Tips to Build Credit Score with Secured Loans
If you are acquainted with the concept of credit rating, you must be aware that a low credit score implies increased rates of interest for almost every loan you wish to take. This in turn leads to a high-interest rate which burns a hole in your pocket.
Hence, whether you’re planning to buy a car, a home, or wish to Take a Personal Loan to meet some financial obligations, your first step must be to establish an excellent credit history. This may often prove to be an uphill task, but not if you have some extra cash in your bank account or own any asset. You can conveniently get a secured loan against your savings (in the form of fixed deposits or other saving mode) or asset (such as gold or property).
By getting a secured loan and repaying it promptly, you can eventually rebuild your credit history.
While most secured loans need you to put one or more of your assets such as your car or property as collateral, a savings secured loan, requires you to use cash or a certificate of deposit as collateral for the loan.
As per the regulations set by your bank, you may either be able to get a loan of an amount equivalent to your savings, or a smaller loan amounting to 80 or 90% of your savings. Once your loan application is approved, the bank will ensure that your savings are unavailable for withdrawals.
All you need to do next is to start repaying the loan with the help of equated monthly instalments (EMIs). In this case, it is extremely essential that you do not miss out on even a single EMI, and make all your payments well within time. Any default on your end will not only lead the bank to use your savings for the repayment of the loan but will also lead to yet another blow on your credit score.
When you are in a fragile situation with respect to your credit score, it might become nearly impossible for you to acquire a credit that can help rebuild your history. This is where savings-secured loans step in. Below mentioned are some of the reasons why and how this loan can help you tread waters in a tough time.
Owing to the fact that these loans are completely secured, that too with a cash deposit which is extremely convenient for the banks to liquidate in case of any defaults, you can expect to get this loan with incredible ease. While the bank may still check for proof of your income, and whether you will be able to repay the loan, the overall process for approval will be rather hassle-free.
Low Interest Rate
Pertaining to the low risk involved for the bank in giving out a credit which has already been secured with cash, a savings-secured loan is offered at a much lower rate of interest as compared to other unsecured loans. This aspect makes this loan a preferred choice for those who wish to build a better credit score without paying a hefty sum towards the interest outgo.
Freedom of Choice
Once you acquire the loan, you are free to use the loan amount on your accord. While it is highly recommended that you set it aside and use it strictly for the repayment of the loan, if need be, you can feel free to use it for meeting any expected or emergency expenses.
As with almost every other product, even a savings-secured loan comes with its own set of drawbacks. For instance, if you fail to pay the EMIs, even when you are well past halfway through your loan, you run the risk of being considered as a defaulter, while also standing a chance of losing your collateral. Hence, before taking credit, it is advisable for you to set aside a small amount that equals at least 3-6 months’ worth of EMI that you may use to make the repayments on time, in case of any emergencies.
That being said, it is essential for you to understand that a secured loan is probably one of the best ways to start building your credit score, without any hassles. Besides, it offers you a chance to rethink your past financial decisions, and to be more disciplined, thus preparing you for any significant loans that you must be looking forward to taking in the near future.
Loan Against Property
This is yet another type of loan that you can avail to build a credit history. If you have a property in your name, you can conveniently Apply for Loan Against Property. When it comes to the loan amount, you can expect to get as much as 40% to 90% of the value of the property that you put up as collateral. Since it is a secured loan against property, you will enjoy a lower rate of interest, thus making it easier for you to pay the EMIs regularly. Moreover, since your bank will report this loan to your credit bureau, it will ensure that your financial stability and discipline gets recorded. Hence, you will enjoy a better credit rating, moving forward.
Of course, you must only opt for this type of a loan, if you are willing to commit yourself to a longer tenure, which is up to 20 years.
Secured Credit Card
Since your bank will not entrust you with a general Credit Card yet, you should place a request to secure an asset in exchange for a secured Credit Card. Such a card is also known as a credit builder loan. Once the bank acquires your collateral, you can expect a credit limit of 80% or more of the value of the asset. Again, as soon as you start using the card, your payment history will be sent to the bureau and duly recorded. If you can pay your bills in full, and on time, you stand an incredible chance of enjoying a much better credit score in comparison to where you started.
In this case, however, you must keep yourself from overspending and exploiting your credit limit. If the bureau notices any lag in your spending behaviour, or that in your bill payments, your score may get affected even further.
We hope that you are now aware of some of the simple yet practical tips which can help you build a better credit score, thus assisting you in getting quick approvals on some significant loans such as Home Loans, car loans, and Personal Loans at competitive interest rates.
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