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Much like any other form of debt you take on, a personal loan will impact your credit score in various ways.
When you apply for a loan, many potential lenders will do what is known as a вЂњhard inquiryвЂќ on your credit report to see whether or not you have a high credit score and would be https://paydayloanstennessee.com/cities/bartlett/ a good credit risk. When a lender does a hard credit check there will be a record of the inquiry on your file and it could result in a 5 to 10-point temporary decrease in your credit score. If, however, youвЂ™ve been pre-approved for a loan, a lender will only make a soft inquiry on your credit record and soft checks do not affect your credit rating.В
35% of your credit rating is based on how good you are about paying off your monthly balances. Therefore, responsibly managing a personal loan will have a positive influence on your credit score and will help you build your score over time. The reverse, however, is equally true. If you donвЂ™t make your payments on time and start to fall behind, your credit score could drop .
Reneging on your agreement with your lender means your loan would go into default after a few missed payments, which would have serious, long-term repercussions on your financial health. Likely, you will start to amass late fees or NSF charges as you begin to miss payments. At some point (usually anywhere from 2 to 3 months, the length of time varies depending on the lender) your creditor may send your debt to a collection agency. YouвЂ™ll then have to deal with constant calls and letters from the agency about repaying your debt. Collection agencies can be very persistent and could chase the payment for years. Or your lender may even decide to sue directly for the money you owe.В
Your lender will also report the loan default to a credit bureau. Your credit score will then decrease and other lenders will be wary about loaning you money in the future. A loan default can stay on your credit report for at least 6 years.
A floating rate (also known as a variable rate) fluctuates over the length of the loan. Usually a variable interest rate will change whenever the Bank of Canada changes its benchmark rate. A fixed rate is ideal for someone who likes stability and wants a predictable payment schedule. A floating rate can either go up or down over time so borrowers who believe that interest rates will decrease will opt for a variable rate. Of course, interest rates and the economy can be hard to predict so borrowers who go with a variable rate have to be prepared to face the risk that their interest rates may increase.
In general, a fixed interest rate stays the same for the duration of your loan period
There are numerous benefits to getting a personal loan over a credit card . The primary benefit of getting a personal loan is that you will usually enjoy much lower interest rates than you would with a credit card, which could save thousands of dollars. Additionally, another benefit of getting a personal loan is that youвЂ™ll have a specific repayment plan to follow, which is especially good for borrowers who are less organized with keeping track of debt. Finally, it can be very tempting to keep charging big ticket items to a credit card and thus amass more debt, whereas a personal loan restricts how much you can spend, preventing you from going further into debt.