John likes to buy an old car for which he needs a loan. The problem is that he doesn’t have adequate finance. He is already struggling to repay an existing personal loan. In plain terms, he is in a ‘bad credit’ situation. If you are in a similar situation this article is for you.
This article explains important issues such as how the loan process works, what do lenders expect before they advance a loan to someone like James, specific loan issues and ways to get the financial status improved.
The loan process:
When a person approaches a lender for loan, he is normally asked to fill up a form of request for loan. The form normally includes Personal information such as Name, Age, Occupation, Residential Address, City, State, Zip Code, Phone Number and email ID. It also includes the following documentation: Purpose of Loan, Type and Value of any Property owned, Loan Amount sought and affordable Down Payment, Annual Income and Credit Report.
Normally, lenders prefer advancing money to people who can afford to repay their loans. To determine whether a loan applicant will be able to repay the loan, all lenders make a careful assessment of an important document known as ‘Credit Report’.
A Credit Report is a document that lists down a person's debts and payments during the previous 7 to 10 years. It carries a three digit number known as a ‘Credit Score’. In the United States, there are three credit reporting agencies which specialize in developing credit reports for individuals. They are Equifax, Trans Union and Experian.
People can obtain credit reports either from any of these three credit report agencies directly or through lenders, to whom they apply for the loan, by forwarding basic information such as existing credit accounts, payment history, Personal information such as name, residential address, Social Security number, Present Employment, Financial status and any legal actions as a result of financial implications (for example, judgments, bankruptcy, recovery etc). The credit report agency, in turn, assesses all these details, verifies the data, and develops the credit report, for a fee.
Credit reporting agencies use the FICO credit score system when assigning the credit score to any applicant. FICO is an acronym for `Fair, Isaac and Co’, the company that developed the system in the 1950s. If you have a good credit rating chances of your getting a loan is brighter and the interest rate will be low. This paves the way for better savings.
There are 5 factors that are considered in assigning the FICO credit score. They are listed as follows along with how much percentage they constitute in the credit score:
1. Your payment history [Punctuality of repayment of any current or earlier loan/s] (35%).
2. Amounts you owe on various credit accounts (30%).
3. Credit History Length [Length of Payment history] (15%).
4. New Credit [If you have recently opened any credit account/s, the ratio of the number
of these accounts to the total number of your credit accounts] (10%).
5. Other factors [For instance, a mix of different credit types such as mortgage loans, credit card, auto loan etc] [10%].
A FICO Credit Rating above 700 is considered to be very good whereas a score of less than 600 is considered to be bad. If your Credit Rating is less than 600, you are considered to have a bad credit rating.
Bad credit rating loans:
Though there are several finance companies that claim to release loans to people with bad credit, such loan options should be viewed with caution. As it is quite logical on the part of lenders not to risk by advancing loans to anyone with bad credit, they increase the interest rates to such an extent that the loan adds to their financial burden instead of mitigating it.
Measures to get your credit score improved:
1. If you are employed, get a letter of reference from your employer. The letter should include your length of employment, current gross and net salary per month or per annum. If you are paid daily or weekly wages instead of salary, it should be mentioned.
2. Ask your landlord for a letter of reference.
3. Prepare a personal payment history. It should include a list of all your bills such as house rent, electricity, gas and phone that you pay on a monthly basis.
4. Seek payment history from utility companies, of which you are a regular customer.
5. If you buy groceries and other items on a regular basis in certain retail stores, you can obtain credit statements from them.
6. If your wages or salary is not usually credited in your bank checking account, open a checking account in a local bank and request your employer to transfer your wages or salary to your checking account.
7. Open a savings account at the same bank. Issue a pay order to the bank authorizing them to transfer a certain amount of money from your paycheck into your savings account.
8. Avoid the temptation of using overdraft facility, credit card etc. They don’t usually help in economizing.
9. Allot some savings specifically in your savings account, so that this amount can be used for down payment when you need a loan.
10. Make your current repayments without default. If possible clear your loan before the loan period ends. This will help improve your credit score.
Bad credit rating loan sources:
If you have a check or savings account in a bank, the bank may be your best lender, because, even if you have a bad credit rating, the bank would have known your money managing behavior from the statement of your accounts [For instance, in a bad credit situation, a person who draws less money or occasionally is better in money managing than one who draws more money or frequently]. For this, it is utmost important to keep your check and savings account in good standing. The next best resource would be a credit union of which you may be a member.
Whatever be your source of loan, the best thing for any one with a bad credit rating would be to postpone the loan application process until the Credit Score improves to at least 700. That will be the time when lenders view your `creditable’ performance!
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