Credit for Loans and Mortgages 101
Lending is, of course, your lenders business, so they are naturally going to be picky about who they lend to. The first thing your lender will do is check your credit scores and look through your credit reports before they decide anything about your loan. Of course, they want to keep their risk as low as they can. (Despite this, the truth is that they really like to find some risk owing to the fact it lets them charge a higher interest rate).
If you have a very good credit history, that will be reflected by your credit score — probably about 720 points or higher. In that case, lenders will be more inclined to offer you much lower interest rates.
Meanwhile, if you have a low credit score, you’re more likely to be saddled with the highest interest rates. In fact, you might not even qualify for a mortgage or loan at all.
How Your Interest Rates Vary with Your Credit
Take this as an example, looking at today’s interest rates in relation to credit scores:
You need $20,000 for a brand new car or truck and want a five-year auto loan.
Were you to go from a 620 credit score to a 720 credit score, it would save you 6% in interest. That translates into approximately $3,500! And that’s just over a five-year loan.
Now imagine how much greater the difference would be over the 30-year term of a mortgage! Simply having better credit can save you an enormous amount on your home.
As Your Interest Goes Down, Watch Your Savings Go Way Up
As another illustration, you apply for a personal loan to consolidate your various debts. Some creditors offer these loans even when your credit score is as low as 580. But, the interest on the loan could be as excessive as 30%.
Increasing your credit score to 660 reduces that interest rate by nearly half – down to just 17%. Meanwhile, debtors with a credit score of 760 or higher are furnished loans at just an 8% interest rate.
On the other hand, you’ve probably encountered loans targeted to people with no credit or bad credit. These are normally payday loans or title loans with abusively high interest — in the neighborhood of 400%! No one but the lender benefits from such loans.
Final Word: Higher Credit Score = Money in Your Bank
Glaringly, a higher credit score translates into heaps of savings over the term of a substantial loan.
On the subject of a mortgage, elevating your credit score by only 20 points could have a serious impact on your interest and save you thousands or maybe even tens of thousands of dollars! Isn’t it definitely worth increasing your credit score now to save you so much money in future?
Contact our credit professionals and let us assist in qualifying for your new home, car, or loan, and save a lot of money while you’re at it!