Before you can take a loan, your credit rating must be assessed by a lender. This is called a credit rating. In this context, your lender (creditor) will investigate your ability to repay and repay a loan from public and private information available. If you want to know more about what influences the credit provider’s credit rating, read here.
Therefore, you must have made a credit rating
It is essential for a creditor to make a credit rating for you as it provides insight into when the money is repaid. In addition, a credit rating helps to determine the conditions for your future loan. That is, how much you can be allowed to borrow and what interest rate you are offered. This is definitely based on three different factors that you can read more about in the next section.
Three risk factors that affect your credit rating
Your credit rating is most often based on three different factors. These factors are as follows:
- Income and expenses
- Personal relationships
- repayment History
Income and expenses. If your loan needs to be approved, then your finances must be able to cope with the loan costs. Therefore, it is an advantage with good income income and a permanent job.
Your creditor will not only examine your income but will also look at your expenses and outstanding debts, as these aspects help determine your monthly availability. Then your creditor can assess your ability to repay the loan.
Personal relationships. Your personal circumstances also affect your credit rating. Your loan provider looks especially at your residence, family relationship and employment history.
It is beneficial to be a resident of the country in which you borrow money. In addition, it is also more likely that you will be allowed to borrow a loan if you are a home / car owner, as these assets can be pledged, which gives the borrower better refund options.
Your family relationships can have both positive and negative consequences for your future loan. For example, you want to have better opportunities to take out a larger loan if you, for example, is married. This means that the total income is higher. On the other hand, children living under the age of 18 may have the opposite effect on your credit rating, as you have more expenses to be paid.
In addition, your employment history gives the creditor an indication of the stability of your finances. For example, if you have long periods without employment, so it may affect your credit rating.
Repayment History. When your loan provider examines your repayment history, account and debt repayment, loan pattern and RKI registration are taken into account.
If you can figure out how to pay your bills on time, avoid taking out loans regularly and not being registered in the RKI as a bad payer, and this will result in a positive credit rating and vice versa.
Positive or negative credit rating
When a creditor or the loan provider has collected the above information and made a credit rating, it can either be positive or negative.
You will receive a positive credit rating if you are assessed to be able to comply with your loan agreement and repay the loan on time. However, a negative credit rating is a prerequisite for you if the lender considers you to be a major risk of being a bad borrower. Most often, this means that your loan will not be approved.
Don’t be nervous about a credit rating
It may seem like a comprehensive and unnecessary process for many to have a creditor to review one’s finances and privacy. However, you must perceive a credit rating as a security for financial situation.
If you are not considered able to borrow money, then it is probably the best solution for you to let go. It is never a good idea to borrow money for a new car or house if your finances are not robust enough.