Does a fair credit score actually help you get lower interest rates?

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A credit score plays a crucial role when it is related to obtain a loan with a lower interest rate. Everybody knows that a higher credit score will help you avail of lower interest rates and vice-versa, but does a credit score play a significant role in deciding the interest rates, or is it just hyperbole?

Well, the fact is that a credit score plays a partial role in deciding the interest rates of a loan, but it is not the be-all and end-all. Further, there are some loans, such as payday loans, that are not subject to a credit check. It would be wrong to say that all types of loans are subject to a credit check. There are a few emergency loans, especially payday loans, which do not involve a credit check.

You will be loaned based on your repaying capacity only. Several other loans, like mortgages, car loans and personal loans with a credit check. Still, the approval rate also depends on other factors, like your income, monthly expenses, the number of dependents, and the like.

Many a time, it is said that you can get better your chances of getting a loan at better interest rates if you have a fair credit score. Can you actually get loans for fair credit at lower interest rates? Or is it a marketing stunt to lure gullible borrowers?

The reality could be different from what is marketed

It is certainly true that you will qualify for lower interest rates as compared to low credit score loans in the UK, but be that as it may, you can end up getting very high-interest rates. This is because other factors might not show you an advantage.

For instance, a lender will also look at your repaying capacity. If it is proved that you are a riskier borrower, they will charge higher interest rates. The odds are that if any of the factors show you to be a defaulting borrower, you will lose your chances of getting favourable interest rates. Getting a loan at a lower interest rate is impossible against all odds.

Most lenders emphasise only a credit score when it comes to giving approval, but the fact is that it is just part of the affordability check. Your credit report reveals how responsibly you paid off your previous debts, but your lender also wants to know whether you will be able to pay off the debt down the line. For this, they need to peruse your income statement as well.

It means if your repaying capacity is not that strong, your lender will charge higher interest rates even if you have a fair credit rating.

A fair credit score might not be that relevant for small cash loans

A fair credit score can help you get a loan at competitive interest rates, but that might not be true when you are using a small emergency loan. Small emergency loans are a form of payday loan regardless of what they are known as. Whether you call them a cash loan, a text loan, or a doorstep loan, they are all forms of payday loans.

Your fair credit score will not let you qualify for them at lower interest rates. A lender will run a soft credit check that just helps verify your contact details, such as name, address and so on, but this does not let them know about your past payment behaviour.

Since, most of the time, bad credit borrowers apply for these loans, it is assumed that your credit rating must be bad despite the possibility of a fair credit score and higher interest rates being levied. Further, these loans are very small, and people who manage their money efficiently do not apply for them. Therefore, it is worthless to hope to qualify for emergency loans at lower interest rates even if you have a fair credit score.

The impact of a fair credit score on auto loans and mortgages

Auto loans and mortgages are big loans that require a thorough credit report check. Whether you borrow money from a private lender or a bank, you will likely find the most competitive interest rates if you have a fair credit score.

However, at the same time, you will have to meet other conditions. In addition, you will have to show that you have a strong repaying capacity. Focus on how much debt you have, your credit card balance, debt-to-income ratio and credit utilisation ratio.

Tips to choose the best loan with a fair credit score

It is not so easy to get the green light for lower interest rates. Follow the following steps to ensure that you will get a personal loan at a lower interest rate:

·        Know your credit score first. Do not live under the impression that your credit score is fair. Get a copy of your credit file from all credit reference agencies, and then see if you need to do up your credit rating. Even if it is fair, try to make it better and better.

·        Determine your loan amount. As you do not have a good credit score, the lender will cap the size of the loan, so make sure you do not borrow a lot of money.

·        Your loan could be subject to hidden fees despite a fair credit score. Make sure you read the fine print because such details will be revealed in your contract. Sign the contract only when it will not affect your repaying capacity.

·        Borrow from a responsible lender like MyFinancialLoans so you get comparatively lower interest rates.

The bottom line

You can get a loan at an affordable interest rate when you have a fair credit score, but this might not be the case when you take out an emergency loan. Understand the nature of the loan first. These loans can benefit you to qualify for lower interest rates when you are using them for buying a car or a house.

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