If you have a less than desirable credit score, you may have trouble getting approved for an auto loan or mortgage. It will not be impossible, though, to qualify for a loan. You should realize that you may not get the best terms on the loan, but that is okay. Auto loans and mortgages are installment loans, and getting one may help you build your credit.
How Lenders Use Your Credit Score When Evaluating Your Loan Application
When you apply for any type of installment loan, the lender will examine numerous things about you before deciding. One primary thing is your credit score. Lenders base creditworthiness on credit scores alone. If you have a great credit score, lenders will view you as creditworthy and will have no problems issuing you a loan. If you have a low score, lenders will consider you as a person who is not creditworthy. You may have trouble getting a loan in this case.
The Type of Loan You May Qualify For
With a poor credit score, a lender may still approve you for an auto loan or mortgage. In this case, you may need to put a higher down payment on the loan, and you may end up with a higher interest rate to pay. Lenders charge higher rates to compensate them for the added risks they assume when issuing loans to people with poor credit.
How to Use the Loan to Build Your Credit
Taking a loan with a high-interest rate can help you, though. Taking an installment loan, even if it has a high-interest rate, can help you build your credit through the payments you make. When you make payments, the payments appear on your credit report, and this helps you build a positive payment history. After a few months of making on-time payments, you may see a significant increase in your score.
What You Can Do in the Future
After your score increases, you can always refinance your auto loan to get a lower interest rate. You will notice that getting a loan with a higher credit score will be easier to do.
While you may pay more interest on a loan if you have bad credit, you can use this loan to build your credit. If you start rebuilding your credit now, it will improve faster. With an improved credit score, you will have an easier time qualifying for an auto loan or mortgage loan in the future. Starting with a bad credit loan is often the key solution to improving your credit.Share