How Can Credit Score Affect Your Borrowing Amount?
The increasing financial uncertainty has led to more lenders checking the credit score before giving money to the borrowers. People are usually super confused about what a credit score is and how it might affect your borrowing ability, loan amount, and other terms of the first mortgage. Understanding the implications of credit scores is more important for SMEs to get loan approval. It is significant because most lenders look at personal and commercial credit scores.
The effect of credit score on short-term bridging loan amount
A credit score is a number that determines your performance as a borrower. It is a record of how well you have managed your expenses. Lenders use this to determine your capability as a borrower, whether you will be able to repay the money back or not. Those with a high score have more chances of their application getting approved.
Credit score affects whether your application for second mortgage loans will get accepted or not. The main factors that your credit score determines are as follows.
1. Rate of interest
If you have a low credit score, it signifies you are a risky borrower. To compensate for this high risk, lenders will charge a high-interest rate to those with a low credit score.
2. Low credit limit
The lenders will determine the amount of your first mortgage based on your credit score. If you want to borrow a large amount, your credit history must be excellent. A low credit score will limit the amount you can potentially borrow. Lenders will consider you a risk and lend you less than what you hoped for or wanted.
The lenders will evaluate your credit history as a part of your short-term bridging loan application. It helps the lending institute understand your repaying ability better. Based on this number, a genuine lending limit is set uniquely for each borrower.
3. Refused application
Credit history has a huge role to play in the acceptance or rejection of a loan application. If you have an ideal financial track record, the chances of a loan approval improve. If, however, your credit score is poor, this can become the primary reason for a loan application rejection.
A rejected second mortgage loan application does not mean that you will not be able to borrow at all. Speaking to the lender may open up the doors of opportunities for you. You may get a loan on different terms and conditions suitable for your current financial situation.
4. Accumulation of credit inquiries
If you repeatedly apply for a first mortgage at different lending institutes, this will lead to the creation of several credit inquiries. This will negatively affect your credit history and lowers your score further down. It means the loan amount you can borrow will reduce significantly.
5. Short credit terms of loans
Borrowers with a poor credit score find it difficult to get short term bridging loans at good mortgage terms. Most lenders offer 36 to 60 months duration for the repayment. But this duration shortens as the score lowers. With a poor score, you can get shorter credit terms ranging from 6 to 24 months. The monthly instalments will be much higher, creating a massive financial burden on the borrower.
Ways to Improve Credit Score
It is easier to enhance your credit rating if you continue to pay all your debts and bills every month on time. You should also apply for any credit only if you need it the most. Always restrict the loan amount to what you can repay, as loan payment default will lower your credit score and impact it negatively.
End Thoughts
A low credit score does not mean that it is impossible to borrow when in need. Although the lenders will consider you a financial risk, you can still agree on some terms and conditions. But keep in mind that your credit limit will be less, and the interest rate will be higher. You will have to compromise on the second mortgage loan amount with a bad credit score. This number is a vital element in determining how much you can borrow.
