting low rates are high. This is purely because of low risk for the lender.
- Loan amounts and terms
With perfect credit scores, you can explore an extended borrowing limit. You can even get an opportunity to repay loans within a flexible term. When you have favourable credit scores, you can get access to the desired loan amount.
On the other hand, when your credit score is not perfect, you can get access to a smaller borrowing range. Moreover, you might be asked to repay loans within a shorter tenure because of a bad credit history.
- Involving collateral or a guarantor
It might even happen that the lender asks you to pledge collateral to lower the risk of lending money, especially when your credit score is bad. In some cases, you might even have to agree to provide a guarantor when pledging assets is impossible for you.
These requirements show up when you need access to a larger loan amount. Then, the lender requires stronger repayment assurance, and something is needed besides affordability.
Does a low credit score mean you cannot get a loan?
Not necessarily, as there are other factors which can help you demonstrate a stable financial profile; it is true that bad credit scores increase the chances of rejection. If other negative factors add up, you might not get a positive response from the loan provider.
Now, if you are capable of establishing that you have worked on improving your financial standing, at the same time, you should be able to demonstrate affordability. The lender requires you to make sure you can repay loans on time in order to process your application despite poor credit.
No one can stop you from getting a nod of approval from the loan provider if the offer is affordable and the loan matches your financial circumstances. You are not ready to borrow loans just by confirming that you have qualified according to the lending criteria.
The bottom line
You must know that your current borrowing decision can impact your credit score. Passing through the initial stage of a loan application with soft credit checks might not be a problem, as your credit history is not fully involved. However, for a full loan application, hard checks need to be performed, which impact your credit score.
