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Using a Loan to Improve Your Credit Rating

If you have a poor credit rating then you might want to do different things to try to improve it If you want a loan, perhaps a mortgage, then your credit rating will be taken into consideration and it could be reducing your chances of getting accepted for one. Your credit rating is also used when looking for rental accommodation and you may have less choice if you have a poor credit rating. Some people even have a poor credit rating because they have never borrowed money, paid bills or rented and so there is no way of knowing whether they are reliable with regards to making regular payments. It can therefore be tempting to try different things to improve the rating.

It is worth noting that there are lots of options for improving your credit rating and so you should consider all of them and not just one. You should make sure that your credit report is correct to start with. Get your name put on bills that are regularly paid in your household and make sure that they continue to be paid, for example. Having a permanent job and a good salary will be a factor as well so if you are not working or are self-employed then you could find that make sit lower. If you have any unpaid debts then paying those back will also make a big difference.

Some people think that if they take out a loan and then repay it, it will show that they are capable of making repayments and therefore improve their credit rating. There is some sense in this as it can prove that you can cope with borrowing money, however with a low credit rating it could be difficult for you to be able to get that loan in the first place. If you do manage to get the loan then there could be a few problems with it.

Firstly, with a low credit rating you could find that the loan will be really expensive. Even if you were to use firms such as Brilliant Payday Loans, you have to decide whether you think that it is worth paying that money just to improve your credit rating. There may not even be any guarantee that it will actually work and so you could be paying out that money for nothing. It is wise to calculate how much the loan will cost and then you can think about whether you think that it is worth it or not.

There is also a risk of taking out a loan. As with any type of borrowing you will need to repay it. Some loans have a repayment schedule that you will need to stick to and others allow more flexibility and you can pay back when you can, usually with a minimum repayment amount to be paid regularly. Whichever type of loan you choose, you will need to think about how you will repay it. You will need to find the money each month to make the repayments or find a lump sum to repay it. It is wise to consider how you will manage to do this. It could be that you have enough spare money each month to afford it or you think that you will use the money that you have borrowed to make the repayments. You need to remember that what you repay will not just be what you borrow but the interest and any other costs on top, so you will need to allow extra money. It could be worth calculating how much this will be and also consider how much this might rise by if the interest rate goes up, which it will do if it is a variable rate and the base rate increases. If this does happen, consider how much that increase might be and whether that will be an amount that you will be able to still afford.

So although getting a loan could seem to be a good way to improve your credit report it may not work out that way. There is no guarantee that it will work and it is a risk. You will have to find the money to repay it and if you do have difficulty with this you could actually end up with a worse credit record than you had before. It will also cost you money and you will have to decide whether you think that it is worth that expense.

Secured Versus Unsecured Loans

A secured loan uses an asset for collateral usually a car or a home and an unsecured loan does not. There are advantages and disadvantages to both and so it is worth finding out more about them before you make a decision about which will be the best one for you.

A secured loan uses an item as collateral which means that it can be cheaper. This is because the item used as collateral, such as a car or house, can be repossessed if the repayments are not made and can be sold to raise money to pay back the outstanding balance on the loan. Therefore the lender has some security which reduces the risk. Without collateral the lender has to rely on your credit rating in order to decide whether they think you are a risk or not. The riskier a loan, the more expensive the interest tends to be. This can mean that if you have a bad credit record you will be offered only high interest rate loans, both secured and unsecured, but you should still find that you will get offered cheaper secured loans compared to unsecured one. Therefore you will tend to find that an unsecured loan will be more expensive, regardless of your credit rating.

It may seem obvious to just go for the cheaper option but there are some other factors that you need to consider when you are deciding which type of loan will be the best type for you to go for. You need to make sure that you look at everything, not just the price, even if the price is the most important aspect for you.
You may not have anything that you are willing to use as collateral. You may feel that you do not want to risk losing your home or car for a loan. This may depend on how sure you are that you will be able to make the repayments on the loan and how valuable the items are to you, that you could potentially lose. Consider how you might cope should you lose your home or your car, for example. What impact would it have on you, your family and your career. You may think there is very little risk of this and it will depend on how high the repayments are and how well you think that you will manage to cope with covering them. Some people take out insurance to cover them if they cannot make repayments but it is wise to be very careful and make sure that the insurance covers what you are expecting.

