This article outlines the steps that should be taken when, for various reasons, we are unable to repay the loan accordingly to the agreed plan, and how this approach affects our creditworthiness. Moreover, the article presents simple and practical ways to improve your credit score, which has a significant bearing on your access to finance for any future investments needing external funding.
Firstly, we will cover the actions that we should take when noticing that we have or will have a problem with repayment of a loan, so that repayment of that loan is as little burden to us as possible. After that, we will proceed to the section that describes how to improve your creditworthiness, which defines whether you will be granted a loan, and on what terms. Remember, the better credit history, the better terms, and conditions of the loan.
What To Do When Having Trouble Repaying a Loan
Many of us, when thinking about getting a loan, do not take into account the changing reality and the hard-to-predict future. Even though the bank is obliged to thoroughly examine the creditworthiness of people requesting for a loan and grant it only to those who are able to pay it back. Even such experienced and developed institutions are not able to predict illness, loss of work or other circumstances that cause us to lose our current financial stability.
As a saying goes: “creditors have a better memory than debtholders.” So, do not hope that if you get into trouble and stop paying back a loan, any dollar will not be forgotten. So, what can you do to avoid financial disaster?
Contact Your Bank
If you expect to have difficulty making your payments or if sudden circumstances cause you to be unable to make a payment on time, inform the bank as soon as possible. Do not burry your head in the sand and do not assume that the problem will solve itself.
Your initiative will show the lender that you are not downplaying the problem or running away from your responsibility. Your bank advisor will certainly suggest some alternative proposals, which, of course, will not eliminate the problem, but, for example, will give you the necessary time to look for solution. Such situations happen and banks are prepared for them. Your concerned attitude will guarantee that you will not lose credibility in the eyes of the bank and additionally will protect you from the consequences of possible debt collection activities undertaken by the bank. At the same time, your credit score will not suffer any negative consequences.
The solution that can be worked out together with the bank mainly depends on the scale of the problem the borrower has. If the problem is a temporary lack of funds or the need to spend the budget on other unforeseen purposes and we know that the situation will return to stability in a few weeks or months, the solution may be “credit holidays/vacations”. With such a solution we can stop repaying credit installments for the period of time for which we have agreed with the bank.
If the financial problem seems longstanding, it may be possible to extend the term of the loan, which will reduce the monthly payment. This will make it easier to meet the monthly payments, but it will make the overall cost of the loan increase in the end.
For people, whose monthly household budget is burdened with the installments of several loans, a consolidation loan may be a solution. The purpose of such action is to combine all liabilities into one credit, in the case of which the monthly installment is lower than the sum of installments of individual credits.
Sometimes the problem that prevents a monthly installment from being paid on time is simply the fact that the installment due date does not coincide with the date of receiving a salary from the employer. It is then worth asking the bank to change the payment schedule.
Show Your Initiative
Taking the initiative in a difficult financial situation requires determination and courage, especially when we associate a bank with an unyielding institution that has no interest in negotiating with a client. Yes, it has. When a loan is no longer being repaid, it becomes a so called “non-performing” loan, with which the bank must take a number of actions. “Bad” loans also mean the need to create specific reserves and contribute to worsening results of the bank.
Immediate action is the first and most important step towards resolving the problem. If you take an action that results in your credit being modified in some way, be sure to check your status in loan register – control if the correct data has been provided by the bank.
How to Improve Your Credit Score
Taking care of your credit score also contributes to getting access to services of “better” quality, that means – better terms and conditions of a loan.
The Bank Law states that creditworthiness is the ability to repay a loan with interest on the dates specified in the agreement. It is the most important element of the credit procedure and determines whether the bank will grant you a credit.
To increase you chances of being granted a loan, it is worth to prepare yourself analyzing your budget and possible future expenditures which have a direct effect on your creditworthiness.
Income And Employment Status
In order to borrow you must earn money. However, the form of employment plays a crucial role because it is a form of security for a loan provider of a borrower being able to pay back a debt. An employment contract is definitely the factor that affects your creditworthiness well.
In the case of a work contract or self-employment, the bank is less certain about the stability of your earnings. The income of micro-entrepreneurs is also less obvious. In this case, the appropriate document confirming the amount would be a tax return.
Fixed costs, mortgages, loans and credit cards.
To put it bluntly – the best option would be having none of before mentioned, but in practice such a situation is rather impossible. Practically everyone of us pays some bills and incurs some expenses. Many of us also have credit, loan or an online loan. It is worth remembering that the installment of the loan you are currently paying off, and the limit on the card, even if you use it very rarely, reduce your financial reliability.
So, if you can do without the card, give it up. If you have an overdraft, do the same. Before you guarantee someone else’s credit, think twice – it will also lower your credit score.
The term of a loan is essential. The longer the loan, the more you will pay to service it. However, prolonging the loan term can lower your monthly payment, which has a direct influence on your creditworthiness.
Parents, partner, siblings are potentially good candidates for a joint loan. Such an arrangement not only improves your creditworthiness, but at the same time provides additional security for the bank. So, consider taking out a loan together.
Although the perspective of paying gradually lower installments may be tempting, these initial – highest installments, the bank will take into account while calculating our debt credibility. Therefore, it is better to choose a loan with fixed installments in order to increase your chances for a positive credit decision.
Credit History In Loan Register
Before you request for a loan in a bank, check your credit history. You can do it without leaving home right here. The loan register report will tell you what information banks, credit unions and loan companies provided to the loan register about you. Remember that the same information will be used by your future lender – checking your financial credibility.
You may find that your loan register status has not been updated by the bank, or a mistake has snuck in. By checking your history, you will have a chance to correct it before the bank checks it. Remember that a good credit history is your asset.
6 Steps Of Building Good Credit History
- Pay back your loans on time – this is the most important part of building a good credit history.
- Check you loan register occasionally to keep it under control – this way you will catch any incorrectness.
- Use loans for cheap expenditures – this is how you build an image of a reliable borrower. If you have no credit history, you are an anonymous borrower for the bank.
- Give your consent to the processing of data about your repaid credit – this allows lenders access to your good credit history.
- Do not bite more than you can chew – do not take out too many loans and do not pay off one loan with another. You can fall into a debt loop this way.
- Talk to your lender – if you are having a trouble with repaying your loan, work out new repayment arrangements with your bank.