The Disadvantage of Poor Credit Personal Loans

  • Smart Personal Loans

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A credit report is a couple sheets of paper that contains personal, employment, financial, and public information on a consumer. Majority of the information found therein are related to credit transactions, specifically total debt, credit utilization ratio, payment history, credit inquiries, etc. The report is then summarized into a score. The higher the score, the better your chances of getting loan approval and lower interest rates, and vice versa.

Poor Credit Personal Loans

The Goal

This article will discuss the cons of a poor credit score vis a vis personal loans in South Africa. The enumeration is not exclusive. It bears pointing out that credit ratings are only part of the approval/disapproval process.

Time Wasted

Logically speaking the more loan denials you get, the more time you waste. You also waste important resources via electricity, internet connectivity, transportation, gas, etc. As a result, you get stressed. Tip: start your search online. Only walk in the lender’s office if the same is a top pick.

Approval Ratio

The lower your credit score, the higher the ratio of lenders who will disapprove your loan application. Bear in mind this is a personal loan. In most cases there is no collateral. Which means your credit rating along with your regular income will be major considerations. Of course, you can increase your chances by offering collateral. But in some cases, banks/lenders do not allow you to offer the same, especially for relatively smaller loans.

Interest Rate

The lower your credit rating, the higher the interest rates on your personal loans. Lenders will politely tell you that you are lucky enough to get approval. So you should just be thankful, considering how low your credit rating is. Remember, chances are the reason your score is low is because your credit report shows defaults, high history of debts, high credit utilization, etc.

Loan Terms

The lower your credit score, the more disadvantageous your loan terms. To start with, the interest applicable maybe adjustable rate, option arm, or balloon, etc. The period of loan maybe longer, resulting in more interest paid. Penalties may be higher. You may not be given the option to prepay or to roll-over the debt, etc. Tip: always insist on a fixed interest rate. 99/100 times, this is the better interest rate. It is also the lower interest rate when you compute the total interest paid.

TIP: Before you apply for a loan, ask around; do your research. What is the median score for your type of personal loan? Now pull out your credit report and buy a score. What’s your score? If it is below median then it may be worth your while to postpone your loan application by a couple of months while you repair your credit rating.

Bottom line

You need to take care of your credit rating. Usually, you need 30 to 90 days to repair the same. This means both paying your debts and disputing information that is false, inaccurate and obsolete. If you are thinking of getting a personal loan in the future, better pull out your credit reports.

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