You may not own your own home or car and then you have no option but to have an unsecured loan. This means that if you want to borrow money you will have to go for the more expensive option. This can be difficult as it means that you will have higher repayments or have to be repaying for a longer period of time and so you need to really make sure that you are happy to go for this sort of borrowing. Think about how you will be able to afford the repayments and how you will cope with the stress of having a loan for that period of time. If you miss repayments on an unsecured loan, then you will still be at risk of losing possessions. Debt collectors could be called in or bailiffs who may take items that you have in your home to cover the cost of the loan. You may face a court case and possibly even jail. This means that just because the loan seems like it is the option where you may have less to lose if you miss repayments, there will still be consequences if you fail to make them.

Cost probably is one of the biggest considerations when you are choosing a loan and so the option of a secured loan could be the best as it is likely to be cheaper. However, if you have nothing to use as collateral or you do not want to put items at risk of repossession then an unsecured loan could be the right option for you. You will need to consider how you will cover the repayments on the loan, whichever type that you choose and make sure that you have a plan and that you will be able to confidently make the necessary payments when required.

Open Ended versus Closed Ended Loans

Often people do not compare loans in the sense open ended and closed ended but it is worth thinking about which loans fit into these categories and whether they are generally a good or bad type of loan for you.

An open ended loan is one which is always available to you and you can draw from it whenever you like. Examples of these are credit cards and overdrafts. Although you have a limit to how much you borrow there is no minimum and you can borrow whenever you like and as much as you like up to the credit limit. A close-ended loan is one where you get a one off sum of money which is a fixed amount. The repayments are different too with the open ended loan having no fixed repayment schedule and the close ended loan having set repayments at set times.

When you need a loan it can be tempting to look at the open ended loans you already have available to you in the form of credit cards or overdrafts. It is easy to use these as you do not have to apply and the money is there right away. You will not have to think about when it needs to be paid back really either. The overdraft will be paid back as money goes into the account and the credit card company will take a small minimum payment each month and it will be up to you to decide when you are ready to make bigger repayments and actually get on top of the debt. This can seem like a great thing because it is easier to manage the debt. However, it means that you can delay repaying it and this can be extremely costly. The interest rates on this sort of account tend to be high compared with closed ended loans. This means that although they are more convenient to organise and you do not have to consider when you will pay it back, it may not be as good as it seems. With regular repayments set on close ended loans it means that you will have to find a way to make them. This could mean that you will budget well and pay it back when necessary and be free of a loan more quickly, however, it could mean that you struggle each month to find the necessary money to pay the loan it could be a miserable time.

It is therefore worth thinking really hard about which type of loan would be the best for you. You need to bear in mind that it will need paying back eventually and having a fixed repayment arrangement could make that easier for you. However, you need to consider where you will get the money from to be able to make these repayments when they are due. You may need to find another source of income or spend less money in order to do it. If cost is a worry then you will normally find that a closed ended loan is cheaper because the interest rate is lower. You are also more likely to pay it back more quickly as you will have regular repayment dates compares with an open ended loan where there is no pressure to get it paid back. If you feel that you will not be offered a loan, perhaps due to your credit record or you need the money really quickly, then using an open ended loan could be useful. However, you do need to make sure that you have a repayment plan even for an open ended loan so that you can manage the debt. If you do not think about how you are going to repay then you could end up with an outstanding debt for a long time which could end up being extremely expensive. It can be difficult to get the right balance between convenience and cost but if you give it some thought then you should be able to come up with the right decision for you. Do make sure that you do some research and compare different types of loans and understand how they differ so that you can make the best decision for you and your current circumstances.