How your Credit Score Affects Loans

When it comes time to finance the big things in life such as buying a home or a new car, a loan is almost always necessary. Your credit score will have an enormous influence in determining if a lender decides to advance a loan or turn you down flat. The lender uses your credit score to gauge your potential risk factor in repaying the loan. Although on paper your income may qualify you for a loan this figure gives no indication of how responsible you will be with your loan repayments, so your credit score is used as it reveals your credit history and previous handling of finances.

As lenders use your credit score, this severely disadvantages those who have not used credit in their past, or are too young to have established a credit history. Young people, who need private student loans to make up a shortfall between federal government student loans and college costs, rarely have an established credit history. They have access to federal loans as these are available without credit checks, but those reliant on private loans as well need the loan to be co-signed by a responsible adult with an established credit history of their own.

Not only does your credit score affect your likelihood of obtaining a loan, it also determines which interest rate you will pay. Lenders use a risk based pricing analysis to set the interest rate which borrowers will receive, and credit scores are one of the key factors in determing the rate you will be offered.Those with low credit scores will pay far more in interest rate charges than those with excellent scores. provides an excellent loan savings calculator which will work out the difference in payments on both auto loans and home mortgage loans, depending on your location and credit score.

Using the calculator illustrates the huge disparity in mortgage interest payments over a fifteen year term fixed rate loan. Those who fall into the highest score group of between 760-850 will make a total saving of $10,847 over the term of the mortgage, compared to those with a relatively average score of between 660-679. Using the same scores but applying them to a thirty year fixed mortgage the savings will be $26,000 for those with the highest scores. It is thus imperative that ones credit score is top notch before applying for mortgages, otherwise thousands of dollars will simply be thrown away in unnecessary interest payments to the lender.

Those with bad credit scores are unlikely to be considered by mainstream lenders, and instead need to resort to sub prime lenders that charge much higher interest rates. Sub prime lenders such as those who advance auto title loans and pay day loans do not run credit checks on applicants, thus your credit score will be an irrelevance. However they will still record late and missed payments to the credit bureaus.

If you are considering any kind of loan apart from those by sub prime lenders, it pays to improve your credit score in advance of applying, and reduce your level of revolving debt. Think beyond just obtaining a loan, and aim to have one with the most favourable interest rates.