Do personal loans affect your credit score?
Finally, one of the oldest types of lenders is the peer-to-peer or P2P lender. Originating in England and working its way to the U.S. in the early 2000s, P2P lending allows individual investors to fund personal loans and collect the interest as their return.
While there is still a formal application process to go through, these lenders have opened the doors to greater access to credit for those with lower credit scores. And if you have good credit, you get to take advantage of low interest rates and flexible repayment terms.
Applying for Personal Loans Online
Lenders who operate online make it easy for borrowers to get offers within minutes of entering a few pieces of basic information. There are typically two types of online applications: the pre-approval process and the formal application.
Pre-Approval
Many lenders allow you to check your personal loan offer through the pre-approval process without performing a hard inquiry. This lets you find out what kind of interest rates and monthly payments you can expect so you can compare offers without getting a hard credit inquiry on your credit report.
Application Process
Once you find loan terms you approve of, it’s time to fill out the loan application form. During this time, you’ll enter your personal and financial information to verify your ability to repay, and they’ll usually perform a hard pull at this point.
You’ll probably also have to upload copies of some important documents that help to verify your identity and financial information, such as your driver’s license and pay stubs. The exact requirements vary depending on each lender.
What Lenders Look For
Traditionally, lenders https://loansolution.com/installment-loans-sc/ place the greatest importance on two factors: your credit history and your current financial ability to repay the loan.
They’ll look at your credit score to determine how well you’ve paid your current and past obligations. But if you have good credit, you most likely won’t have any issues.
Debt-to-Income Ratio
Lenders also review your current outstanding debt payment obligations, as well as your income. They compare the two using a formula called the debt-to-income ratio, or DTI. If you carry too much debt for the amount of money you earn each month, then they might not view you as very creditworthy. Even if you have excellent credit history, it’s worth taking a look to see how your DTI stacks up.
While those are historically the most important criteria for traditional lenders, remember that many online lenders began explicitly to replace the old underwriting standards.
Many place greater importance on other factors besides your credit score and debt, like your education, earning potential, and the types of debt you owe. Depending on your situation, you might be better suited with a lender that takes the bigger picture into account.
You want to make sure you keep your good credit score intact. So, what changes can you expect after taking out a personal loan?
You may see a slight dip after submitting your application, but this typically only amounts to 5 to 10 points. The good news is that credit scoring models typically group similar loan inquiries together as long as you complete them within a few weeks of each other. This allows you to price shop without worrying about a huge drop in your credit scores.
Once a personal loan is funded, you may see another dip in your credit score because you’ll have a higher debt balance. The exception to this is if you’re consolidating credit card debt into a debt consolidation loan. Generally speaking, installment loans are viewed more favorably than revolving credit, so you might actually see an increase in this situation.
