Every adult in the UK has a credit score. It’s a reflection on how well you manage your debts, and it helps lenders decide if they should lend to you. A low credit score tells the lender that the risk of lending to you is high. While a high credit score tells them that the risk of lending to you is low.
These days, it’s hard for anyone to go through their entire life without taking out a loan of some sort. Short term loans are common ones to take out these days.
Short term loans help us out when faced with unexpected emergencies. They’re meant for when you want to borrow small amounts of money. You can pay them back anywhere between 1 and 6 months. Short term loans are easy to apply for online through brokers or with a direct lender, and you get the money fast, if approved. Demand for these types of loans is increasing, with some lenders offering them to people even with a bad credit rating.
Here we’ll look at how short term loans can affect your credit score.
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How Does a Short Term Loan Affect Your Credit Score?
There are three stages at which a short term loan can impact your credit score. They are at the application stage, the maintenance stage, and the settlement stage. Here’s how each stage can affect your credit rating.
1. The Application
Every time you apply for a short term loan, a hard check is carried out. It’s only done by responsible lenders to help them assess whether to approve your loan. Each hard check leaves a mark on your credit file regardless of whether you take out the loan or not.
If you’ve applied for a few loans in a short span of time, your credit score may drop. This can indicate to other lenders that you’re not managing your money well. It could show that you’re struggling financially by applying for lots of loans. As a result, you may be turned down for a loan, or you may be offered a higher interest rate.
You may see some lenders say they’ll do a soft check on you first. They do this to see if you’re eligible to apply for a loan with them. Soft credit checks don’t leave a mark on your credit file, so they’ll have no impact on your credit score. But once you make a full application, a hard check will be done.
If you’ve made a few loan applications, wait a few months before applying again. That way you give your credit score time to go back up again.
2. Maintaining Your Short Term Loan
If you make every monthly payment when it’s due, this’ll reflect well on your credit file. But if you miss any of your monthly repayments, it’ll negatively affect your credit score.
If you allow overdue repayments to remain unpaid for some time, lenders can record a default against you. This is serious as a default shows other lenders that you’ve broken the terms of your contract. It also remains on your credit file for years.
The best way to keep a good credit score is to never borrow what you can’t afford to pay back. That way you’ll make all your monthly repayments in full and on time.
3. Settling Your Short Term Loan
If you pay all of your loan back on time, this will reflect well on your credit score. It’ll show on your credit file as being settled when it’s all paid off.
If you want to pay off a loan early but haven’t got enough to pay the full amount, you can agree a settlement. This means you agree with the lender to pay a lower sum than what you owe. This lump sum payment would be agreed in full and final payment of your loan. When this happens, your credit file will be marked as partially settled. This can negatively affect your credit score. It’ll also remain on your credit file for years.
If your loan is marked on your credit file as satisfied, this can bring your credit score down too. This is because a loan that’s noted as being satisfied has had a default registered against it.
It’s always better to try and keep on top of your loan repayments if you can. And pay it all back in full.
In Summary
Now and again, short term loans can be the perfect solution. When you’re short of cash and have an unexpected bill to pay, a short term loan can help to keep you going. If you pay the whole loan back in full and on time, it’ll help improve your credit score. But missing repayments and paying back less than what you owe will hurt your credit score.
Let short term loans have a positive effect on your credit score. Use them wisely and only borrow what you know you can pay back on time.
Disclaimer: Please note, we are not providing financial advice, these are just tips for informational purposes.