How Do Unsecured Loans Affect Your Credit

Introduction

Any kind of borrowing will have some sort of effect on your credit rating, that goes without saying but what will be taking out an unsecured loan due to your credit? In this article, we are going to take a look at how an unsecured loan might affect your credit rating, in both positive and negative ways.

What Is An Unsecured Loan?

There are two types of loans, secured and unsecured. A secured loan is where you offer some sort of collateral that the lender can take possession of should you fail to make the repayments. An unsecured loan, however, is a loan where there is no collateral in place. With this in mind, it is worth noting that an unsecured loan is much more difficult to get approved for since the lender will be taking much more of a risk. It is for this reason, mainly, that those taking out an unsecured loan will be expected to have a much better credit rating to be approved.

How Do Unsecured Loans Affect Your Credit?

There are many ways that an unsecured loan might have an effect on your credit score, some of these effects are good whilst others are not. Let’s take a look at some of these now.

When you initially take out a loan, your credit score will be negatively impacted for a short period of time. This is due to the fact that the application for the unsecured loan itself will show on your report and the additional credit on your report will be increased. However, this is only a temporary effect and as you make regular repayments, this will change. Your monthly repayments of the unsecured loan will have an effect on your credit, but depending on how you manage your repayments will greatly depend on the effect that they have. If you default on your unsecured loan, then this will have a very negative impact on your credit and the overall score will go down. However, if you keep up with making the required monthly repayments, this will actually have a very positive impact on your credit score. An unsecured loan will not have such a dramatic effect on your credit score as something like a credit card or overdraft. This is because the latter forms of loans are revolving and are often borrowed and repaid month by month and so keep reappearing on your credit report, whereas an unsecured loan is one single loan, therefore only appears once. Once you have completely paid off your unsecured loan, you can rest assured that it will have had a positive overall effect on your credit. This is because, when a loan is paid off after having made regular payments and not having defaulted, it shows that you are a responsible borrower and this will reflect in your credit report. If you fail to repay the loan in full, this can adversely affect your credit score, bringing it right down and if the failure to repay results in a CCJ, you can be almost certain that this will severely damage your credit.

Conclusion

Taking out any type of loan will have an effect on your credit score and unsecured loans are no different. There are various ways that they may affect your credit and not all of them are bad. It is important to factor in your current credit score as well as your ability to pay the repayments, and this will give you a clearer indication of how the loan will affect your credit.