Ever hesitated on taking out a loan because you didn’t want your credit to be impacted? Well, there are several misunderstandings today regarding the effect different loan products have on an individual’s credit. Yes, many financial transactions can affect your credit or your ability to obtain credit in some manner. However, in this article we will unfold exactly what the process looks like from the lender’s perspective when you apply for a loan, how your information is communicated to credit reporting agencies, and how your credit could be affected by installment loans with this jammed-packed informational guide below.
What happens on the lender’s end when you apply for a loan?
What information is collected?
When you apply for a loan, the financial institution will obtain information from you that will aide in their decisioning process before granting you the loan. Such information includes your identification information, proof of income, and in some cases your credit history. This is used as a reference to determine your likelihood of repaying back the loan. Financial institutions will also request permission to obtain and report information about you with third-party Credit Reporting Agencies (CRA). For the most part, these agencies fall under either of these two categories:
- Traditional Credit Bureaus
- Fair Isaac Co (FICo)
- Trans Union
- Alternative Credit Reporting Agencies
- Lexis Nexis
How is my information used?
When the financial institution inquires about you, they will forward to the CRA the information you provided about your identity, income, and the type of loan you are requesting. In exchange, the CRA will send information to the lender that includes your Personal Identity Information, Public Record Information, Installment Loans information, Revolving Credit Information, and Inquiry information. With these pieces of information, lenders are better able to determine your loan amount and eligibility.
Non-traditional credit sources may also be queried from other data sources. Some examples include when a financial transaction is made using a checking account or to service providers including cell phone, internet, or utility service transactions. Other pieces of information that are made available are things like how long you have had your cell phone number, how old your checking account is, whether the routing number you provided is a legitimate number for the institution you named.
Will my information be shared with every credit reporting agency?
One thing to keep in mind is that the CRA and lender relationship is a membership relationship. The lender only obtains information from the CRA(s) that they have a membership with and the CRA(s) only report information back to the institutions that are within their membership.
Smaller financial institutions that include pawn shops, payday lenders, and title lenders do not often have a relationship with one of the traditional credit bureaus such as Fair Isaac Co (FICo), Trans Union, Equifax, or Experian. Instead these smaller financial institutions often have a relationship with one or more of the alternative CRAs: Microbilt, Clarity, or Lexis Nexis and are able to access some limited data about you.
Because this is a one on one relationship between the agency and lender, who the lender has a membership with can directly affect the borrower’s ability to get a loan. Only lenders who share a membership with the same CRA are able to use the customer’s credit history with those lenders as a reference to aide in the decisioning process for the loan.
How can an installment loan affect my credit?
During the Inquiry
Once an inquiry takes place with the CRA, that inquiry can affect your credit positively and negatively. Inquiring for credit is positive as it shows that a customer is active and is building a credit profile. Periodic inquiries, when they result in obtaining loans, can create positive attributes and increase various credit scores. However, multiple, frequent, or too many recent inquiries can have a negative impact on your attributes and credit scores.
After being Approved
Once you have the loan with the institution, the details of the loan are also reported to the CRA. Lenders will report how much you borrowed, when the loan was opened, the type of loan, and the repayment term for the loan. The CRA will then compile this loan information with the other loans that have been reported to them by other lenders.
When making Payments
As the first and subsequent payments come due, the financial institution will again report these to the CRA. In turn, the CRA will compile the payment and balance information and include that in their performance calculations and scores. Payments that are made on time will improve a customer’s credit, while delinquent payments will negatively impact their credit. Additionally, the recency of the performance will be considered. Good recent performance will have a positive impact, while both older and recent poor performance will have a negative impact.
So how does an installment loan affect your credit? As you can see, your credit will be affected as information gets communicated to credit reporting agencies during the inquiry, after being approved, and even when making payments on your loan. The reporting for installment loans will vary from lender to lender, depending on the CRA membership each lender is affiliated with, but the process is all the same.
If you think you’re ready to take the next step towards getting an installment loan, Always Money Finance is here to help. For over 20 years, Always Money has been a regional leader in providing affordable credit solutions to customers across the southeast looking for a convenient and confidential way to meet their needs. Our rates are very competitive within the industry. With Always Money, you get the cash you need in a minimum amount of time as we have streamlined the process and made it very easy! To get started visit www.alwaysmoney.com or you may speak to a live representative at 1-855-GO-ALWAYS (462-5929).