A loan is a lump sum amount of money a person borrows from a bank or lending company. Borrowers pay the amount and interest based on terms that can span between 6 and 60 months. There are different types of loans that one can qualify for, such as a personal loan, car loan, home equity, or student loan. Individuals can use the money to build a house, purchase a new car, or fund a vacation, among others.
Banks and lending companies keep track of your payments until it's paid in full. They then forward this information to a credit bureau, which collates all your payments and loan transaction into an annual compilation report known as a credit report.
Loan and corresponding payments, whether late or not, are included in a credit report. These details may seem good news to some, but loan history is something many people may want to remove from their credit report. Sometimes loans can get unpaid and payments get delayed, leaving a nasty record on your credit report. While you may be able to repay it in due time, it may come back and haunt you whenever you receive a new credit record. Missed payments are drawbacks because loans and repayments have an impact on individual credit scores. It can spell the difference between the approval or denial of a new loan or credit card.
You may wonder, how long will these last on your credit report? What can make it go away?
Read on for the answers to these burning questions.
Why do credit reports include loans?
A credit report is a compilation of your previous and current financial transactions. It gives information on the type of debt you have, how you pay them, the number of financial products (loans, credit cards, etc.) you avail of, and how long you've had them. Loans are included in the report since they provide insight into how often you obtain debt and manage them.
Installment loans such as mortgages, car loans, student loans, and unsecured personal loans are included in the report. Loan details can consist of the specific type of loan you make and a timeline of your payments until paid in full.
How long does a loan stay on your credit report?
A newly approved installment loan appears on your credit report after 30 days. Depending on the status of your loan, it can remain part of your credit report for as long as:
Six years- for secured loans (personal, auto, and home equity loans)
Seven years- for overdue loan payments and loans that went to a collection agency
Ten years- for installment loans paid in full
Loans stay on your credit report long after payment. Lenders can look into your credit report whenever you apply for a new loan or credit card. This 'hard inquiry' gets included in your credit report and stay part of it for three years.
Are there any alternatives to installment loans?
Installment loans can have a significant impact on your creditworthiness. Before taking out another loan, you should take your time to evaluate and consider the pros and cons since these loans tend to linger on your credit report for several years and say a lot about how reliable you are as a borrower.
Missed payments can translate to limited opportunities. In the event you need money for financial emergencies, you can opt for a payday loan instead. A payday loan serves as a cash advance you pay when you receive your next paycheck. It serves as a favorable alternative to installment loans since it requires only requires a one-time payment. It's also a better option since it doesn't affect credit scores. Payday loans can tide you over, without getting reflected on your credit report and haunting you for the rest of your days.
What is the impact of loans on credit scores?
An essential feature of the credit report is the credit score. This figure sums up all your debt capacity into three numbers and an accompanying descriptive rating (excellent, very good, good, fair, poor) which determine your creditworthiness. Loans can affect your credit score's three components, namely: credit history, payment history, and credit mix.
Loans form part of your credit history. Your payment history indicates how you pay for your loans. It determines if you're prompt with your obligations or otherwise. The loans you obtain also demonstrate the variety of financial products you subscribe to and pay.
Your credit score considers these three measures. Repayment history accounts for 35% of your credit score. Your loans' duration is included in the credit history and forms 15%, while the type of loans you have compromise 10% of your overall credit score. Loans and repayments form the bulk of your credit score and may spell the difference between a good or bad credit score.
Thus, loans can have either a positive or a negative impact on your credit report and subsequent credit score. On-time payments and different credit types improve your credit score. On the other hand, late or missed repayments can have profound implications. These delays can lead potential creditors to conclude that you're an unreliable borrower. Such an impression can decrease your ability to obtain loans in the future.
It would also help if you were careful about getting loans in succession. While this may lengthen your credit history, it can cause your credit score to drop a few points. This new loan causes another factor of your credit score, the debt utilization ratio, to fall. Having one too many can hurt your score. Remember also that a hard inquiry by potential lenders can stay on your account for three years, and constant reviews can compel creditors to think that you're not self-reliant and are too dependent on loans.
How do you manage loans?
Loans are given as lump sums and serve as attractive sources of funds for large expenses such as building a new house, getting a new car, or funding a vacation. However, paying them can become a bit challenging as the years pass. These lapses may lead to overdue notices and severe implications on your repayment history.
To avoid this, you need to give loan payment a priority. It should come first in your monthly budget. You may even need to set aside non-essentials to make sure you have enough money to pay.
Setting up your bank account for auto-pay assures you that you pay on or before the due date. If you cannot meet the deadline, you can ask your creditors to give an extension to provide you with more time to round up the needed amount. Or you can work out a much more manageable repayment scheme that can help you pay off your loans. This way, you can still keep your payments updated, and it won't come back as a negative mark on your credit report.
Conclusion
Loans, for the most part, are useful resources for myriad expenses. Installment loans, in particular, give immediate access to a large amount of money. Simultaneously, these types of loans allow you to pay for the sum and its interest in affordable monthly payments. Loans can go beyond providing much-needed funds, as it can also impact your credit history. It can even stay in your credit report for as long as ten years to indicate your standing with creditors.
Loan repayments also show your ability to pay on time. Prompt payments remain in your record for six years. This detail reflects your ability to manage debt, and a track record of quick payments can give favorable terms when you apply for another loan. Being unable to repay loans in time can hurt your repayment history and tag you as an irresponsible borrower. As much as possible, you need to avoid missing due dates, as this can come back as glaring reminders when incorporated into your credit report.
The severe impact of loans on your current and future credit report is probably enough to compel you to think twice before taking out a loan. You need to carefully assess your finances and your ability to pay for the entire loan duration. This process may entail sacrificing some pleasures to keep up with your payments. Loans can challenge your money management skills, but your sacrifices will undoubtedly bring many benefits when you use them for worthwhile purposes.
It would be best if you also were careful about taking another installment loan too soon. What you can do is to explore other alternatives that do not tarnish your credit report. A payday loan is a viable option since it immediately gives you the needed funds. It's short-term and convenient, offering greater financial freedom compared to long-standing installment loans.
At the end of the day, whatever loans you decide to take-whether installment or payday loans-keep in mind that borrowing is a huge responsibility. It would be best if you endeavored to do everything you can to pay it off as soon as possible. You should also be ready to face its financial consequences that can span the present and the coming years. Your credit score serves as a reminder of all these. Pay off your loans on time, and your next credit report will produce better results.
