4 Common Loans and How They Affect Your Credit Score

by Nov 16, 2016

When you are getting ready to obtain a mortgage to purchase a home, it is important to understand your credit score and what affects it. Any loans you currently have may impact your credit either positively or negatively. Knowing and understanding the difference will help you to set yourself up to be approved for the mortgage you want at a desirable rate.

Loans fall into one of two categories: secured and unsecured debt. For a loan to be considered “secured” there has to be a physical object that the lender can take possession of it payment is not being made in order to attempt to recoup their loss. An example of this is a home or car loan. “Unsecured” loans are from money that was given out without any item on the line for a lender to take back if payment isn’t being made. An example of unsecured debt is a balance on a credit card.

Here are 4 common consumer loans and how they impact your credit score along with what you can do about it:

  1. Student Loans – Any student loans that you have are considered unsecured. However, this doesn’t necessarily mean they are bad for your credit score. Student loans are typically paid over a long period of time, so if you are making your payments on time every month you will actually be building your credit score up. Consistent payments on student loans show a good repayment history, which lenders like to see. You do need to keep in mind though that student loans will increase your debt-to-income ratio, lowering the total that lenders will want to make available to you based on your ability to repay.
  1. Auto Loans – These loans are secured by the ability of the lender to repossess your vehicle if you are missing payments. These loans are not as easy to obtain as credit card debt, which shows lenders that you might be more credit-worthy.
  1. Payday Loans – While payday loans do not usually show on your credit report, they can still harm your credit score. If you are not repaying these loans as agreed upon, they will put negative marks on your credit report and lower your score overall. These loans also carry extremely high interest rates, which are not favorable to you.
  1. Existing Mortgage Loans – If you are looking to obtain a mortgage on a rental property or vacation home and you already have a mortgage on your primary residence, you may be met with resistance. It typically takes having a history as a landlord for at least two years before lenders will begin to consider rent as part of your income-to-debt ratio when lending you money. Until that point, you need to show that you can make both mortgages off of your current income and assets.

The best way to get approved for the mortgage you desire is to get your current debt under control. Know what types of loans you have and work on paying down the ones that negatively impact your credit report. Always pay everything on time to help show lenders your credit-worthiness.

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